Nithin Kamath warns Zerodha could lose revenue from August 3. Here's what's changing in the stock market

A major change to India's equity market structure is set to take effect from August 3, and Zerodha co-founder and CEO Nithin Kamath believes it will not only change how investors trade at the close of the market but could also dent the brokerage industry's revenues.

In a post on X, Kamath said the introduction of the Closing Auction Session (CAS) by the NSE and BSE for stocks with futures and options (F&O) contracts will make the trading day more complex for investors. He also acknowledged that the move could reduce Zerodha's brokerage income by 1% to 5%, while increasing the number of customer queries because different segments of the market will now close at different times.

“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.”

How the new Closing Auction Session will change stock trading

The Closing Auction Session (CAS) is a dedicated auction window that will be held at the end of the trading day for stocks with F&O contracts. During this session, investors will place buy and sell orders, which will then be matched through an auction mechanism to determine a single closing price for each eligible stock.

Kamath pointed out that the system is already widely used by leading global exchanges.

"This isn't a new concept globally. Major exchanges such as the New York Stock Exchange (NYSE) and London Stock Exchange (LSE) already use versions of a closing auction to determine closing prices."

He explained that the current Indian system determines the closing price using the volume-weighted average price (VWAP) of trades executed during the final 30 minutes of trading. Under the new framework, however, orders will be accumulated and matched at one equilibrium price instead.

"Today, the closing price of a stock in India is based on the volume-weighted average price of trades during the last 30 minutes. Under CAS, buy and sell orders will instead be collected and matched at a single equilibrium price."

According to Kamath, the new mechanism is intended to solve two long-standing market issues.

The first relates to passive funds that track benchmark indices. These funds typically execute large trades near the market close to minimise tracking error, but such transactions often influence prices while they are being executed. Kamath said the auction-based mechanism is expected to address this problem.

The second issue involves large institutional orders placed during the final few minutes of trading, which can disproportionately influence the closing prices of individual stocks and, consequently, benchmark indices. Since CAS aggregates all orders before matching them at a single price, manipulating or influencing the closing price becomes significantly more difficult, he noted.

Challenges of the new timings

While Kamath welcomed the structural benefits of the new system, he said the operational implications for brokerages would be immediate.

One of the biggest changes for investors will be the introduction of different market closing times depending on the instrument being traded.

Stocks that have F&O contracts will end continuous trading at 3:15 pm before entering the Closing Auction Session. Stocks without F&O contracts will continue to trade until 3:30 pm, while stock and index derivatives will remain open until 3:40 pm.

Kamath believes this staggered closing schedule is likely to confuse many retail investors initially.

He added that the larger challenge may not be the financial impact but helping customers understand why different parts of the market appear to close at different times.

"The more immediate challenge, however, would be explaining why different parts of the market now appear to close at different times. We're braced for the flood of questions."

Summing up the changes awaiting market participants from next week, Kamath wrote:

"Things get a little more complicated from Monday, August 3."

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.