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Saturday, April 9, 2016

Discount brokers and online trading-the unheralded ecommerce revolution

As Marc Anderssen put it, software is eating the world, and with the advent of cheap personal computing technology/consumer electronics i.e smartphones, this trend has reached B2C sectors such as travel, retail, home services. For those active in the financial markets, one such impact is the ability to trade online through your smartphone app, without needing a terminal or to call. This is possible through discount brokers like Zerodha who facilitate online trading-in fact the cornerstone of their business model is the online self service model which mitigates the need for expensive brick and mortar branches, people and call centres. As a user of these services, i though to list the pros and cons of this, along with eco system impact, since this business is well known to those trading in the markets, but maybe not to the lay person. This is now ~20% of the total volumes but growing rapidly


  • Cost-Brokerage costs are low-as marginal cost is near zero-this week I read an article in the Economist where brokerage is even free as the brokers get some money from the exchanges to which they direct volume
  • Time-If internet access speed is good, one can place an order in the time it otherwise takes to get through to the agent
  • Convenience-Can be done 'on the move' or even at the desk-This is especially useful for those on field jobs. 
  • Self Service for fund transfer: One can transfer funds if shortage/excess on the app itself, without the need to do a website login.
  • Reduced friction for margin funding: This can often automate the need for margin funding at 0.05%/day or so, and make it less evident to the customer since no explicit margin application done. 


  • Distraction from day job: One of the reasons organizations insist on brick and mortar offices is the assumption that employees within the same premises will dedicate their attention to their work, and the monitoring of laptops/phones/CCTV/min hours norm ensures that. Online trading through smartphones disrupts this social contract, and makes time leak for those who do it. While employees might be able to juggle both without loss to themself or organization, there would be many who cannot, and who hence lose out in networth and at work. This is the biggest risk to day trading since the market hours(for equity/F&O segment atleast), are squarely in the prime office hours of 9-6-unless of course one works in shift based timings which fall outside this bucket. 
  • 'Fat finger' orders-chances of errors-while there is an order confirmation page AND a post order validation, things can still go wrong especially while closing orders in a hurry
  •  Internet Access limitations/No QoS guarantees-With low internet speeds in India, and inconsistent network quality(telcos doing their best but issues still possible), it is possible that
  • IT Issues(in App)-If the app does not work then the call centre is inundated with call volumes and woe befit you if you have any positions hitting the upper/lower circuit against you.
  • Addiction-Like the well documented smartphone/social network addiction phenomemon to getting updates due to dopammine bursts, the same is true since ready access to prices may make you check your positions more often. 
  • Encourages trading over value investing-With the phone accessible and the ease of trading and MTM data on positions, one may panic and tend to liquidate positions while it was better to hold.
  • Screen size limits charting and other functionalities as it may distort visual effect of charts
  • Not all order types available/Limited functionality-Some order types like bracket orders are not available on apps due to complexity of coding or processing power requirement. While this caters to the most frequent use cases, it does not help advanced users. 
In the future, I see the business driven to technology based differentiation where the app speeds, UI, research and flexibility commands business share like in loan business-where often the one to process the loan fastest or flexibly wins over the lowest cost lender 

Some useful links/References


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