Zerodha's Nithin Kamath explains CAS, flags market limitations, rollout timing

Zerodha's Nithin Kamath in a post on X said the Call Auction Session (CAS) is not a bad idea in itself, but it makes the Indian stock market's structural limitations more apparent. He said the timing of its rollout is unfortunate, as the Reserve Bank of India's new norms on banks' capital-market exposure, which limit their exposure to capital-market activities, are coming into effect at the same time.

Kamath said there might be tweaks required in how CAS itself works, but the larger issue of Indian markets being shallow is a complicated problem to solve. It requires building an ecosystem that encourages all kinds of traders and investors, with different time horizons, to participate easily, he said."When one instrument is more attractive than another, or when participants cannot express both bullish and bearish views easily, distortions are inevitable," Kamath explained.

His comments came as the benchmark indices, Sensex and Nifty, moved in opposite directions over the past couple of sessions, leaving investors puzzled.

Kamath noted that India has over 13 crore registered investors, but only about 20–30 lakh traders trade actively on any given day. He said India does not have a large enough committed ecosystem providing two-sided liquidity across the cash market, futures, ETFs, and closing auctions.

He said closing auctions work well when there is deep liquidity and a large and diverse ecosystem of market participants, including market makers and arbitrageurs. Whenever prices diverge between the cash market, futures, ETFs, or different exchanges, participants step in and arbitrage the differences away.

This ability to arbitrage is much more limited in India, Kamath explained.

He said 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.

Then, Kamath said, there is the difference in the cost of trading an option versus a futures contract. In April 2026, STT on futures was increased to 0.05 per cent of the entire contract value, while STT on options is charged on the premium. So even though the STT rate on options is higher, trading futures is more expensive, he said.

"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. The same directional view can often be expressed more cheaply through options. This leads to traders preferring options over futures," he said.

Kamath said most large global markets have some form of closing auction. A large amount of institutional activity, especially from passive funds and other benchmark-tracking investors, happens near the close. Instead of the closing price being determined based on the average traded price during the final 30 minutes, CAS brings these orders together in an auction to discover one closing price.

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, Kamath said.