Nithin Kamath, co-founder and chief executive officer (CEO) of leading online stock brokerage firm Zerodha, predicts ‘tough times’ for the broking industry in Indian. Kamath took to microblogging platform ‘X’ and said that almost every broking company’s business model in India is skewed towards earning from options, which is likely to create challenges for the industry going forward.
The industry leader’s comments come one day after the capital markets regulator Securities and Exchange Board of India (SEBI) conducted its board meeting, after which Chairperson Madhabi Puri Buch announced that some derivative products could be taken off the market.
On Thursday, SEBI tweaked the selection criteria for securities or stocks to join the derivative segment to curb manipulation in futures and options (F&O). Buch added that the market ecosystem is “very mature”, enough to understand the regulatory risk.
In a briefing to the media, Buch stressed that the regulatory risk is a global reality, affecting all sectors, not just the capital market. “Wherever there is regulation, there is regulatory risk,” she said. The SEBI Chairperson also reinforced the necessity for the market to adapt and accept such risks.
India has F&O contracts on more than 180 stocks out of 500 eligible and the new criteria comes in the backdrop of growing participation in India’s stock derivatives, which is now the largest in the world in terms of contracts traded. The market regulator said earlier this month that it wants to weed out stock derivatives contracts with low turnover to reduce market manipulation.
Responding to the SEBI board meeting outcome, Kamath claims that regulatory risk is the ‘biggest risk’ for any regulated business. The Zerodha co-founder runs one of India’s largest stock brokerage platform, which backs Sensibull – India’s largest options trading platform. Sensibull is headed by Abid Hasan.
‘’We are in the middle of a period of excess in options trading. Volumes in index options have gone up from 4.6 lakh crore in 2018 to 138 lakh crore in 2024, and, more importantly, the share of retail has gone up from two per cent to 41 per cent,” said Kamath.
Kamath said that Zerodha has been a big beneficiary of this jump in volume but they have always been aware that it can be significantly reduced in size due to regulations, which can significantly hurt revenues. ‘’That’s also why we have never made any forward projections,” said Kamath.
The Zerodha co-founder concluded, saying, ‘’..times will be tough for the broking industry going forward because almost everyone’s business model is skewed towards earning from options.”
