Summary of this article
Nithin Kamath says CAS exposed long-standing gaps in India’s market structure
He wants easier short selling, securities lending, and better market-making
Kamath says deeper markets, not CAS tweaks, are the real need
Zerodha co-founder Nithin Kamath has weighed in on the debate around the closing auction session (CAS), arguing that the mechanism itself is not flawed, but has exposed long-standing structural weaknesses in India’s capital markets. He has called for easier short selling, a stronger securities lending ecosystem, and better market-making in order to improve price discovery and reduce distortions.
His comments come days after the launch of the new CAS triggered sharp swings in the closing prices of several stocks and benchmark indices, prompting concerns among traders and investors. The Securities and Exchange Board of India (Sebi) and the NSE later clarified that the auction-based closing mechanism was functioning as intended and that price movements reflected genuine demand and supply during the auction window.
In a blog post published on August 5, 2026, Kamath wrote, “CAS itself is not a bad idea. Most large global markets have some form of closing auction.” He explained that closing auctions are designed to bring together institutional orders at the end of the trading session to discover a single closing price rather than relying on the average traded price during the last 30 minutes.
“The goal of CAS is to enable better price discovery and make it easier to execute large orders without moving prices abruptly. But the price dislocations we have seen over the last few days highlight some of the structural problems that are specific to the Indian markets,” he added.
Why India Is Seeing Larger Price Swings
Kamath said closing auctions work best when markets have deep liquidity and a broad mix of participants, including market makers and arbitrageurs, who quickly eliminate pricing differences across the cash market, futures, exchange-traded funds (ETFs), and exchanges.
“This ability to arbitrage is much more limited in India,” he wrote.
One of the biggest reasons, according to Kamath, is the difficulty of taking bearish positions in the cash market. “For one, it is impossible to express a short view in the cash market. We have a securities lending and borrowing mechanism, but it isn’t deep or easy enough to use. Unless borrowing stocks and shorting them becomes easy, there is bound to be structural upward pressure in the markets,” he said.
Kamath also highlighted the higher cost of futures trading after the increase in the securities transaction tax (STT). Since April 2026, STT on futures has been charged at 0.05 per cent of the entire contract value, while options continue to attract STT only on the premium. As a result, many traders now prefer expressing the same market view through options rather than futures, he added.
“Once you add STT, exchange charges, spreads, and impact costs, the trading opportunity has to be quite attractive before a futures arbitrage trade is worth doing,” he further said.
Market Still Lacks Enough Liquidity
Kamath argued that the problem is not just about one trading segment, but about the overall depth of Indian markets. India has more than 130 million registered investors, but only around 2-3 million traders are active on a typical trading day, he further said.
“That’s it. We don’t have a large enough committed ecosystem providing two-sided liquidity across the cash market, futures, ETFs, and closing auctions,” he wrote.
He added that the rollout of CAS has merely made these issues more visible. “CAS is not the reason for these structural limitations, but it makes them more apparent,” Kamath said. He also pointed out that the timing coincides with the Reserve Bank of India’s (RBI’s) new norms restricting banks’ exposure to capital-market activities, which could further affect liquidity.
More Than Just Short Selling
While easier short selling was one of his key recommendations, Kamath stopped short of calling it the only solution. He said, “When one instrument is more attractive than another, or when participants cannot express both bullish and bearish views easily, distortions are inevitable.”
According to him, improving the market ecosystem will require multiple reforms rather than changes to CAS alone. “There might be tweaks required in how CAS itself works. But the larger issue of our markets being shallow is a complicated problem to solve,” he wrote.
Kamath suggested three areas that deserve attention: making shorting and securities lending easier, reducing distortions between trading instruments and, encouraging genuine market-making. “Making shorting and securities lending easier, reducing distortions between instruments, and encouraging genuine market-making would be a good place to start,” he wrote.
With CAS still in its early days, discussions around its impact are likely to continue.
