Zerodha co-founder Nithin Kamath has stated that the sharp price swings observed under India's new Closing Auction Session (CAS) reflect deeper structural weaknesses in Indian markets, rather than flaws in the auction mechanism itself.

The new 20-minute closing auction, which replaced the earlier VWAP-based closing price calculation, has triggered unpredictable late-day price movements since its introduction. Options traders and algorithmic trading desks have reported losses as a result of the heightened end-of-session volatility, fuelling growing calls within the trading community for modifications to the system or a full rollback.

Kamath's remarks come amid mounting scrutiny of the CAS framework. The session was designed to produce a more robust and manipulation-resistant closing price by concentrating order flow into a brief auction window at the end of the trading day. However, the concentration of buy and sell orders into this compressed timeframe has, in practice, amplified price movements—particularly in less liquid stocks—creating what Kamath described as inevitable distortions. The issue is compounded by India's uneven liquidity distribution across roughly 5,500-plus listed stocks on the NSE alone, where only a subset sees consistent institutional participation.

Under the previous system, the closing price was determined using the Volume Weighted Average Price (VWAP) over the last 30 minutes of the trading session. That approach smoothed out end-of-day price fluctuations but was considered susceptible to manipulation. The CAS was introduced as a reform measure intended to address those concerns.

The impact has been especially pronounced for derivatives traders. Because the closing price serves as the settlement reference for stock and index futures and options contracts, sharp last-minute moves can trigger significant mark-to-market losses for positions that appeared stable moments before the close. The closing price is also used for mutual fund net asset value (NAV) calculations and index rebalancing, meaning the distortions have implications beyond derivatives markets. Algorithmic trading strategies, which often rely on predictable end-of-day price behavior, have also been disrupted.

Kamath, who founded Zerodha in 2010 and built it into India's largest discount brokerage by active clients, has previously spoken about structural issues in Indian market microstructure. His latest comments suggest that the problems exposed by the CAS transition point to broader challenges related to market depth, liquidity distribution, and participant concentration in Indian equities. India's retail investor base has expanded rapidly in recent years, with demat account openings surging, but much of this growth has been concentrated in index derivatives and a narrow set of large-cap stocks, leaving mid- and small-cap segments comparatively thin.

Indian stock exchanges BSE and NSE implemented the CAS under regulatory guidelines from the Securities and Exchange Board of India (SEBI), which has been overseeing reforms aimed at aligning Indian market practices with international standards. Several global exchanges, including those in London and Hong Kong, already use closing auction mechanisms.

The debate over the CAS underscores a tension between improving price discovery integrity and managing short-term volatility, a balance that regulators and market participants will need to address as the system matures.