By the time you have finished scrolling through this article 1,018 demat accounts have opened, 13,767,766 F&O trades have been executed and 90% of those have lost money!
For the unaware the BSE Sensex just delivered 100x returns over the last 4 decades. But what’s mind-boggling is that most of these are back ended with 70% of these gains coming in the last 4 years. Does that mean, 70% of the progress in India has happened in the last four years? Let’s look at what has changed in the past 4 years:
- With increased market penetration of Discount Brokers, the number of Demat accounts has skyrocketed ~4x from 40 Mn to 160 Mn!
- 1/4th of the trades in Indian Capital Markets originate on user-friendly mobile trading apps.
- The Daily Turnover on the Cash Segment of BSE/NSE has almost quadrupled from Rs 0.4 Tn to Rs 1.5 Tn.
- The market is high on the Algo trading steroid. The daily turnover in the F&O segment exploded 27x to an eye-popping ~ Rs 496 trillion. This is 330x of the Cash Segment!
In this age of instant gratification and validation, technology has acted as a catalyst for the urge to make a quick buck.
Today, opening a demat account is FREE! All you need is a smartphone, an inexpensive $1 Jio network, and a few minutes of your precious time. As Groww’s founder says “Trading is as easy as online shopping”. Everything is available at the ‘click of a button’. Just fill your Demat Basket with your choice of stocks. Don’t worry if you don’t understand which is a suitable scrip. Finfluencers are there to guide you as you embark on the journey of being the “new age investor”.
Online Demat account Opening Process
GenZ’s YOLO and FOMO feelings are triggering spontaneous investment decisions stemming from emotions rather than logical reasons.Technology historically has been attributed to improving efficiencies, but do you think digitization has created a bubble of epic proportions when it comes to the Indian Capital markets? The sheer scale and pace at which new investors have joined the force is alarming. But India is a growing market!
The current market frenzy has led to investors gleefully ignoring the Red Flags:
TOWERING MCAP TO GDP
In 2007, when the Market Cap to GDP Ratio touched 149, the BSE Small Cap corrected by 75%, and the Nifty corrected by 60 % over the next two years. And today at similar levels of 150, all we continue to hear is “India is a growing market”.
HOW STICKY IS THE SIP MONEY?
Yes indeed, we are a growing market, and the Monthly SIPs have been breaking records. While the nation is riding the “Mutual funds Sahi Hai” bandwagon, there is a fair argument on how sticky this SIP money really is! Gone are the good old days when one had to go through a cumbersome process of filling forms which also made people reluctant to close one. With the ease in process stickiness also reduces. The SIP money that is getting auto-debited could also vanish by merely clicking “Redeem across Funds”!
INDIAN DERIVATIVES MARKET: A RUSSIAN ROULETTE?
India’s market cap is just 10% that of USA’s market cap. Ironically, India’s derivatives turnover is 100x that of the USA’s. NSE remained the world’s largest derivatives exchange for the fifth consecutive year in 2023 and dominated the Equity Index Options segment with a 98% global share in terms of contracts traded in June 2024. An attempt to simplify trading apps coupled with gamification by the likes of Zerodha and Groww acted as a powerful tool for attracting new and younger audiences to the world of investing. User-friendly interfaces, real-time market data, and seamless transaction capabilities empowered investors to trade stocks on the go through the mobile app. Weekly expiries and possibility to take leveraged positions is all the push that was required. So, what if 9 out of 10 F&O participants lose money, India is a growing Market!!!
WHERE ARE THE CUSTOMER’S YACHTS?
Post-COVID the market cap of brokers increased by 4x as they continued to get rich. Zerodha’s net profit rose 37% to INR 2,908.9 Cr in FY 23 and co-founder and CEO Nithin Kamath attributed the growing increase in futures and options trading to the growth in the startup’s top line and bottom line.
INVESTOR'S JINGLE POST-COVID
My big basket of stocks is GROWWing,
The roaring Bull is my Angel One.
All I have seen is Upstock in Stock Prices,
With Zerodhan going for brokerage,
I don’t mind putting my last 5paisa in the market.
During Covid-19, brokers spent a lot of money to acquire new customers. With client acquisition costs as low as Rs 200 discount brokers expanded the client base by attracting new traders and investors with no prior experience. As of Apr 2024, more than 65% of Indian retail investors are today using discount broker services.
IMPACT OF SOCIAL MEDIA
How can we talk about the impact of technology and not discuss social media. Twitter and YouTube have transformed into speculation grounds thanks to the emergence of so-called financial influencers – ‘fin-fluencers’. With little authority on the subject and zero accountability to the investors, fin-fluencers have seen a meteoric rise since the Pandemic across the globe. Apart from giving unsolicited tips to buy/sell scrips, thus, increasing their followers; these fin-fluencers earn substantial amounts of money through promoting brokerage services. Fin-fluencers would be rewarded handsomely by discount brokers and they laughed their way to the bank with referral bonus ranging from 30% to up to 90% of the brokerage fee paid by the traders.
ARTIFICIAL INTELLIGENCE, ALGO TRADING, ROBO ADVISORY & HIGH-FREQUENCY TRADING (HFT)
The integration of algorithmic trading and artificial intelligence has propelled stock trading into the realm of automation and predictive analytics. High-frequency trading (HFT) which is algo trading at its core, involves the use of powerful technology to execute trades at extremely high speeds, flipping positions in milliseconds. HFT algorithms can be programmed to send hundreds of fake orders and cancel them in the next second. Such “spoofing” momentarily creates a false spike in demand/supply, leading to price anomalies, which can be exploited by HFT traders to their advantage. Trades by HFT firms today account for ~ 50 % of the total trades on the exchanges.
THE VICIOUS CIRCLE OF ‘SHORTENED SETTLEMENT CYCLES’
The journey of technology in stock trading can be traced back to the digital revolution of the late 20th century. Over the last 2 decades, SEBI encouraged the adoption of digital technologies to streamline trade settlements and fund transfers. From the T+14 days settlement in 1994 to T+1 Settlement Cycle in Jan 2023, we have come a long way. While shortened cycles improve liquidity it also spurs higher investor participation in the market. It makes BTST i.e. buy today, sell tomorrow trade, smoother leading to higher trade frequencies which encourages speculative transactions instead of long-term investments.
IPOs – MAD MAX FURY
There seems to be MAD MAX FURY so far as IPOs are concerned. The timeline for listing securities has been shortened to T+3 days. Unlike the olden times when large IPOs would squeeze out liquidity for 14 days, the shortened cycle has made one apply to IPOs only for listing gains as if it’s a lucky draw! No wonder some IPOs are seeing subscriptions over 1000 times each.
Further, because there is zero-cost brokerage, the propensity to hold stocks has gone considerably down as there is no cost attached to applying to an IPO. In older times one had to diligently fill a plethora of forms sent to them by their broker and issue a cheque where in the money would move out of the bank account for at least a fortnight. From blocking your money for almost a month, the investor today has negligible opportunity cost with money just getting blocked for 48 hours.
HAS DALAL STREET COME A FULL CIRCLE?
Stock exchanges in India began informally in the 18th century opposite the Town Hall of Bombay under a banyan tree. Once again, we have investors sitting under a Banyan tree, trading under the shadows of the leaves, far away from Dalal Street with a phone, network connectivity, and a stock trading app.
Yes, technology has led to the democratization of the market, but the increased volumes have added to heightened speculation and volatility. Financial markets are a more sophisticated space that requires acumen and understanding of risk-reward ratios. With negligible costs attached to trading, a user-friendly app, transactions triggered by Algos and referrals by fin-fluencers, the notional gains in an apparently never-ending bull market have started giving an exhilarating experience as if one is playing on a PlayStation.
Can we let the roots of technology spread indefinitely like a Banyan Tree or take adequate measures to scrutinize this tech growth before it strangulates and cripples the entire market is a question that regulators need to answer.