Broking is a unique business because there’s a hard ceiling on how much we can grow and the rate at which we can grow. What most people don’t realise is that SEBI has set a 15% open interest (OI) cap at the broker level.
No single broker can hold more than 15% of the total market OI. This restriction exists to mitigate the risk of concentration from any single broker becoming too large. Concentration is beneficial for business but ultimately detrimental to consumers.
These are all excuses. How does it even affect brokers, please enlighten me. Its impossible one broker breaches 15% of open interest. Brokers should focus on improving their platforms than crying, this is not good, that is not good.
Remember the times when one couldnt buy naked OTMs in Zerodha due to OI limits? Back when Zerodha was dominating broking industry It was one of the catalysts that led to loss of market share.
If Open-Interest in F&O (OI) is a perfect proxy/metric towards how much revenue a broker can make, then the first instinct is that any broker close to breaching OI limits is better served focusing on extracting more profits from the existing user-base and trades (i.e. within the existing volume of OI being generated).
Alternately, what are the aspects a broker can invest in
to improve their revenue/profits WITHOUT increasing their OI ?
What would be key aspects of a GTT-like feature for F&O,
one that does NOT count towards OI,
but something that users will prefer to use (instead of placing F&O orders that add to the OI) ?
Possible within the current regulations? (Also, likely to fulfill the spirit of the regulations / intent of the regulators behind the OI-limit?
i.e. once implemented, unlikely to be prohibited in future.)
BTW, the tweet linked above goes on to say that Zerodha has been close to the 15% OI limit for the last few years already…
This is similar to the 33% market share restriction that NPCI imposed on third-party UPI apps. That measure was never implemented because it would’ve meant UPI apps stopping transactions, but in our case, the limit is applicable.
For us to grow, the overall market must grow, and that means other brokers must also do well. Although we have been at nearly 15% of OI for the last five years, fortunately, the overall market has grown, and we’ve benefited.
@Sanjeevkumar_M what’s the logic behind the assertion that a broker won’t breach a 15% limit?
That won’t work. GTT is on the broker side and won’t increase OI. So does limit orders. Any order that is not completed is never counted as OI. But such orders would completely defeat the purpose. I can’t be long or short on say NIFTY, if OI is breached for that call/put.
Bro, There 100s of trading firms trading with more than 2000 cr a day. Do you think retailers with hardly 10 lakhs capital, can breach 15% on one broker. Its impossible, I’ve run a analysis on this, so its impossible.
Hmmm… Interesting. Can you share the details of exactly what/how you analysed this? ( Since this claim appears to be in direct contradiction with what @nithin claimed in the tweet.
Or maybe the 2 claims are about 2 slightly different things? )
This is mostly by looking at the cash and futures flow, along with options open interest. It’s quite complex, i had spent nearly 3-4 days analysing this few months ago.
@cvs
What’s the logic behind your assertion that a broker can easily breach a 15% limit?
Do retail traders really become that big?
why only Zerodha seem to complain about it;not Groww, not Angel One, not Upstox, not Icici Securities,…
Exactly, zerodha keeps crying about all of these, while no other broker has this issue. they’re not able to keep up with the competition like dhan, groww, sahi and all.
I used to work for one of the hedge funds untill late 2024 and which used to run biggest option book, rougly 3-4% of daily volumes across strikes. At retail level it’s quite impossible to calculate this, unless you’ve data.
If you get some estimation around options oi and how much of it is hedged(market makers mostly hedge), how?? Using futures/spot or other strikes. This can be estimated using historical data. Most of the retail trades are not hedged, basically they’re delta long/short.
Probably during covid days. Yes, during that time zerodha was the only platform most people used. Now there are many, and cheaper brokerage alternatives as well. On top of that most of the traders with decent size capital won’t trade on zerodha/dhan/groww, they trade using prop accounts.
Hmmm… so one option (already in use) is to utilize an alternate custodial account,
as apparently the OI due to a user through such a custodial account, doesn’t count towards the broker’s OI limit.
If a broker were to
offer one (or more) such custodial accounts for all their users participating in F&O,
and offer intuitive and instant transfer of each user’s available funds between such custodial accounts,
then could the broker seamlessly balance their users’ OI across such custodial accounts
(eg. before placing the user’s order),
thus enabling the broker to handle 15% more OI
for each such custodial account they offer their users?
If legally feasible, would the costs of supporting such a system be prohibitively expensive? (or atleast more than any of the alternatives)
For a broker approaching/hitting these limits,
another alternative (that is hinted at in the linked tweet in the original post) that is more in line with the stated intent of the regulations - “mitigate the risk of concentration from any single broker becoming too large” is to focus on “increasing the overall pie” i.e. the OI in play from other brokers, so the broker near the 15% limit can continue to grow and handle more OI themselves.
Yet another approach could be to commoditize access to a lot of the stack (software, legal, procedural, …) involved in being a broker, by licensing them to a bunch of independent broker entities, each of which can now operate upto capturing 15% of the OI.
customer acquisition/loyalty might be a challenge,
Perhaps operating them as legally independent brokers, but under a single brand umbrella/foundation work? (eg. Zerodha-North, Zerodha-East, Zerodha-West, Zerodha-South).
Are the fixed costs associated with each “broker instance” high enough to make this a financially less attractive option?
There is a difference between daily volumes and OI? For sure there is no way we would be close to 15% of daily volumes, but OI yes, especially the clearing corp calculating the OI the same way irrespective of if you buy or sell, if you buy ITM or deep OTM. Our biggest issue is with customers buying OTM options and then holding it overnight.
What has made it tougher is that on a per client there is a max OI of Rs 1500 cr (it was Rs 500 cr until sometime back). That means even if you are hedge fund, you can’t take positions beyond this or there is a penalty. So the overally OI in the ecoystem also reduces.
How the OI limit is calcualted is, if you hold 1lot of Nifty calls, it is considered as OI of ~15lks.
It was one of the catalysts that led to loss of market share.
