Closing Auction Session for F&O stocks may trim brokerage revenue: Nithin Kamath

Mumbai (Maharashtra) [India], July 28 (ANI): Zerodha founder and CEO Nithin Kamath has said the new Closing Auction Session (CAS) mechanism could reduce the brokerage firm's revenue by around 1-5 per cent, while also creating an operational challenge as different segments of the market will now close at different times.
Indian stock exchanges will introduce a new CAS mechanism for stocks with futures and options (F&O) contracts from August 3, replacing the existing mechanism for determining closing prices in a move aimed at improving price discovery and making end-of-day price manipulation more difficult.
According to Kamath, the closing price of a stock is currently calculated based on the volume-weighted average price (VWAP) of trades during the last 30 minutes of trading. Under the new Closing Auction Session, buy and sell orders will instead be collected and matched at a single equilibrium price.
In a social media post on Tuesday, he said, "Things get a little more complicated from Monday, August 3. Exchanges are introducing a Closing Auction Session, or CAS, for stocks with F&O contracts".
He said the new framework is designed to address two key issues. First, passive funds tracking market indices often execute large orders near the market close to match benchmark closing prices, which can move stock prices and increase tracking error.
Second, large trades placed in the final few minutes of trading can have a disproportionate impact on closing prices and benchmark indices.
"Since CAS pools all orders and matches them at a single price, influencing the close becomes harder," Kamath said in a social media post.
The change will also result in different market closing times depending on the asset class. Stocks with F&O contracts will stop continuous trading at 3:15 pm and move into the Closing Auction Session, while all other stocks will continue trading until 3:30 pm. Index and stock futures and options contracts will trade until 3:40 pm.
Kamath said the staggered closing timings are likely to create confusion among investors initially and increase customer queries for brokerages.
"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 per cent of brokerage income," he said.
He noted that while the Closing Auction Session is new for Indian markets, similar mechanisms are already used by leading global exchanges, including the New York Stock Exchange (NYSE) and the London Stock Exchange (LSE), to determine closing prices. (ANI)