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Challenges of starting a brokerage business

Nithin Kamath, Founder & CEO, Zerodha

Jun 09, 2016 13:12

I was convinced quite early in life about the opportunity of building a career/business around financial services in India, especially around capital markets. My reasoning was that for India to have its moment in the sun and be the economic power house that it can be, capital markets flush with domestic money would have to be a major driving factor. With less than 0.5% of India actively participating in capital markets vs. 10%+ in developed markets, the potential for growth is immense.

I started off trading the markets when I was around 17 years old; finished my college; blew out my trading account—not once but twice; worked at a call center to make time to trade during days; started a portfolio advisory business after working nights for 3 years; became a sub-broker, and finally started Zerodha in 2010 and grew it into one of the largest retail brokerages in India today.

Throughout my life, until Zerodha happened, the one question I was always asked was, “Why don’t you do a real job?”. There is still social stigma surrounding people who have any sort of relationships with the stock markets in India. Perhaps, because of the of big stock market scams we have witnessed, or because of the perception that everyone is gambling in the markets. Convincing the near and dear ones of the opportunity you spot and, how you will get to your goal without gambling, are usually the biggest roadblocks.

For the same reason above, being able to setup a talented team becomes extremely hard. It is exponentially harder to be able to create a good technology team, which is imperative in today’s day-and-age to succeed in an environment where everyone is moving online.

Also, being a brokerage has a huge entry barrier both in terms of fixed costs and time. Exchange deposits, compliance costs, infrastructure costs, and more. The turnaround time from thinking of being a brokerage firm to getting the required approvals, setting up technology stack, getting the trading platforms approved before going live, takes at least 1.5 years.

Regulators in India have done a great job protecting retail interests, but somehow, the compliance requirements for a brokerage firm are quite tough, and several norms, outdated. This poses an inherent risk of regulatory flak with new initiatives, especially technological, stifling innovation in the industry. But, like in all businesses, you can see the glass half empty, or half full. I’d have a vested interest if I said I see it half full.