Breaking All Barriers
A Bengaluru-based online discount brokerage firm, Zerodha’s aim has been to make trading barrier-free since it was founded in 2010. Zerodha started its journey with a team of five people. Today, it employs over 1,300 people. Nithin Kamath, Founder & CEO, shares his journey of how he built a large, profitable, retail trading platform by charging only `20 a trade and offering many free services
“The brand name was a play on the word zero and the Sanskrit word ‘rodha’, meaning barrier. We began with a team of five people, which has now gone up to an employee count of nearly 1,300 today”
For those who aren’t familiar, what is discount broking?
Discount broking is a service allowing traders to buy and sell securities at a low to no fees. It is built on the principle of economy of scale, charging low fees and having low overheads. These overheads are generally in the form of advice, wealth management services, and dedicated relationship managers. By getting rid of all these overheads and offering online platforms to trade, discount brokers can cater to a large number of clients at lower costs.
Why don’t you start with your personal story, your early life and the narrative of how you found your way into this business?
I’ve been a trader all my life, starting at the age of 17. In the early 2000s, I was a sub-broker for Reliance Money. When I was a trader, I did all the research myself and didn’t really rely on my broker for anything other than order execution. This being the case, the cost of executing trades seemed quite high for me, since the other services that my brokers offered didn’t add much value. Zerodha was born out of a need for a broker that I didn’t have for myself when I was trading.
We kick-started operations on 15 August 2010 with the goal of breaking all barriers that traders and investors face in India in terms of cost, support, and technology. The brand name was a play on the word zero and the Sanskrit word ‘rodha’, meaning barrier. We began with a team of five people, which has now gone up to an employee count of nearly 1,300 today.
Today, our disruptive pricing models and in-house technology have made us the biggest stockbroker in India in terms of active retail clients. In addition, we run a number of popular open online education and community initiatives to empower retail traders and investors.
How did you validate that Zerodha was worth pursuing?
Discount broking was already popular in developed markets like the US when we started off and it just seemed natural for us to do it. The first 30-40 clients that we got were all people we knew already as friends and customers of the Reliance sub-broking business. After a couple of months, we started participating in online forums pitching Zerodha to traders. The idea was liked and adopted by people quite enthusiastically and that gave us our next 100-200 clients. This was good validation for the business, since getting people to trust you in the business of money isn’t easy. If there are people putting their trust in you, the idea must be good.
Zerodha is growing incredibly fast so can you tell me what you do and why it’s growing so fast? Where is the growth coming from?
Our growth is mostly thanks to word-of-mouth marketing we get from our clients. We don’t really spend on advertising or marketing. Instead, we let our products speak for us. Over the years, we’ve been able to build an ecosystem of products and services to cater to a wide array of investor and trader needs. This is essentially our growth plan – to be able to offer all that a trader or investor may need.
What is the culture at Zerodha relative to the culture at other discount brokers? More programmers than marketers?
Yes. In fact, we don’t have a marketing team. We only have a couple of people responding to queries on social media and picking up client feedback to pass on to the developers.
“Our growth is mostly thanks to word-of-mouth marketing we get from our clients. We don’t really spend on advertising or marketing. Instead, we let our products speak for us”
How does Zerodha distinguish itself from its competitors?
The primary differentiator for us has always been our products and technology. We have a great team of developers who now understand markets and the needs of traders well enough to build products that add real value.
Do you think the market will get even more competitive as incumbents cut pricing further to defend their market share and new discount brokers enter?
I don’t think that competition in terms of pricing will make much of a difference going forward. The prices are already quite low. What will make a difference though, is the quality of products. Incumbents are at a disadvantage here, owing to the difficulty of moving away from legacy systems. However, if anyone, incumbent or a newcomer, is able to offer a better platform—that would spark a lot more competition.
How many customers do you have right now?
Right now, we have over 15 lakh customers out of which almost 11 lakh are active. Our clients place millions of orders every day through our powerful ecosystem of investment platforms, contributing over 15% of all Indian retail trading volumes.
How do you acquire customers, for Zerodha? And how do you retain them?
Customer acquisition for us has mainly been by word-of-mouth.
Do you think discount broking firms have helped expand the market by bringing on board a large number of first-time investors?
Over 50% of our customers are first-time investors, so yes.
What is the average age of investors trading through Zerodha?
Our clients are quite young. The average age would be around 25.
Do discount brokerages work the best for people who are tech-savvy?
Not really. Anybody who can use a smartphone nowadays can trade with us. The idea is to make trading and investing accessible to all.
What are the benefits of using a discount broker for an early-stage equity investor?
Today, investors with us get access to the best investing platforms and educational resources. We allow investors to invest in equities, ETFs, bonds and zero commission mutual funds for free. Apart from this we also run some of the most popular educational initiatives in India such as Varsity, Tradingqna, and the Zerodha Educate series of webinars.
What are the latest products that you offer?
- Kite 3 mobile - our mobile platform which was completely revamped
- Mobile app for Varsity
- GTT orders
- Portfolio analytics on console-our back office to give clients more insights.
Zerodha’s early-stage fintech fund and incubator, Rainmatter, funds and incubates innovative Indian fintech startups. You recently invested `4 crore in Finception, an early-stage startup. Tell us more.
Rainmatter provides well-equipped workspaces, mentorship, and funding ($100K-$1M) to innovative startups in the capital markets space in exchange for minority stakes.
Finception aims to make stock markets more accessible to the layperson. The platform uses storytelling as a key feature to simplify the content featured on their platform.
We liked the idea that a platform can explain complicated stock market activities in simple language, which is very important in a country like India, where the retail investors’ count is hardly two per cent of the total population. This will help to spread awareness and knowledge about the markets to get more investors on the bourses.
What are the challenges before the discount broking companies?
Indian markets are incredibly shallow. Growing the market and bringing more Indians into the financial markets is the biggest challenge for the financial services industry as a whole. All our educational initiatives such as Varsity, Tradingqna, and our Zerodha Educate series are geared towards this objective.
“Indian markets are incredibly shallow. Growing the market and bringing more Indians into the financial markets is the biggest challenge for the financial services industry as a whole”
Do you agree that credibility and transparency are crucial for any financial services business?
It took a long time to build credibility, it was a slow transition that happened over the last nine years. In our first year, we opened 3,000 accounts. We applied a flat fee of Rs.20 for every trade, irrespective of its size with no brokerage fee, which was deemed as quite disruptive by experts at that time in the market. Compared to that, other brokerages used to typically charge a percentage of the traded amount. When the cost of any product or service is less, people automatically question the quality. That was a big challenge for us right from the start. We were able to build a community around us, which helped in the long run.
AI and ML are the new buzzwords in the broking community. What latest technology are you leveraging to reduce costs?
The development team maintains a deeply technical perspective when approaching any problem. There isn’t any specific technology that I Growcould name that we employ, but it’s more of how we approach the problem at hand.
Speaking of problems, could you tell us about the Zerodha glitch that hampered trading on expiry day?
On 29 August, between 10:00 am and 10:40 am, we faced technical issues with our order management system (OMS). Order placements resumed after that, but clients who had open orders from before 10:00 am that got executed at the exchanges during the affected period, faced issues with additional margin blocks until we could reconcile the overall positions with the exchanges.
The root cause of the issue was a freak incident that neither we, nor our OMS vendor, Refinitiv (formerly Thomson Reuters) a subsidiary of the London Stock Exchange, have encountered before. It is normal for a large single order to get executed in multiple trades at the exchanges, usually up to several hundred trades. But on that day, a single order for 10 lakh quantity placed at around 9:40 am on a sub Rs.1 stock (penny stock) on BSE got executed in almost 1+ lakh individual trades. This is unprecedented and caused an overload in the OMS.
There is no way to predict or control how an order placed at the exchange is filled. It is a function of market liquidity. Refinitiv is working on a fix to the OMS to handle cases like this. Until then, we are limiting the maximum allowed quantity per order for equity trades to 20,000. If a client has to enter or exit larger quantities, it would have to be done in multiple orders of 20,000 quantity. We will soon launch basket orders on Kite to ensure it is not inconvenient to create multiple orders of 20,000 for a particular stock. This limit affects less than 0.02% of our clients.
There are unforeseen edge cases and rare conditions like this that can affect any technology business. I have had many of our clients writing to me asking to increase the brokerage costs to ensure technical issues do not happen. I had to reassure our clients that technology and quality of our products are something that we never compromise on. Our low brokerage has no bearing on the quality of our technology, which every day, scales to serve millions of our clients place millions of trades.
What are you focussing on currently and what is next?
We are working on bonds platform that will enable investors to easily invest in fixed income securities, given the poor liquidity on the exchanges. NPS is a really good product to save for retirement, given the poor retirement readiness among Indians. We are working on getting our NPS license to enable Indians to save for their retirement.