Nithin Kamath, the co-founder and CEO of online stock brokerage Zerodha said in a post on X (Formerly Twitter) that tough times are ahead for India’s broking industry due to their business model being skewed more towards earning primarily from options.
What are options?
Options refer to a contract which allows an investor to buy or sell a financial instrument at a predetermined price at a predetermined future date. This is for safeguarding investments from market price fluctuations.
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Options are called so, since they allow the investor to have the option of not going through the deal if needed too. However, this does come at a small price, known as a premium fee.
What are futures and derivatives?
Futures are instruments just like options, but they don’t have the option to opt out of the deal. Both futures and options come under the term, ‘derivative instruments’ or ‘derivatives.’
Why does Nithin Kamath feel India’s broking industry is in trouble?
India’s markets regulator, the Securities and Exchange Board of India (Sebi) conducted its latest board meeting during which, Sebi Chairperson Madhabi Puri Buch announced that some derivative products could be removed from the market.
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Sebi had altered the selection criteria for stocks to be part of the derivatives segment. This was to curb potential market manipulation, on grounds of increased speculative trading that can lead to financial distress, especially for small retail investors.
What was Nithin Kamath’s response?
Kamath claims that “regulatory risk is the biggest risk for any regulated business,” such as broking. Zerodha is one of India’s largest brokerage firms.
“We are in the middle of a period of excess in options trading,” Kamath wrote. “Volumes in index options have gone up from 4.6 lk cr in 2018 to 138 lk cr in 2024, and, more importantly, the share of retail has gone up from 2% to 41%.”
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This is important because he highlights how this huge volume of options trading has profited brokerages, but the new regulations can significantly hurt the earnings in the future.
“Wherever there is regulation, there is regulatory risk,” said Madhabi Puri Buch, highlighting the market’s need to adapt. The new eligibility criteriawill be effective in three months after Sebi issues a circular.
