Discount Brokerages, Algo Trading Killing Retail Broking | CORPORATE ETHOS

Discount Brokerages, Algo Trading Killing Retail Broking

By: | November 9, 2017
Captstocks MD

Rajendran Velayudhan Chettiar, Managing Director of Captstocks and Securities (India) Pvt Ltd is among the earliest stock brokers in Kerala having started as a sub-broker in The Cochin Stock Exchange in 1989.

Belonging to a third generation Chettiar business family, entrepreneurship was in his blood. A mechanical engineering graduate, he worked for a year for Hindustan Paper Corporation before venturing into stock broking business. It was at the instance of elder brother Balachandran who was working in VSSC he started Capstocks with zero capital.

From the Harshad Mehta scam that caused a huge loss due to a Bombay broker’s default, with whom he was doing business in the initial years, Rajendran has seen the chequered path taken by the Indian stock markets over the last 28 years.

With the emergence of discount brokerages, who offers just a trading platform through internet, at very low brokerage rates, the traditional brokers who make personalized services with offices and infrastructure were facing difficulties. Due to fierce and unhealthy competition from discount brokerages, some even offering free brokerage, the revenues from retail broking is muted for most traditional brokerages.

Both discount brokerages and Algo trading have made life miserable for small and traditional brokers.
In an interview to Sreekumar Raghavan of Corporate Ethos, he talks about the present market boom and stock markets as a wealth management system.

#What are the new disruptive forces happening in the stock market after the advent of discount brokers?

Now the biggest worry for all of us is Algo Trading. A normal trader has to compete with machines that has been programmed to act without any emotions.For eg. most traders who do technical analysis tend to put a stop loss at a particular price. The Algo programmer also understands this, will bring the price down below that level hit all stop losses, make the market hollow and easily take it up again. Traditional traders who follow technical analysis will see their positions getting cut and will lose their money. In a split second the algo machine can be programmed to generate thousands of orders which can swing the price of the scrips in either direction.

But for small to medium brokers it is quite expensive to develop an Algo system or program. A new program will have a shelf life of only around 3 months as competitors will develop a new system that makes my program ineffective. I have been successful in earlier years in trading using technical analysis but now Algo trading makes it difficult to trade at all.

No brokers in Kerala have used Algo effectively as per my knowledge and information. If you look at retail broking business, hardly anyone is making any money compared to what they previously made in bull markets.  Discount brokers have already disrupted the market. Now in the current bull markets, revenues from retail broking is not even half of what brokers used to get inthe peak of the previous bull markets in 2007. Even professional second-generation traders from Mumbai and Gujarat are saying that they are unable to trade successfully with the advent of Algo trading. Three years ago,Algo trades volumes constituted only less than 20% of the total trading volumes in the stock exchanges, but now it is said that it is well above the 50% mark.

# Could you tell us how Algo trading works?
Algorithmic trading (automated trading) is the process of using computers programmed to follow a defined set of instructions for placing a trade in order to generate profits at a speed and frequency that is impossible for a human trader. The defined sets of rules are based on timing, price, quantity or any mathematical model. Apart from profit opportunities for the trader, algo-trading makes trading more systematic by keeping away emotions from influencing decisions.

#Do you believe that stock market is capable of wealth generation for all classes of investors?

In China about 14% of population invest in stocks, in USA around 60% but in India hardly 3% invest in stocks because people here are afraid of the volatility. A common man thinks that Stock Exchanges are places where people gamble and lose their hard-earned money.
And compared to bank fixed deposits or gold, the stock markets have always outperformed by a huge margin. In 1979,the BSE Sensex was constituted as 100. This index is now at 33000. If you had invested Rs 100 in Sensex stocks, the value now would be Rs33000, in fixed deposit at 10% compounded rate, returns would only be Rs 4200, while in Gold it would only be Rs 3300. People think of gold as a goodinvestment. But it is not true. In the last 37 years, international gold prices rose only 4 times while Indian prices rose 32 times because of the depreciation in Rupee Vs Dollar. Dollar-INR was Rs 8, 37 years ago and now Rs 64. The eight times appreciation in dollar prices combined with 4 times rise in gold prices caused the 32 timeshike now. Most people don’t understand it. In 2008, the gold was trading at Rs 5000 per sovereign which rose to Rs 25000 but that was caused by the depreciation of Rupee from Rs 45 to 65 to dollar during the same period and international prices from $1300 an ounce to $1900 an ounce. This is a one-time coincidence, and we cannot expect this to repeat any time in the future, as our currency has become relatively very stable.

#How different is present rally compared to the previous rallies?
In Harshad Mehta’s and Ketan Parikh’s scam times in 1992 and 2001 respectively, the rallies were purely money driven but not backed by any fundamentals. Earlier, between 2003 – 08 when markets rallied, Foreign Institutional Investors (FIIs) pumped in around US$ 20 to $US 25 bn. The retail money through mutual funds was meagre if you see the investment by domestic institutional investors. So in 2003-2008, the market rally which was on strong fundamentals was taken up by the foreign funds. But this time around foreign investors are net sellers, as American Economy and world economies are doing well, It is the domestic mutual fund which is driving the markets to new highs. In the last two financial years around 85000 Cr rupees have come through mutual fund per annum. The current year more than one lakh crores have come in six months. The momentum in the market has only started and when the fundamental macro economic data becomes positive, we will really see a big bull run. The effect of demonetisation and GST has brought more white money into the market which will push indices even higher.

#How can investors understand which stocks to buy and stay invested?

I have been doing technical analysis since 1996 and also fundamental analysis in recent times. We have an equity research team working under me and we have been able to identify fundamentally strong stocks which had moved up substantially over the years. People lose money when they enter at the fag- end of a bull cycle as happened in 2008. In 2008 when the markets crashed due to global meltdown, the performance of our PMS was affected badly, in fact people who put in 5 lakhs just before the crash, saw their money eroding almost 50% to around 2.5 lakhs. Those who waited patiently has seen their portfolio increasing to more than 20 lakhs by 2017 a rise of over 400% in 9 years. This shows that if you invest in good companies, fundamentally good stocks, in the long term your portfolio will outperform the market by a huge margin.

I would advise people not to trade but invest. In my experience of 28 years, as far as day traders and traders in the futures and option (F&O), I have only seen a handful that made money.  Such traders will end up only making losses, as trading activity is leveraged and even if markets fall by a small percentage one loses his margin money (people have to pay only 10 to 15% margins for trading). In Kerala, there are very few professional traders(meaning someone who earns a living out of trading).Here mostly trading is done by people who have surplus money and end up gambling.

#How do you visualise the future of broking business, especially smaller players?

There is always a niche for small broking firms. Onehas to offer personalized and value-added services like equity research, Portfolio Management Services (PMS), good advisory services etc. Many retail brokers cater  to clients in far flung areas. There is no point in competing with discount brokers who offer even zero brokerage. We have recommended good stocks which have multiplied several fold. Say, Can Fin Homes wasrecommended at 300 in 2014 which went up to over 3000 in 3 years time. Our clients who are long term investors are not bothered whether we charge them a brokerage of 1%, 0.5% or 0.1%. How much does a rupee or two in brokerage counts on a recommendation like Can Fin homes?

We provide personalised service and resolve any genuine complaints of clients immediately. There are no pending complaints against us in the stock exchanges or statutory authorities.We have a loyal workforce some of them have been with us since the nineties.Market is going to scale new highs and small players do have a space if they do research and provide value for clients. Our portfolio management service has given 40% returns over the past three years. Earlier the revenues from PMS were very meagre but now it has grown substantially. We are also focussing on distribution of mutual funds which brings good income.

#How long you expect the bull trend to continue?

Now, only 3% of the population in India invest in stocks. We have the largest domestic savings in the world and imagine if 6% of the people come to the market.

Due to the reforms in the financial sector our economy is likely to do very well in the coming years. The bold measures of demonetization and implementation of GST, though caused a temporarily lull in growth, will see that all businesses come into the mainstream economy, revenues of the government growing substantially and we will see India emerging as a major economic power. This will raise our GDP and ultimately might have already triggered probably the longest and the most powerful bull market that our country is ever going to see.  We expect the BSE Sensex to cross the one lakh mark in a few years.