How STT is Fueling India’s Options Trading Boom
Thank you for reading this post, don't forget to subscribe!Nithin Kamath, co-founder of Zerodha, argues that India’s Securities Transaction Tax (STT) is the primary reason behind the massive surge in options trading. In a recent post, he stated that the tax is distorting the market by making options trading significantly cheaper than trading in the cash and futures segments.
Kamath highlighted that STT has become the single biggest cost for many traders, often exceeding the brokerage fees they pay. He revealed that Zerodha now collects and passes on more money to the government in STT than it earns in brokerage fees.
A Look Back at the Turning Point
Kamath traces the shift back to a pivotal change in 2008 when the STT on options was altered. Instead of being based on the total contract value, it was calculated on the premium, making it far more affordable. This change, he says, was so influential that it inspired the founding of Zerodha, betting that options trading would skyrocket—a prediction that proved correct.
Kamath’s Proposed Solution
While Kamath believes STT is a problem, he isn’t calling for its complete removal. Instead, he suggests a strategic adjustment to rebalance the market:
- Lower STT on Cash and Futures: By reducing the tax on these segments, they would become more competitive with options.
- Ease Intraday Leverage Limits: Loosening the restrictions on intraday stock trades would also help encourage more activity in the cash market.
Kamath argues that this approach is a “much better strategy to increase cash/futures volumes” than trying to directly curb the volume of options trading, which is currently a major concern for regulators worried about systemic risk.
