The recent sharp swings in stock prices at market close have sparked debate over the newly introduced Closing Auction Session (CAS), but Zerodha Founder and CEO Nithin Kamath believes the mechanism is not the real problem.
In a post on X, Kamath said the Closing Auction Session is a globally accepted mechanism designed to improve price discovery and facilitate the execution of large institutional orders without causing abrupt price movements.
"CAS itself is not a bad idea. Most large global markets have some form of closing auction," Kamath wrote.
There has been a lot of discussion about the sharp closing moves since the new Closing Auction Session went live.
— Nithin Kamath (@Nithin0dha) August 5, 2026
CAS itself is not a bad idea. Most large global markets have some form of closing auction. A large amount of institutional activity, especially from passive funds… pic.twitter.com/BrfrOzZFAz
ALSO READ: NSE Dominates Closing Auction Session With 99.1% Market Share; Turnover Hits Rs 1,383 Crore
He explained that while the earlier closing price was based on the average traded price during the final 30 minutes of trading, CAS aggregates buy and sell orders into an auction to determine a single closing price.
According to Kamath, the recent price dislocations instead expose deeper structural weaknesses in India's capital markets.
"Closing auctions work well when there is deep liquidity and a large and diverse ecosystem of market participants, including market makers and arbitrageurs," he said.
Kamath argued that arbitrage opportunities are difficult to exploit in India because investors cannot easily take short positions in the cash market. Although a securities lending and borrowing mechanism exists, he said it lacks sufficient depth and ease of use.
"Unless borrowing stocks and shorting them becomes easy, there is bound to be structural upward pressure in the markets," he said.
Kamath also pointed to changes in the Securities Transaction Tax (STT) regime as another factor affecting market efficiency.
He noted that after the increase in STT on futures contracts in April 2026, trading futures has become more expensive than expressing the same market view through options, once taxes, exchange charges, spreads and impact costs are factored in.
"The same directional view can often be expressed more cheaply through options. This leads to traders preferring options over futures," he said.
Highlighting the lack of market depth, Kamath said that despite India having more than 13 crore registered investors, only 20-30 lakh traders participate actively on a typical trading day.
One day is unusual. Two days is maybe a coincidence. Three days is a pattern that cannot be ignored.
— Varsity (@ZerodhaVarsity) August 5, 2026
As India's new Closing Auction Session enters its third session, the quantity clearing in the auction remains well below what these stocks traded in the same window before CAS.… pic.twitter.com/Qj4gokw8gk
ALSO READ: NSE Closing Auction Turnover Hits Rs 1,276 Crore; Top 10 Stocks Drive 30% Share
"CAS is not the reason for these structural limitations, but it makes them more apparent," he wrote, adding that the rollout has coincided with the Reserve Bank of India's new norms on banks' capital-market exposure, further impacting liquidity.
Kamath said some refinements to the Closing Auction Session may be required, but stressed that the bigger challenge lies in strengthening the overall market ecosystem.
"Making shorting and securities lending easier, reducing distortions between instruments, and encouraging genuine market-making would be a good place to start," he said.
Essential Business Intelligence, Sharp Market Insights, Practical Personal Finance Advice, Daily Fuel, Gold and Silver Prices and Latest Stories — On NDTV Profit.
