Nithin Kamath, founder and CEO of Zerodha, has provided detailed insights into how regulatory constraints create a "hard ceiling" for Indian brokerage firms, specifically highlighting the Securities and Exchange Board of India's 15% open interest cap. Speaking on social media platform X, Kamath explained how this regulation fundamentally limits both the scale and pace of growth in the broking industry while ultimately benefiting consumers.

SEBI's Open Interest Cap Framework

The regulatory framework establishes clear boundaries for brokerage operations in the derivatives market. SEBI has implemented a 15% cap on open interest at the broker level, preventing any single broker from holding more than 15% of the total market open interest.

"No single broker can hold more than 15% of the total market OI. This restriction exists to mitigate the risk of concentration from any single broker becoming too large," Kamath explained. He emphasized that while concentration benefits business operations, it ultimately proves detrimental to consumers. Open interest represents the total number of active contracts not closed, exercised, or expired in futures and options trading.

Comparison with UPI Market Dynamics

Kamath drew a notable comparison between the brokerage sector's enforced caps and the unimplemented restrictions in the digital payments space. The National Payments Corporation of India has established a 33% market share cap for third-party Unified Payments Interface platforms, though this limit remains unimplemented.

"That measure was never implemented because it would've meant UPI apps stopping transactions, but in our case, the limit is applicable," Kamath noted, highlighting the practical enforcement difference between the two sectors.

Zerodha's Growth Experience Under Regulatory Ceiling

The regulatory ceiling creates unique growth dynamics for brokerage firms. Kamath explained that for companies like Zerodha to expand, the overall market and competitor firms must also grow simultaneously. This interdependent growth model distinguishes the brokerage sector from other financial services.

"For us to grow, the overall market must grow, and that means other brokers must also do well. Although we have been at nearly 15% of OI for the last five years, fortunately, the overall market has grown, and we've benefited," Kamath stated. This indicates that Zerodha has operated near the regulatory maximum for an extended period, with growth tied to market expansion rather than market share gains.

Consumer Protection and Market Stability

Kamath characterized broking as a "unique business" due to these regulatory constraints, emphasizing the consumer protection aspect of the restrictions. The regulation prevents excessive concentration that could potentially harm market participants through reduced competition or increased systemic risk.

The derivatives trading segment remains a significant focus area for regulators due to associated risks. The open interest cap represents one of several regulatory tools aimed at maintaining market stability while allowing for controlled growth in the derivatives trading ecosystem, ensuring that no single broker becomes too dominant in the market.

The Securities and Exchange Board of India (SEBI) has proposed a uniform 30-day lag for both sharing and usage of stock price data for educational and awareness activities. In a consultation paper released recently, the market regulator emphasized that this timeframe would adequately protect against misuse of exchange data while maintaining the relevance of educational content.

The proposal comes in the wake of the regulator banning financial influencer Avadhut Sathe of Avadhut Sathe Trading Academy from the securities market for offering unregistered investment advisory and research analyst services. SEBI alleged that Sathe, despite not being registered as an investment adviser, offered advisory services under the guise of stock market training programmes to a large number of investors.

Current Regulatory Framework

Stock exchanges currently share live data exclusively for trading and related activities. The regulatory evolution began with SEBI's May 24, 2024 circular, which prescribed a one-day time lag for educational and awareness activities. This was followed by a subsequent circular that further tightened the framework, requiring entities engaged solely in education to use market data only with a three-month lag.

SEBI on May 24, 2024 prohibited stock exchanges from sharing real-time price data to third parties, in an attempt to prevent online gaming platforms, apps and websites from using such data of listed companies. The ban remains in force. It then introduced the one-day lag for sharing the data for preparing content and, subsequently, the three-month rule for classrooms and other educational activities.

Stakeholder Feedback and Internal Assessment

SEBI received substantial stakeholder feedback indicating that the one-day time lag was insufficient, with possible cases of misuse making a strong case for increasing the time lag period. Stakeholders expressed concerns that the short timeframe remained vulnerable to exploitation in online gaming platforms and similar applications.

Conversely, SEBI's internal deliberations concluded that the three-month lag was excessively long, reducing the practical effectiveness of educational content. The regulator determined that educational input could be more efficient with a reduced timeframe.

Proposed Framework Structure

The consultation paper outlines that the 30-day lag would serve dual purposes of protecting against misuse while keeping educational content relevant and timely. Price data can currently be shared with a one-day lag for preparing content for educational purposes. For using in classrooms and any other media for educational and awareness activities, the data should be at least three months old.

The regulator is now proposing a uniform 30-day lag for sharing price data for all educational and awareness purposes. Persons engaged solely in education will continue to abide by the prohibited activities provisions mentioned in existing circulars, with all other existing provisions remaining unchanged.

Public Consultation Process

SEBI has invited public feedback on the proposal, specifically seeking input on whether the 30-day lag is appropriate for pure educational purposes and if any additional safeguards are necessary while sharing the data. The regulator aims to create a standardized approach that addresses stakeholder concerns while maintaining effective regulatory oversight of market data usage in educational contexts.