As BSE and NSE introduced the Closing Auction Session (CAS) on Monday, Nithin Kamath, CEO and Founder of Zerodha, said, ‘it’s not a bad idea’ but argued that the sharp closing price swings seen since its launch expose deeper structural weaknesses in India’s markets rather than flaws in the auction mechanism itself
In a social media post on Wednesday, Kamath points out, “Most large global markets have some form of closing auction. A large amount of institutional activity, especially from passive funds and other benchmark-tracking investors, happens near the close.”
The aim is to enable better price discovery and to make it easier to execute large orders without abruptly moving prices. “But the price dislocations we have seen over the last few days highlight some of the structural problems that are specific to the Indian markets.”
Why is arbitrage harder in India’s markets
Closing auctions are most effective in markets with deep liquidity and a broad mix of participants, including market makers and arbitrageurs. These players help eliminate pricing discrepancies across cash, futures, ETFs, and exchanges by exploiting arbitrage opportunities.
This ability to arbitrage is much more limited in India, the Zerodha boss asserts.
- For one, it is impossible to express a short view in the cash market. We have a securities lending and borrowing mechanism, but it isn’t deep or easy enough to use. Unless borrowing stocks and shorting them becomes easy, there is bound to be structural upward pressure in the markets.
- Then there is the difference in the cost of trading an option versus a futures contract. In April 2026, STT on futures was increased to 0.05% of the entire contract value, while STT on options is charged on the premium. So even though the STT rate on options is higher, trading futures is more expensive.
- Once you add STT, exchange charges, spreads, and impact costs, the trading opportunity has to be quite attractive before a futures arbitrage trade is worth doing. The same directional view can often be expressed more cheaply through options. This leads traders to prefer options over futures.
- India has over 13 crore registered investors, but only about 20–30 lakh traders trade actively on any given day. That’s it. We don’t have a large enough committed ecosystem providing two-sided liquidity across the cash market, futures, ETFs, and closing auctions.
CAS may need tweaks, but structural reforms are key
CAS is not the reason for these structural limitations, but it makes them more apparent, he says and adds, “The timing of its rollout is also unfortunate, because the RBI’s new norms on capital-market exposure, which limit banks’ exposure to capital-market activities, are going live at the same time.”
There might be tweaks required in how CAS itself works, he notes and adds, “But the larger issue of our markets being shallow is a complicated problem to solve. It requires building an ecosystem that encourages all kinds of traders and investors, with different time horizons, to participate easily.”
Making shorting and securities lending easier, reducing distortions between instruments, and encouraging genuine market-making would be a good place to start, he concludes
