As more and more elements of the stock market get digitized, it increases its potential to attract a new generation of investors who’re no longer drawn to real estate to park their disposable income
The Bombay Stock Exchange (BSE), dating back to 1875, started as a broker’s forum under a tree on Dalal Street, and is Asia’s oldest stock exchange. For over a century, registered brokers exchanged shouts, gestures and signals on the floor to make trades happen.
The National Stock Exchange (NSE) came up in 1994 to provide screen-based electronic trading. It gave fibre-optic access to brokers in other cities who could join the trading in the centralized exchange located in Mumbai. That ended the era of disjointed stock exchanges.
Dematerialization of shares started in the late 1990s and online trading began at the turn of the millennium where investors could buy and sell shares through electronic brokers such as ICICI Direct and Sharekhan. More brokers went online but another disruption was to come in the next decade.
Online financial services company Zerodha brought “discount broking" to India in 2010, applying a flat fee of ₹20 on a trade whatever its size. It removed even that in December 2015, charging only for futures, options, and day trading. This attracted newcomers and young investors who could do small commission-free trades to get a feel of the market. Within a decade, Zerodha overtook legacy players to become the country’s largest brokerage in terms of number of trades, according to NSE data.
Alok Jain, who was one of the first brokers to become an NSE member from New Delhi in 1996, saw the writing on the wall when Zerodha started its flat fee model. The brokerage fee others were charging for investment advice and facilitating trades were suddenly antediluvian. “I could see that it would be difficult for brokerages such as ours to stay in business," says Jain, an engineer from IIT with an MBA in finance from the University of Maryland.
He started his Weekend Investing blog in 2016 where he put up his entire portfolio of stocks, and posted details of his weekly trades. He soon built up a following of investors who liked his portfolio and thesis of momentum investing. The “MI50" product he built for his own use gave returns of 54% when it completed a year on March 31, 2017, says Jain.
The popularity of his blog prompted him to register with Sebi as a financial adviser to provide portfolio management services to high net-worth individuals (HNIs). But his transition from broker to adviser wasn’t complete.
Even as exchanges and brokerages evolved, new investment instruments came up. The country’s first mutual fund, Unit Trust of India came up in 1963 and remained a monopoly until 1987 when other institutions were allowed to offer mutual funds. This became a mode for investors to take exposure in a basket of stocks managed by an expert instead of investing in individual stocks on their own.
Its appeal was limited by hidden fees, lack of transparency, and no control for the investor beyond entering and exiting the fund. Last year, a new portfolio investing instrument called ‘smallcase’ became available in India, which resides in the investor’s trading account, thus providing control and transparency.
This has enabled advisers like Jain to offer their portfolios as smallcases for retail investors to buy with a subscription fee. Millennial professionals typically have an appetite to invest but not the time to track and manage their portfolios. Such an instrument gives them that option.
It also ties in with another stock market trend, which is the growing share of algorithmic investing and emerging influence of AI. It’s getting harder for an ordinary investor to keep up with new age investment experts who no longer need armies of analysts when an AI engine can do all the crunching.
One of these new investment advisers is Abhishek Banerjee, a computer science engineer who was a senior research analyst with Franklin Templeton. Last year, he founded an investment advisory firm in Hyderabad, LotusDew, which uses AI-based analytics and data points to create portfolios.
Banerjee, who offers a couple of his portfolios to retail investors as smallcases, likes the fact that the value proposition of these is upfront unlike a mutual fund. “There are 1,277 financial advisers registered with Sebi. Most of them are not active, but of the ones that are active, very few have their track record independently calculated and publicly available," says Banerjee.
As more and more elements of the stock market get digitized, it increases its potential to attract a new generation of investors who’re no longer drawn to real estate to park their disposable income.
Sumit Chakraberty is a consulting editor with Mint. Write to him at firstname.lastname@example.org