Nithin Kamath on Broker: India’s stock trading world is booming, and many people think brokerage firms are making easy money. But Nithin Kamath, the co-founder of Zerodha, says this isn’t fully true. In a post on LinkedIn, he shared that the broking business may look bright from the outside, but it has many hidden dangers that most people don’t see. According to him, there is a major risk in the way revenues are concentrated in a very small area, and that’s something not many outsiders understand.
Kamath remembered a conversation from back in 2008, when a private equity expert refused to invest in a broking company because too much of the company’s income came from just a few clients. “As I’ve mentioned numerous times, a small number of active traders contribute to most of the exchange turnover,” he wrote. “This was a lot worse back then.”
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The problem has changed but hasn’t really gone away. Even though more people are now trading, especially in the retail space, Kamath pointed out that over 80% of Zerodha’s earnings and that of other brokers too depend mainly on just two things: trading in Nifty and Sensex futures and options. “That means one change can wipe out a big chunk of our revenues,” Kamath noted.
Kamath also talked about another issue. In the U.S., some platforms like Robinhood make money through something called payment for order flow. This means they earn from sending user trades to big firms. But India doesn’t allow this. Kamath added that even if India did allow it, Zerodha wouldn’t use this method because they don’t support it on principle. So, brokers in India don’t have that extra source of income.
“I wonder why the brokerage business looks so sexy from the outside,” he wrote.
“I was chatting with a veteran from private equity who said they had evaluated a broking firm back in 2008 and decided not to invest. What spooked them?” he wrote on LinkedIn
He also pointed out another rule that makes it tough for brokers the quarterly fund settlement. According to this rule, every broker has to return all the money in client accounts once every three months. Kamath compared this to a mini bank run because a huge amount of cash leaves the system at once. This can cause pressure on the system and adds to the stress of running a brokerage.
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Even with all these risks investors are still very interested in the broking sector but Kamath warned that this business, which looks very attractive from the outside, actually has weak areas that people need to understand better. He questioned why people still find it so “sexy” when, in reality, it depends so much on just one small part of the market and has so many rules to follow.
