How safe is it to trade with Zerodha now in 2018?


#1

I had posted this long back in 2014 and looks like a lot of views on it. In 2014 zerodha used to charge brokerage for investments, now it is free. Feels too good to be true. So the question still remains, how safe is it to trade with Zerodha? We have had more incidents now with brokerage firms like F6 Finserve, Amrapali Aadya and others.


Size of Trading Account.
#3

Didn’t realize that it is already 4 years since I wrote this. Of course we are safe, and everything that I had written back then still holds true.

  1. Businesses that shut down usually will be loss making businesses and not profitable ones. We are probably among the most profitable if you look at earnings from pure retail broking.

  2. We have zero debt on our books, no money ever borrowed. We don’t lend any money either, if anyone wants facility like margin funding, we pass the lead onto our partner IL&FS.

  3. We are usually among the first companies to file our IT returns, usually companies in trouble will delay and sometimes not file at all.

  4. We have almost zero complaints against us on the exchanges by our clients in the almost 4 years of being in the business.

  5. We are quite conservative in terms of leverage/intraday margins, changing quite fast based on the market volatility. High leverage is usually the culprit for disasters, both for clients and brokerages.

  6. We have been acknowledged by various newspapers and also awarded CII Emerging Entrepreneur award where the due diligence was done by Grand Thornton.

  7. Members of recognized exchanges and regulated by SEBI/FMC. Even if a brokerage decides to shut down the client funds should ideally be safe if not there is also an investor protection fund setup by exchanges (more than Rs 1000 crores at NSE) which can be used in such cases

  8. Constantly looking at empowering clients by sharing as much knowledge and giving access to as many trading tools as possible.

Along with all the above reasons here are some updates

  1. One of the reasons for the question about our credibility is because of our pricing - 0 for investing and Rs 20/trade for intraday and F&O. Such a business model with low pricing works only if we can scale well. We have been able to do this successfully over the last 8 years of business. Check this link where I regularly update a list of the largest brokers in India by active clients (data shared by NSE). We have in just under 8 years grown to be the 4th largest brokerage firm in India by active clients, largest by trading turnover, and most profitable in terms of retail brokerage operations.
    So yes, at a certain scale, even a business model with extremely low pricing like ours can do well. But like I have always said, I think the Indian brokerage industry with its shallow retail participation can’t really have more than 2 or 3 discount brokers. The rest will slowly perish as the cost of technology and compliance keeps going up.

  2. Thanks to the recent Rs 4000 crores ICICI direct IPO which valued them at over Rs 16000 crores, we as a business have a benchmark set in terms of valuation. Even if we are valued at a portion of theirs, we will have a lot more to lose if we can’t keep our clients happy and safe.

Here’s a google trend graph of Zerodha vs the top 5 brokerage firms over the last 5 years. Much larger than others in terms of online activity.

  1. We are building new revenue verticals to reduce our dependence on just broking revenues which is cyclical in nature. We are building up Coin the direct MF platform, Zerodha Technology business, Zerodha capital the NBFC arm, Rainmatter the incubator, and couple more in stealth currently. We want to ensure that the business continues to generate revenue even if trading turnover on the markets dip. The best indicator of the safety of a business is if it is doing well financially.

  2. Over the years we have won multiple awards which has meant our financials being scrutinized. The most recent being the E&Y Entrepreneur of the year 2017 - Startup, maybe the most prestigious one in the country currently.

  3. Yes we haven’t seen a 2008 kind of episode yet from starting our business in 2010. But if it were to happen again - we would be better placed than all other brokers out there because of no leverage on our books. No debt as a business or no HNI clients who have been given special privileges to use the margin funding route to take huge equity positions in mid/small cap companies. Traditional brokers use both debt and margin funding route to run their business and hence are at much bigger risk if 2008 were to happen again.

  4. The new SEBI enhanced supervision regulation from April 2018 requires brokers to comply weekly with all requirements in terms of declaring to exchanges client balances and securities which were earlier done once a year. They are also bringing in alert mechanisms to inform investors if the financials of a brokerage firm starts deteriorating suddenly. This will hopefully ensure incidents of small unscrupulous brokerage firms like F6 Finserve, Unicon, Amrapali, Wealthmantra (1 discount pricing and 3 traditional pricing models) going bust don’t repeat. Btw, every industry/business will have such players, the consumer has to be aware and pick up on any early signs of trouble. The first and the most important step is to by ensuring your latest mobile/email id is updated with your brokerage firm and with the exchanges/depositories (NSDL/CDSL, wherever your demat account is opened). All transactions are today sent via sms/email by them.

  5. Most importantly we have over Rs 300 crores of our own capital in the business today. We run a rewarding employee stock option program to ensure everyone working at Zerodha is also a stake holder. Our skin is in the game, which ensures our interests are aligned with our clients.

Some of the above might come across as blowing our own trumpet, but there is no other way to put this across when answering a question on safety. :slight_smile:


#5

Excellent response @nithin. Keep it up & pls make kite more stable. Also, if you can kindly see how you can allow bracket order & some blocked strike prices of bank nifty options.


#6

Compared to others Zerodha is Safe… Make kite more stable and error free…that’s only problem…


#7

@nithin Very well done Mr Nithin Kamath. I had read about you even before I entered stock market in a magazine long time back. I also liked your office when I visited once. Its a nice environment indeed. I am sure Zerodha is safe because your spreading your risks thin by expanding. That is a good thing. But broking/execution is your core business and you must make it the best and bug free, whatever issues Kite or your backend infrastructure is facing, please correct it asap. I am sure your business will earn more good rep than any others in the competition. All the best, Zerodha being the pioneers may it reach the top soon :smiley:


#8

Where is nbfc we all awaiting this for use


#9

@nithin What about Proprietary trading? (disclosed in every contract note provided)


#10

@Tarzan,

Isn’t broker risk applicable to entire brokerage industry including traditional brokerages. Why is this specific to Zerodha?

Every broker has risk.

Globally well reputed brokerages have gone bust.

Why do you think there is risk specific to Zerodha?

Am i missing something?


#11

It is applicable to everyone. It is just that people/competition try to single us out sometime trying to disrepute us.


#12

Nitin - just one question - with so many active clients, you would have their margin money in your books. Most of the clients would not be using their margin balance to the fullest. If you add up the unused margin of all clients, it would run into hundreds of crores I guess. It must be tempting to use these idle funds to make some quick bucks. I used to get calls from my RM at ICICI Direct telling me not to keep too much money in Zerodha account which I always ignored because I could understand where he is coming from. However, I came to know through someone I know - who is a very good friend, in the market since even longer than you and has worked in broking firms and he also was the one who actually told me try Zerodha - that a broking firm uses the idle fund of client to play in the market. As long as the trade is profitable there is no problem but if the proprietary trade goes wrong, it impacts the entire clientele. And I have been told not to keep too much balance with Zerodha. In fact, he told me that Sharekhan is the only broking house which doesn’t have a proprietary trading desk.

How would you assure an F&O trader trading only through Zerodha and regularly having unused margin lying in the account that his money is safe. Are there any safeguard for clients in case the broker goes bust on proprietary trades?


#13

This used to be a problem earlier, from 2008 onwards SEBI has been tightening the screws significantly. The new SEBI enhanced supervision regulation requires brokers to declare fund utilization every week (used to be once a year earlier) and show that no one other than the client who owns the funds is taking margin on it (neither prop nor another client). This new requirement is an operational burden, but this kind of takes away any possibility of misutilization of client funds. After this new regulation, it is just a matter of time that this industry will come down from 500 odd active retail brokers to maybe less than 100 in the next 3 years.


#14

Hmmm…Thanks for the reply.


#15

DEAR NITHIN,
i believe that this was due to the power of attorney. upstox has started e-dis facility with otp. please bring this facility in zerodha.


#17

Well said Nithin. I am a customer since Jan-2016 and i really like your services and i have no doubt about your ability to continue operations, even in a 2008 like scenario.
However, what really spooked me about Zerodha is the Tech. On the DeMo 9-Nov-2016. You servers were down - the website could not be accessed, the call n trade number was busy. I could not close some of my trades as a result.
Although you guys have done a good job since and i keep seeing constant updates whenever there’s a breakdown. However, how can you assure us that this issue will not be repeated in the future when there’s extreme volatility on a single day.
Thanks!
Ali


#18

Yes, It’s very much safe to Trade with Zerodha until…

  1. Server goes down and you are on your own.

  2. When serve goes down They Pretend to Solve the problem but in actual they close all the helpline number, No Response on E-mail.

  3. This server failure happens in every 3-4 months. (Mark date on calendar)

  4. High probability of Order failure on Big event days.

After all this Zerodha is still safe to Trade.


#19

@nithin, zerodha is growing at a faster pace & adding new clients so obviously your servers need to scaled up regularly which is not an easy task. I suggest you should keep separate instances with different URLs like say kite1.zerodha.com, kite2.zerodha.com etc…& possibly auto switch clients to server with less load…you may have already thought about but pls do something on this serious concern


#20

I feel secured with Zerodha as far as money is concerned. There are however other problems associated with it like slow user interface, occasional mismatch in margin on trading platform and ledger, price refreshment is too slow, placing AMO order is like placing normal orders (I have a feeling that AMO is not useful nowadays with Zerodha - it might be probably due to large client base). Zerodha needs to scale up on this area


#21

100% agree with all the above.

However, from the retail consumers perspective, feel that Zerodha has been a bit slow in technical development and infrastructure upgrade. Thanks to the novice-ness of Indian retail customers in not to able to demand and ask more than in line with best in class trading platforms.

Having said that, I am sure @nithin and team might be addressing the technical infrastructure constraints currently faced.

Thanks.