The above video was quite refreshing to watch. The speaker sharing relevant details calmly. 
and despite the host’s repeated attempts to “dumb it down” and create one-line quotes that lose a lot of the nuances involved, the guest did not fall for it. 
However, i did encounter what i think are a couple of aspects that were not discussed in detail. Sharing them below in the form of “counter-arguments”. If anyone sees any logical issues with these, please do share any aspects i might have misunderstood or what i might still be overlooking. 
Recurring theme A
The most common recurring theme in the above video was the lack of exploring/questioning whether increasing financialization is the need of the hour in India. The speaker seems to take the necessity of increased financialization as a given. However, i think it is worth exploring the alternate perspective that regulators may be acting rationally under a different assumption - that India (within the current global economic environment) has reached a point where more financialization could be detrimental to the economy/society.
Of course, it is not a zero of one, all or nothing choice, and the “right amount of financialization” is an extremely dynamic target right now, especially in recent times with all the adversarial economies working overtime, and the amount of chaos being engineered across the world right now.
Recurring theme B
Another recurring theme in the above video is pointing to other economies and stating that we are behind and now going backward. An easy counter-argument to that is
As a developing nation/economy, while the cutting-edge developments are usually lagging, an advantage we have is to avoid potential mis-steps. As we have the benefit of hindsight looking at others ahead of us that have run through and encountered eventual issues.
Examples of leapfrogging - Mobile networks, Digital transactions/Payments, ...
Of course. India’s development path offers several fascinating examples of “second-mover advantage” or “leapfrogging,” where not being the first to adopt a technology or an economic model allowed it to avoid the pitfalls faced by early adopters and implement more efficient, modern, and cost-effective solutions.
Here are some potential instances where India has benefited from this approach:
1. Telecommunications: Skipping the Landline Era
- Pitfall Avoided: Developed nations spent decades and billions of dollars laying extensive copper-wire infrastructure for landline telephones. This was a slow, capital-intensive process that created a dependency on physical lines for connectivity.
- Leapfrog Approach: India’s telecommunications revolution happened in the age of mobile. Instead of replicating the landline model, India went straight to wireless networks. This was significantly cheaper and faster to deploy, allowing the network to reach remote and rural areas far more quickly than a physical network ever could have.
- Benefit: This resulted in one of the world’s largest mobile subscriber bases, with very low call and data costs. It became the foundation for the country’s digital economy, enabling everything from mobile banking to e-commerce in areas that never had a physical phone line.
2. Financial Services: The Unified Payments Interface (UPI)
- Pitfall Avoided: The financial systems in many Western countries evolved through cheques, magnetic stripe credit cards, and then chip-and-PIN cards. These systems often involve multiple intermediaries, leading to high transaction fees for merchants and slower settlement times.
- Leapfrog Approach: India built the “India Stack,” a public digital infrastructure that includes the Unified Payments Interface (UPI). UPI allows for instant, real-time payments directly between bank accounts using a mobile phone.
- Benefit: India bypassed the legacy credit card infrastructure and created a mobile-first, interoperable, and extremely low-cost payments system. This has driven massive financial inclusion, empowered small businesses by enabling them to accept digital payments without expensive hardware, and made digital transactions accessible to a huge portion of the population.
3. Space Exploration: Frugal Innovation
- Pitfall Avoided: The initial space race between the US and the USSR was driven by geopolitical competition, leading to enormous expenditure and high-stakes projects with many early failures.
- Leapfrog Approach: The Indian Space Research Organisation (ISRO) learned from the successes and failures of its predecessors and adopted a philosophy of frugal engineering. It focused on practical, high-impact goals like communication and weather satellites rather than purely prestige-driven missions.
- Benefit: ISRO has achieved remarkable feats at a fraction of the cost of other space agencies. The Mars Orbiter Mission (Mangalyaan), for example, cost less than the production budget of the movie “Gravity.” This approach has made ISRO a competitive player in the global satellite launch market.
4. Renewable Energy: Tapping into Falling Costs
- Pitfall Avoided: Early industrializers built their economies on fossil fuels, creating a long-term dependency and lock-in to carbon-intensive infrastructure. Early investments in renewables were also extremely expensive.
- Leapfrog Approach: As a later industrializer, India is building out its energy capacity at a time when the global cost of solar and wind power has plummeted. The government is aggressively pushing for renewable energy adoption.
- Benefit: India can now build a significant portion of its new energy capacity with cheaper and cleaner technology. It is on track to become one of the world’s largest solar power producers, potentially avoiding some of the worst environmental consequences of the development paths taken by earlier industrial nations.
5. Retail: E-commerce over Big-Box Stores
- Pitfall Avoided: The 20th-century retail model in countries like the United States was based on building massive, car-dependent, out-of-town “big-box” stores and shopping malls. This required huge investments in real estate and physical infrastructure.
- Leapfrog Approach: The rise of e-commerce in India coincided with the explosion of smartphone penetration. Companies were able to build sophisticated online retail and logistics networks, reaching customers in Tier-2, Tier-3, and even rural areas without needing a massive physical store footprint.
- Benefit: This has created a more dynamic and accessible retail market. It allows small producers and sellers from anywhere in the country to access a national customer base, fostering entrepreneurship and providing consumers with a much wider choice of goods.
While the video talks about the risks of
how we are going against the established flow of ensuring speculators and securing middle-men their cut, to promote the market, and ensure greater good for the society as a whole,
i.e. follow the playbook laid out over the past few decades.
The counter-argument to that is,
by following the laid out over the past few decades by other developed economies,
we run the risk of ending-up with an well-established system with the current set of overheads
just as the other economies move on to alternate far more efficient mechanisms possible.
(basically think of being the one that enters the game late, enables others to exit, and is left holding the now worthless/less-worthy asset - in this case a “sub-optimal market”.)
While it is definitely not going to be easy to switch to a differently structured market, one with hopefully lesser middlemen / and a need for lesser middle-men for a smooth operation of the market, i.e. less overheads; it is easier said than done. Even if one were to identify such an alternate market framework, successfully executing the transition to it from the current market-structure in a democratically manner is an additional challenge.
Note: While reading the above paragraph, If you thought of the class of currencies whose name starts with a “cry” and ends with a “pto”, then yes, that was on my mind too. However, i tried to to avoid calling them out as they are just one of several potential alternatives that the major economies are already pivoting towards as the modern implementation of alternate regulated markets for one reason or the other. For example, USA legitimizing fiat-collateralized stablecoins over the past 12 months [1][2][3] and the nimble money in the financial sector trying to embed themselves as service providing “value extracting middle-men” even in the new emerging market.
Speculators are an essential part of an economy, to provide liquidity
Counter-arguments specific to the thought process.
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Increased Volatility and Price Bubbles: Rather than just providing smooth liquidity, speculators can be a source of major market volatility. Their activity can lead to price bubbles where asset prices are driven far above their fundamental values (e.g., the dot-com bubble or housing bubbles). When these bubbles burst, it can cause significant economic damage.
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Detachment from Economic Fundamentals: Speculation can cause markets to become detached from the underlying fundamentals of the assets being traded. Prices may move based on market sentiment, rumors, or complex trading strategies rather than the actual performance or value of a company or commodity. This can lead to a mis-allocation of capital in the economy.
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Liquidity is Not Always Guaranteed, Especially in Crises: While speculators may provide liquidity in normal market conditions, they can quickly withdraw from the market during times of stress or panic. This can lead to a “liquidity black hole” where it becomes very difficult to buy or sell, exacerbating a crisis just when liquidity is needed most.
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Market Manipulation: Large speculators, or groups of speculators acting in concert, can have the power to manipulate markets. They can engage in practices like spreading false rumors or using their large trading volumes to artificially move prices for their own gain, at the expense of other market participants.
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Focus on Short-Term Gains Over Long-Term Investment: Speculation is inherently focused on short-term price movements. An economy dominated by speculation may see less focus on long-term, productive investment in companies and infrastructure, which are crucial for sustainable economic growth.
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Moral Hazard: The belief that speculators will always be there to provide a backstop can create a moral hazard. Other market participants might take on excessive risks, assuming they can always exit their positions easily. Furthermore, if a speculative bubble gets “too big to fail,” it can lead to government bailouts, shifting the cost of risky behavior to taxpayers.
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Resource Diversion: A significant amount of financial and human capital can be diverted into speculative activities that, some argue, produce little of tangible value for society compared to investing in innovation, production, or services.
While the role of speculators in providing liquidity is a standard argument in economics, these counter-points highlight the potential negative consequences their activities can have on the stability and health of an economy.
Investor suitability tests and other such nuanced solutions
On the topic of introducing tiered permissions to access the derivatives-market based on income/wealth, experience in financial markets, and/or investor suitability exams. it sounds like a very well-thought through proposal at first glance.
This is expected to prevent the 90-95% of traders from accessing the markets for now, which would ensure the remaining 5-10% traders with access to the derivatives markets and are currently profitable, will continue to be so.
How true is this though?
Is it possible / even likely that most of the remaining retail participants
- will now become the loss-leaders funding the institutions now?
- will now become unprofitable/unsustainable as the unsophisticated 90-95% is no longer in the market.
Also, instead of the above “nuanced” approach to cull the 90-95% and retain the rest, if the entire 100% is culled, where will the remaining 5-10% relatively experienced and relatively sophisticated retail traders go instead?
- Are there any alternative markets that can be kick-started by this sudden over-supply of retail traders?
- Is the technology ready? Are other market participants ready to cater to this?
- Can this be the moment where we leap-frog other developed nations into adopting a better market framework that most developed nations/economies can only dream of? (lesser friction, lesser-middle-men, finer controls to the regulator (instead of a blunt central-rate) to quickly adapt from time to time in a dynamic world? …)
What % of professions are successful?
The comparison is flawed as it compares
- What % of derivative traders are making money
(i.e. net positive, not even whether they are sustainable).
vs.
- what % of some other professions make extremely high lopsided returns.
Taking the example of cricket (IMHO, still the riskiest/weakest compared to other options discussed),
for folks attempting to end-up in the National cricket team or IPL teams, but who do not make it,
there are plenty of financially sustainable “off-ramps” for them to pursue activities
- involving cricket
- like coaching, training, lower-tier cricket teams and companies
- and not related to cricket per-se
…earning not crores, but maybe lacs, or tens of thousands.
Are there any such opportunities for derivative trading as a profession?
Possibly.
What’s the distribution like though?
Is it an “all or nothing” profession,
or something with sustainable options for those who do not make it to the top?
The following is a work of fiction inspired by the recent events.
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