{"id":281876,"date":"2021-01-22T13:46:02","date_gmt":"2021-01-22T08:16:02","guid":{"rendered":"https:\/\/zerodha.com\/z-connect\/?p=281876"},"modified":"2021-01-22T13:46:47","modified_gmt":"2021-01-22T08:16:47","slug":"beyond-misleading-trading-turnover-numbers-the-actual-size-of-indian-capital-markets","status":"publish","type":"post","link":"https:\/\/zerodha.com\/z-connect\/rainmatter\/beyond-misleading-trading-turnover-numbers-the-actual-size-of-indian-capital-markets","title":{"rendered":"Beyond misleading trading turnover numbers \u2014 the actual size of Indian capital markets"},"content":{"rendered":"

We have all heard of the lakhs of crores of Rupees worth of trading turnover that happens in the Indian capital markets every day, creating the illusion that the markets are massive. However, this post explains why they are not, and why looking at trading turnover to determine the market size is highly flawed.<\/p>\n

Trading turnover<\/h3>\n

The most straightforward definition of turnover = Qty X Price.
\n100 shares of Reliance bought at Rs 2000 = Rs 2lks of turnover.
\nIn the case of derivatives (F&O), quantity is the number of lots x lot size.
\n5 lots of Nifty futures sold at 14000 = 5 x 75(lot size) x 14000 = Rs 52.5 lks.
\nThe total sum of values of all trades on the exchanges is the total trading turnover, which by the way, is a very very large number. This number gets tracked widely to measure trading activity on the exchanges.<\/p>\n

From the time we started Zerodha in 2010, I have always been asked, \u201cwhat is your trading turnover?\u201d. The primary objective of this question is usually to estimate the size of our business. I was always forthright about this, until an incident that made us realise that talking about absolute turnover as a brokerage firm is misleading.<\/p>\n

An uncle of mine saw a news article that said that Zerodha does Rs 10,000 crores of turnover per day and asked me – \u201cYour revenue should be at least 1% of Rs 10,000 crores, or Rs 100 crores per day which is Rs 25,000 crores per year?\u201d This was when we were quite small, with annual revenue of less than Rs 25 crores.<\/p>\n

This was when we started talking about our turnovers only in terms of the number of trades per day, a better way to measure the size of a business that works on a flat fee per trade model.<\/p>\n

Total trading turnover on Indian exchanges<\/h3>\n

Here is the trading turnover on NSE on January 15, 2021:<\/p>\n

Equity: ~Rs 75000 crores<\/strong><\/p>\n

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F&O: ~ Rs 23,00,000 crores<\/strong> (notional options turnover) or ~Rs 3,20,000 crores<\/strong> (premium options turnover). I have explained further in the post the difference between notional and premium turnover for options.<\/p>\n

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Yeah, that is a whopping Rs 25,00,000 crores per day (25 lakh crore rupees)<\/strong> across all exchanges.<\/p>\n

For an exchange, a buy and sell side together constitute one trade, so the trading volume declared considers a buy-sell pair as one trade. But for a brokerage firm, every trade is turnover. So, if you summed up the trading turnover of Individual brokers across India, the turnover will show up twice of what the exchange is declaring.<\/p>\n

There have been multiple times in the past where this turnover number has been compared with India\u2019s GDP. The story typically is a version of, \u201cIndia\u2019s GDP for FY 19\/20 was approximately $3trillion or Rs 210 lakh crores\u201d. Just ten days\u2019 trading turnover on all exchanges would be almost Rs 250 lakh crores, higher than India\u2019s GDP. This type of comparison is ridiculous and misleading as I explain below.<\/p>\n

Gross domestic product (GDP)<\/strong> is a monetary measure of the market value of all the final goods and services produced in a specific time period.<\/em><\/p>\n

When estimating the market\u2019s size, a good starting point is by looking at the contribution to turnover by various types of participants and retail participation.<\/p>\n

Participant wise trading turnover contribution<\/h3>\n

Check this data below from NSE Market pulse, a monthly review published by NSE. This is from the Jan 2021 issue<\/a>.<\/p>\n

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This year\u2019s interesting development has been the increase in retail contribution to turnover by around 20% in equity and about 10% in derivatives, possibly resulting from COVID caused work-from-home. But, as you can see, the retail contribution is still less than 50% for equity and only around 30% for derivatives or F&O. This trend of increase in retail participation is not just an Indian phenomenon, but a global one.<\/p>\n

Size of Indian capital markets – Retail<\/h3>\n

As of Jan 2021, CDSL has 2.89 crores, and NSDL has 2.08 crores demat accounts. That is a total of around five crore non-unique demat accounts. For example, I personally have over a dozen demat accounts opened in the last 20 years; most of them now inactive.<\/p>\n

A better way to track the size of the market is by looking at the NSE\u2019s active client data. As of Jan 2021, according to NSE, around 1.6 crores or 16 million customers had traded once a year last year (last 12 months). This again is not a unique count, so if a customer had traded with two brokers, it would show up twice. By the way, this number has almost doubled from two years ago thanks to markets performing well in this period.<\/p>\n

Zerodha today is the largest retail brokerage in India by all measures of trading activity. Extrapolating our active client data, we believe that the current size of retail in India (unique customers) is:<\/p>\n