According to Zerodha CEO Nitin Kamath, the new closing auction session (CAS) being implemented for F&O shares from August 3 could lead to a 1-5% decline in the brokerage firm’s earnings. Due to this, market closing time will also vary, which may create initial confusion.
Zerodha founder and CEO Nitin Kamath has said that the new closing auction session (CAS) mechanism could reduce the brokerage firm’s revenue by about 1-5 per cent. Additionally, this will also create 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. This will replace the existing mechanism for determining the closing price. Its purpose is to improve price discovery and make it more difficult for price manipulation to occur at the end of the day.
What is the new closing auction session?
According to Kamath, currently the closing price of a stock is 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 be aggregated and matched at the same equilibrium price.
“Starting Monday, August 3, things will get a little more complicated. Exchanges are launching a closing auction session, or CAS, for shares with F&O contracts,” he said in a social media post on Tuesday.
Why is the new rule being brought?
He said the new framework has been designed to address two major issues. First, passive funds that track market indices often place large orders close to market close to match the benchmark closing price, which can cause stock price fluctuations and increase tracking error. Second, large trades placed in the last few minutes of trading may have a disproportionate impact on the closing price and benchmark indices.
“Since CAS pools all orders together and matches them at the same price, it will become more difficult to influence the closing price,” Kamath said in a social media post.
There will be change in market closing time
As a result of this change, market closing times will also vary depending on asset class. Shares with F&O contracts will cease continuous trading at 3:15 pm and will move to the closing auction session, while all other shares will continue trading till 3:30 pm. Index and stock futures and options contracts will trade till 3:40 pm.
Kamath said the different closing timings are likely to create confusion among investors initially and increase customer inquiries to brokerages.
Estimated reduction in revenue by up to 5%
“Now that broking is listed and people are looking at this business more closely, the honest thing is: it will probably reduce some revenue, probably around 1-5 per cent of brokerage income,” he said.
He said that although the closing auction session is new to the Indian markets, a similar mechanism is already being used by the world’s major exchanges including the New York Stock Exchange (NYSE) and the London Stock Exchange (LSE) to determine the closing price. (ANI)
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