Nithin Kamath on why retail investors' participation in auction trades is hitting prop desks

Nithin Kamath has highlighted how opening up stock exchange auction markets to retail investors is beginning to change market dynamics, including squeezing profits for proprietary trading firms that previously dominated the space.

In a recent post, Kamath said that when Zerodha enabled retail participation in auction markets in 2023, only a small fraction of its user base -- around 25,000 out of over 1.7 crore clients -- actively participated. Despite this limited participation, the impact has already been visible.

He noted that some small proprietary trading brokers, which historically profited from these auctions, were "hit pretty hard" as increased participation improved liquidity and narrowed spreads.


Auction markets are triggered when a seller fails to deliver shares on time, resulting in a short delivery. Exchanges then conduct auctions to procure the required shares, often at a premium to the last traded price due to limited availability.

These premiums had earlier created opportunities for specialised traders to earn relatively easy profits by supplying shares into these auctions. However, Kamath said that as more participants enter the system, the inefficiencies that enabled such gains are gradually reducing.

"Liquidity improved and spreads tightened," he noted, indicating that the market is becoming more efficient even with a relatively small increase in participation.

Zerodha remains one of the few large brokers offering access to these auctions for retail investors. Kamath said participation is steadily increasing, suggesting that more investors are becoming aware of this niche segment.

He also pointed out that retail investors holding eligible shares can benefit from the system by selling them in auctions at a premium, effectively generating near risk-free returns in certain cases.

The auction window typically opens around 2:30 pm and remains active for about 30 minutes, with eligible stocks available for bidding through the broker’s trading platform.