Indian stock market participants will soon face a slightly more complicated trading landscape - one that Zerodha co-founder and CEO Nithin Kamath openly admits will likely eat into the brokerage firm's top line. In a recent post on 'X' (formerly Twitter), Kamath broke down the implications of the newly introduced Closing Auction Session (CAS) for stocks with Futures and Options (F&O) contracts. Spearheaded by stock exchanges BSE and NSE, the structural shift aims to curb late-day price manipulation and ease the burden on passive funds, but it will bring major changes to how the trading day ends.
"Things get a little more complicated from Monday, Aug. 3," Nithin Kamath wrote in his post on the microblogging website, highlighting that while the CAS system is new to India, major global stock exchange platforms such as the New York Stock Exchange (NYSE) and London Stock Exchange (LSE) already employ similar closing auction mechanisms.
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Why are stock exchanges implementing the change?
Currently, a stock's closing price in India is determined by the volume-weighted average price (VWAP) of trades executed during the final 30 minutes of the session, explained Kamath. Under the new CAS rules, buy and sell orders for F&O stocks will be pooled and matched at a single equilibrium price. Kamath highlighted two primary reasons for the shift:
Minimizing Tracking Errors: Passive funds that track indices typically execute massive block orders right before the market closes to match the official closing price. In a continuous market, these large trades inadvertently move prices, causing tracking errors.
Preventing Price Distortion: In the current setup, massive orders dumped in the final minutes of trading can disproportionately skew a stock's final price-and by extension, the broader indices. By pooling orders into a single auction price, CAS makes it significantly harder for individual players to manipulate the close.
''The change is meant to address two issues. First, passive funds tracking indices need to execute large orders near the end of the day to match the closing price. These orders can move prices while they are being executed, increasing tracking error.
Second, large orders placed in the final few minutes can disproportionately influence the closing prices of stocks and, in turn, the indices they are part of. There have been concerns that this can be used to push indices towards certain closing levels. Since CAS pools all orders and matches them at a single price, influencing the close becomes harder,'' said Kamath on X.
A Tangible Hit To Brokerages
While Kamath acknowledged the broader market benefits, he also noted the financial friction it introduces for brokerages like Zerodha. "Now that broking is listed and people are looking more closely at the business, the honest bit: this will probably knock off some revenue, perhaps around 1-5% of brokerage income," Kamath revealed. However, Kamath noted that the immediate operational headache won't necessarily be the lost revenue, but rather explaining the newly staggered market hours to retail traders. "We're braced for the flood of questions," he added.
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Navigating the New Timings
The new framework applies exclusively to the cash segment of securities that have derivative contracts available, though future phases may expand the scope under SEBI's guidance. The new CAS rollout effectively splits the Indian stock market into three distinct closing windows, depending on the asset being traded:
- 3:15 PM: Continuous trading halts for stocks with F&O contracts, and they enter the CAS window.
- 3:30 PM: Continuous trading ends for all other cash stocks (non-F&O).
- 3:40 PM: Trading officially ends for Index and stock F&O contracts.
The CAS itself will run a tightly structured 20-minute window for eligible stocks from 3:15 PM to 3:35 PM. A transition period will calculate reference prices until 3:20 PM, followed by an order entry window that transitions to "limit-orders only" at 3:25 PM. To prevent last-second manipulation, the order entry session will close at a randomized time between 3:28 PM and 3:30 PM.
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