Founder and CEO of brokerage firm Zerodha, Nithin Kamath, said that the next big disruption in the broking industry is not likely to come from another brokerage but from cryptocurrency. He added that there is not much to disrupt in the exchange business, both on pricing and products.
Zerodha itself is a brokerage that disrupted the broking industry with its discount fee model. The name of the company Zerodha is a combination of the English word 'zero' and Sanskrit word for barrier, 'rodha'. The name signifies the goal of the company that seeks to break all barriers that traders and investors face when it comes to cost, support and technology.
Kamath, however, thinks there is not much to disrupt in the brokering industry and stated, “In broking or exchange business, both on pricing and product, there is not much left to disrupt. Unless of course, someone figures a way to pay people money for trading (-ve brokerage not allowed by regulation) or figures a way to help all customers make money (very tough),” he explained in a series of tweets.
Brokers and exchanges depend on a small group of active traders, about 1 million, for revenue, stated Kamath, adding that if they start trading something else, they will disrupt everything. He said that active traders also provide liquidity, reduce impact cost and risk, as well as help better price recovery.
As traders want high leverage and volatility as well as for markets to remain open longer, cryptocurrencies score more than stocks on these aspects, Kamath explained. “Of course, trading crypto is a lot riskier & there is no fundamental information for price movements. But greed usually gets the better of most people with time,” he said.
Kamath also gave the example of the US where crypto disrupted brokerages and exchanges. “The AUM of Coinbase is $180 billion, and the crypto AUM of Robinhood Crypto is ~$11.5bil. Many incumbents couldn't react quickly, fearing regulatory lash back and mostly missed the bus,” he said.
India too is in a similar situation as the US was a few years back, even though crypto is still small in the country. “The regulatory fear doesn’t allow regulated platforms to offer Crypto. Eventually, if the status quo on regulations continues, traders can move away & disrupt the broking industry,” he said.
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