New market closing rules could dent Zerodha revenue: Nithin Kamath
What's the story
Nithin Kamath, the co-founder and CEO of Zerodha, has warned that a major change in India's equity market structure could impact the brokerage firm's revenue. The change, which will come into effect on August 3, is the introduction of a Closing Auction Session (CAS) by NSE and BSE for stocks with futures and options (F&O) contracts. Kamath said this new system could reduce Zerodha's brokerage income by 1-5%.
Trading changes
What is Closing Auction Session?
The CAS is a dedicated auction window 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 be matched through an auction mechanism to determine a single closing price for each eligible stock.
Kamath said that this system is already widely used by leading global exchanges like NYSE and LSE.
Market integrity
CAS to tackle long-standing market issues
The new mechanism is designed to tackle two long-standing market issues.
The first one concerns passive funds that track benchmark indices and execute large trades near the market close to minimize tracking error.
These transactions often influence prices while being executed. The auction-based mechanism is expected to address this problem, Kamath said.
Order influence
The 2nd issue that CAS addresses
The second issue tackled by CAS is large institutional orders placed during the last few minutes of trading, which can disproportionately influence closing prices of individual stocks and benchmark indices.
Since CAS aggregates all orders before matching them at a single price, manipulating or influencing the closing price becomes significantly more difficult, Kamath noted.
Investor confusion
Changes in market closing times
The introduction of CAS will also change the market closing times depending on the instrument being traded.
Stocks with F&O contracts will end continuous trading at 3:15pm before entering CAS.
Non-F&O stocks will continue trading until 3:30pm while stock and index derivatives will remain open until 3:40pm.
Kamath believes this staggered closing schedule could initially confuse many retail investors and the operational implications for brokerages would be immediate.