Can Crypto Really Disrupt The Broking Business?

A tweet by Nithin Kamath, the CEO of Zerodha, has brought the possibilities of disruption in the financial space into focus. The sector has already seen disruption led by the rise of several fin-tech giants in recent years. With easy access to the internet and mobile devices, users are joining these platforms at a rapid pace.

Ironically, Zerodha leveraged technology to become a disruptor in the broking space. Before Zerodha, most brokers charged high commissions and various fees resulting in high trading costs for traders.

Soon, discount brokers like Zerodha who operated on lower margins and offered low-cost trading came to dominate the space. Today, Zerodha is the largest broker in In India with a strong focus on catering to retail customers.

Traditional brokers have been forced to slash their fees and step into other businesses.

Brokerages and fintech companies have introduced several new low-cost financial products at a low cost in India. According to Kamath, the low prices and the versatile products available in the space ensure that there aren’t many areas for disruption.

“In broking or exchange business, both pricing and product, there is not much left to disrupt. Unless of course, someone figures a way to pay people money for trading (negative brokerage not allowed by regulation) or figures a way to help all customers make money (very tough),” said Kamath.

Since exchanges and brokers depend on a small trader base that generates the highest volumes, any change in the preferences of the trader base can disrupt the industry.

Traders are actively looking for volumes. An asset class with high volatility, trading times and volumes is likely to generate higher returns and therefore attract more volumes.

Crypto, with its high volatility and longer trading time, has emerged as a good option for traders. Platforms like Coinbase have already garnered a strong assets-under–management (AUM) base for crypto.

If a few major traders leave the platform, liquidity will lower and impact costs will increase, resulting in a vicious cycle of lowering volumes. Currently, most people who hold crypto-currencies or tokens are speculators. They do not care about the fundamental uses and benefits of the product over the long term.

Therefore, a shift in trader preferences for asset classes might see exchanges getting disrupted.

But so far, initial coin offerings have run into trouble with regulatory authorities. For instance, Telegram’s ICO received strong interest and the Securities and Exchange Commission (SEC) asked Telegram to pay a penalty and also return the money raised in the ICO to investors.

Further, the threats to the broking industry aren’t limited to crypto. The Securities and Exchange Board of India in the past has suggested direct market access for investors.

Currently, DMA is limited to institutional investors, but if DMA becomes a reality for retail investors, brokers could be pushed out of business.

However, experts have argued that DMA is unlikely to be a reality for smaller investors. DMA would mean that exchanges would have to take up the activities and risks that brokers take up.

Exchanges are a critical part of the market infrastructure, making it difficult for them to conduct these non-core activities.

Goldman Sachs, a critic of Bitcoin, which had claimed that crypto is not an asset class, has introduced products for investors interested in “digital assets”.

Recently, several large investment companies have launched crypto exchange traded funds and proprietary trading desks.

But, crypto had found several enthusiastic backers in 2017 too, but after a huge crash, soon the narrative around turned negative.

With the rise in prices in 2021, the narrative has reversed yet again — but it remains to be seen whether it can live up to the hype.