Looking back on 2024: A year of transitions

It’s the end of another year, and it’s a good time to look back on the year that was. Performance-wise, 2024 was a weird year. Whether you were bullish or bearish, the markets gave everyone something. When you look at the broad indices, it was a good year for the markets. Look underneath the indices, however, and things were starting to look bad in some corners of the market. Where things go from here is anybody’s guess.

Also see: List of all new features and product updates in 2024

Zerodha is now 14 years old. Things look nothing like they once did, all those years ago, when we were a fledgling outfit amongst entrenched heavyweights. Things are changing at an unnerving pace. Trends of all sorts keep popping up, with eye-watering sums of money backing all sorts of complicated experiments. It’s hard not to get caught up in the frenzy and feel a sense of FOMO. You keep wondering if you’re missing out on something big.

At times like this, though, we fall back on the philosophies that guide everything that we do.

In a recent internal chat, Nithin talked about “shinise,” which in Japanese means “old shops”. Japan not only has some of the oldest businesses in history, but also the highest number of old businesses. There are thousands of Japanese companies that are hundreds of years old. Some are even thousands of years old.

What makes Japanese businesses so resilient?

A big reason is their philosophy of sticking with the core of what they are good at, and not trying their hand at random, ancillary things. Another inspiring quality is their philosophy of investing back in the communities that enable their success. This is what we try through the Rainmatter Foundation.

A lot of this resonates deeply with all of us at Zerodha. Despite being 14 years old, we’ve more-or-less stuck to the same things we started out with, which is to provide the best possible platforms for traders and investors. Of course, our mission and approach have evolved over time, but the core of what we do has and will remain the same.

Companies often assume they can enter unrelated businesses and be good at them. The temptation to do so is especially strong in financial services, where the numbers are front-and-center. At Zerodha, however, we were always clear that we’ll do what we are good at and partner with smart entrepreneurs for the rest. That’s the idea behind Rainmatter and all the investments we make. We, however, have and will keep our focus trained on the capital markets.

After 14 years of business, we are no longer a startup. We’re a mature financial institution that is the custodian of the hard-earned savings of over 1.5+ crore Indians, who have entrusted us with nearly Rs. 6 lakh crores of their money. We take this responsibility very seriously.

Financial services are centred on handling other people’s money. They cannot exist without trust. It takes years to earn this trust, but a moment to lose it all. Even a cursory look at history throws up hundreds, if not thousands, of cautionary tales, of entities that burnt down years of goodwill over a single misdeed. This is why whenever we build and design products or services, we think deeply about what they mean for those who trust us.

Just as we ask investors to think for the long-term, we do the same. We take a long-term approach to everything that we do at Zerodha. We’ve constantly resisted the siren song of quick fixes and shortcuts, even when they’ve felt like the obvious choice. This is hard in a maddeningly complex and fast-changing industry like financial services. But, to paraphrase Kipling’s advice, we try to keep our heads when everyone around is losing theirs.

Our core philosophy has remained the same from day one, which is the idea of “Do not do to others what you don’t want to be done to you.” That means no stock tips, no pushing people to trade, no spamming people, and nothing else that isn’t in the best interest of our customers.

Instead of just making a quick buck off you, we want to grow with you as you grow in life, being there for you whenever money is involved. This is what we have done, this is what we will do more of in the future, and this is what you should always expect from us.

With that being said, we thought we’d share some updates about the year that was. 2024 was ridiculously busy for us at Zerodha, in terms of products, services, and educational initiatives. Check out this post for more.

But it was also an interesting year for the broking industry at large.

Regulatory changes

2024 was a year of significant regulatory changes that affected pretty much everyone in the markets, from retail traders, investors, brokers, and the market infrastructure institutions. Perhaps the biggest and most consequential regulations were related to reducing speculative activity in the futures and options (F&O) segment.

Here’s a quick summary of these changes, from my colleague, Faisal:

1. From December 1st, weekly expiries have been limited to 1 contract per exchange and only one benchmark index—Nifty 50 for NSE and Sensex for BSE.
2. All monthly expiries of options contracts of an exchange will happen on the same day of the month. This limits the regulatory arbitrage of trading weekly expiries in other index contracts on the last week of the month.
3. To discourage excessive activity on expiry days, an additional margin of 2% of the contract size was imposed on all short option contracts.
4. All index options contracts will have a 2-3x increase in lot size, effective from January 1st.
5. The calendar spread margin benefit on expiry days has been removed, effective from February 1st.
6. SEBI has prescribed client- and broker-wise maximum open interest position limits. This is about 5% of the total OI on a client level and 15% for brokers. Currently, this is being monitored for violations at the end of the day, with additional margin blocks and penalties being levied. This will now be done intraday to ensure that traders don’t violate the limit during the day either.
7. SEBI has mandated that, from Feb 1, 2025, an option buyer needs to pay the entire option premium upfront. This is to curb the excessive leverage that some brokers would offer while trading intraday options where you are already trading the risk of the underlying contract. At Zerodha, we have always collected option premium upfront as a healthy business practice.

Given all these measures, there’s been a 20-30% drop in F&O activity on the exchanges and across the brokers from the time these regulations kicked in. Most of these measures haven’t even been fully implemented, and so, the fullest extent of these measures will be felt next year. Assuming that markets remain sideways, it’s fair to assume that F&O trading will dip even further.

Market activity in charts

It’s not just F&O — things are starting to cool down in the equity segment as well. The total equity turnover is back to the level it was a year ago — i.e. around December 2023 / January 2024. We’re still well above where the markets were before the COVID-19 pandemic, but it looks like the craziness may be ending.

We might be returning to sanity.

(Or, for all I know, Nifty will go up another 2000 points and I’ll look like an incompetent idiot.)

It’s the same when you look at the number of trades as well; we are back to January 2024 levels.

The fall in the value of shares deliverable is the same, and it’s back to December 2023 levels.

Other notable regulatory changes

Beyond the F&O regulations, there were several other important regulatory changes.

True-to-label charges

SEBI mandated all market infrastructure institutions, like stock exchanges, to be “true to the label” in how they levy charges. This circular has a significant impact on brokers, traders, and investors.

Until recently, stock exchanges charged transaction fees based on the overall turnover contributed by brokers. At the end of each month, brokers would be given a rebate — that is, the difference between what the brokers charge the customer and what the exchange charges the broker at the end of the month. Starting from October 1st, this was disallowed, and a uniform transaction charge was introduced across all brokers.

Taxes

In the 2024 budget, the finance minister announced an increase in STT for F&O contracts of about 60%. This amounts to STT of Rs. 1,000 per crore (up from Rs. 625 per crore) of futures sell turnover and Rs. 5,000 per crore of options sell turnover (up from Rs. 3,125 per crore).

The long-term capital gains tax was increased from 10% to 12.5%, and the short-term capital gains tax was increased from 15% to 20%.

Direct payout of securities

Currently, when you buy or sell a stock, the securities are settled through the broker’s pool accounts. With this change, the clearing corporation will directly settle the stock to your demat account.

These regulations are a step further in making securities trading safer for investors, as stocks don’t need to hit the broker’s account for a day in between. The implementation of this has been delayed because market infrastructure intermediaries were facing issues in implementation.

Dynamic price for F&O stocks

SEBI brought in changes in how the dynamic price bands for stocks in F&O are relaxed intraday. These changes involve sliding price bands (earlier both sides of the circuits would open up), stricter criteria to flex price bands, etc. We’ve explained this in detail in this post.

Basic services demat account

SEBI has restrictions on how much AMC can be charged for a Basic Services Demat Account (BSDA). This used to be up to Rs. 100 for up to Rs. 50,000 in holdings and Rs. 300 for up to 2 lakh in holdings. SEBI increased these thresholds to Rs. 4 lakh and Rs. 10 lakh, respectively.

T+0

In September, SEBI increased the number of securities in the T+0 segment from 25 to the top 500 in terms of market capitalization. Unfortunately, this will create a separate T+0 segment alongside the one for T+1 settlement, even though the same securities will be traded in both segments. This might create fragmented liquidity, and it’s not sure how this segment will take off.

Registered investment advisors and research analysts

In September, again, SEBI approved changes that make it easier for people to become registered investment advisors (IA) and research analysts (RA). This was a big change. Currently, we have just about 800 RIAs in India. The new changes could transform this anemic landscape.

Faisal has written a comprehensive post on all these regulatory changes, and you can read it here.

Road ahead

What does this mean for the broking industry and the markets as a whole?
It’s very easy to predict what happens to the broking industry. The industry’s fortunes are tied to what the markets do. If the markets will do well, we will.

But having said that, it’s possible that the glory days of the industry are behind us. Things might soon revert to the mean. This is due to both, all these new regulations, which will have a significant impact on revenues, as well as the fact that the Indian markets going forward may be subdued.

2025 will be an interesting year in all senses of the word.