‘Odds of succeeding when actively trading are very low’


MUMBAI : Zerodha co-founder Nithin Kamath’s statement about the dismal performance of individual investors in derivatives trading highlighted the risk involved in equity futures and options .

According to Kamath, just 1% of his firm’s customers who actively trade equity derivatives generated annual returns higher than bank deposits over the past three years.

“We have used every opportunity to create awareness that in the long run (3-year period), less than 1% of those who actively trade equity futures and options generate returns higher than bank fixed deposits or 7% annually,” Kamath said in a business update on Zerodha, the country’s largest stockbroker, over the weekend.

“Generating profits from active trading is as hard as generating profits while running a business, if not harder, given that anyone can start trading and not everyone can start a business. The odds of succeeding when actively trading are very low, similar to any other walk of life, which requires skill, hard work, and some luck to succeed. From running a business to playing sports or music for a living,” he added. His comments come in the wake of retail participation in the NSE equity derivatives segment, having jumped almost 25% in the past six years through the first half of FY23. This has helped drive equity derivatives turnover on the exchange to a record high. The share of Proprietary traders, or brokers who run their own trading book, rose from 49% to 50.9%, while FPIs’ share declined from 12% to 7.8% over the same period.

However, Kamath’s comments left analysts divided.

“How can one tell whether a trade is naked (not backed by an underlier) or a hedge against an underlying cash market position,” said Rajesh Baheti, director of Crosseas Capital, one of the country’s largest jobbing and arbitraging firms.” Let’s not forget that retail investor participation through SIP has reached record high levels and helped India outperform other developed and EM stock markets. My sense is that many retail investors could be hedging their portfolios through index options. Rather, it’s proprietary traders who make naked high-frequency trades more often than not.”

Individual investors’ share in equity derivatives trading on NSE rose from 23% ( 149 trillion out of 648 trillion) in FY16 to 28.5% ( 4,250 trillion out of 14,911 trillion) in the first half of FY23. S.K. Joshi, a former director of finance of Bharat Petroleum Corp. Ltd and executive director of Khambatta Securities, said segregating retail into punters or hedgers was “not easy” while agreeing that making money by trading derivatives wasn’t “child’s play”.

“Retail traders, unlike proprietary traders and high net worth individuals, are not good at money management and position sizing, the main reasons why making money on derivatives is not easy for them,” said Chandan Taparia, derivatives head at Motilal Oswal Financial Services.

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