Nithin Kamath, the CEO of Zerodha, a prominent online stock brokerage firm, cautioned that the Indian broking industry may face challenging times ahead. He has attributed this to the industry’s heavy reliance on options trading, which could be significantly impacted by regulatory changes.
What Happened: In a recent post, Kamath highlighted that the business model of nearly every broking company in India is heavily dependent on options trading, a situation that could pose significant challenges for the industry.
"Regulatory risk is the biggest risk for any regulated business. Times will be tough for the broking industry going forward because almost everyone’s business model is skewed towards earning from options," said Kamath, underscoring that Zerodha has been a "big beneficiary" of the massive surge in options trading.
He also highlighted that this regulatory risk could "significantly hurt" Zerodha's revenues, which is also the reason why the company has not made any forward projections.
His comments come in the wake of the latest board meeting of the Securities and Exchange Board of India (SEBI), where Chairperson Madhabi Puri Buch indicated the possible removal of certain derivative products from the market.
"You ask the pharma companies and bankers what regulatory risk is, it is a reality that is part of the business, and any investor must be conscious of that," Buch said.
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Why It Matters: The Indian stock market has witnessed a surge in derivative trading, with SEBI expressing concerns about potential market manipulation.
The recent SEBI board meeting introduced new criteria for stock selection in the derivative segment to address this issue. The board also approved new rules to facilitate the delisting of companies from stock exchanges.
SEBI has also previously underscored that nearly 90% of traders in the futures and options segment end up losing money. Buch even expressed surprise at the amount of interest investors have shown in the F&O segment despite high risk of losing money.
Disclaimer: This content was partially produced with the help of AI tools and was reviewed and published by Benzinga editors.
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