Technical Analysis

Zerodha makes stock broking pay at Rs 20

Aarati Krishnan | Updated on March 23, 2013

Nithin Kamath, Founder,

Professional stock traders don’t want algos, advice or research. What they need is flat brokerage and hassle-free execution.

Can stock broking be a paying proposition? Numbers from big Indian brokerages don’t suggest so. But, an online trading portal that started out in August 2010, seems to be raking in the money, with clients flocking to it in a difficult market.

The firm already has 22,000 clients who do over 15,000 trades a day. They account for a daily turnover of Rs 2,000-3,000 crore, says the portal’s founder Nithin Kamath. That puts Zerodha in the big league with established brokerages such as ICICIDirect and Kotak. Zerodha’s business model, if you can call it that, is quite simple. Any trade put through on this online platform, no matter what its size, attracts just a flat brokerage of Rs 20.

Fulfilling trader’s need

With the Sensex see-sawing, retail interest in trading stocks is in the dumps. How has Zerodha managed to scale up, one asks Kamath? “Having done it myself, I knew what exactly a trader wants and I offered it,” he explains. “I am not a mathematics PhD, writing complicated codes,” he says, taking a jibe at the new breed of algo traders who promise outsized returns from programme-based trading.

Having started out as an arbitrage trader himself, Kamath says he knew that career traders survive on high volumes and wafer-thin profits. The percentage fee model that most traditional brokers work on he observed, wiped out much of that profit. Therefore, he built an alternative platform around a flat fee. This encourages professional traders to put through high-value trades and yet retain most of the winnings.

Despite the Rs 20 fee, though, the portal makes money. In Kamath’s own words, “We make crazy margins.” The margins come from Zerodha’s low overheads. This discount broker has just 70 people on its staff working out of two Bangalore offices. They are mostly from a ‘non-capital market’ background and support clients with their trades. “With 70 people, we probably do the same turnover as other brokers do with 1,000 people on the team.”

Hassle-free execution

Other brokers also offer value additions such as research, SMS alerts and trading tips, but not Zerodha. “A professional trader doesn’t need all that. What he needs is low brokerage and smooth hassle-free execution”, says Kamath. The portal doesn’t advertise either. It got its clients mainly through its referral system.

Kamath isn’t the typical IIT, IIM-grad who quit a ‘lucrative job with a multinational’ to strike out on his own because he was gripped by the entrepreneurial spirit. Instead, he admits that trading was his first love and that his day job was always, just a means to fund his trading activities. When he finished his engineering degree, he plunged headlong into trading. Early on, Kamath’s knack for spotting arbitrage opportunities in the market was noticed by an NRI, who wrote him a Rs 25-lakh cheque at the gym one day. Thus was born Kamath Associates, which managed money for wealthy NRI clients.

All was well until 2008, when Lehman went bust and with it, the Indian stock market. Ironically, Kamath made money during the crash by being short on stocks (selling stocks he didn’t own). But it was the post-election rally of 2009 that took him by surprise. “I remained bearish for too long and missed the rally.” The firm returned the money to clients. Being a sub-broker for Reliance Money, which was offering a flat brokerage structure at that time, showed him that this was a good business idea.

Why choose Bangalore? Couldn’t Zerodha have made it bigger by being in those hotbeds of trading — Mumbai or Ahmedabad? “It’s a myth that all the stock market trading is happening out of Mumbai or Ahmedabad. If Bangalore or Chennai had Mumbai’s population, we would have as many traders here too,” he laughs. Trading stocks, commodities and currencies, he says, is quite the rage with the salaried IT crowd in these two cities of the South. “Every month, your trading ‘fund’ gets replenished by your salary,” he says.

Finally, what is Zerodha? Kamath explains: “The name breaks up as Zero Rodha. Rodha means barrier in Sanskrit. We believe in trading without barriers.”


Published on March 23, 2013

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