'75% of trades are...': Zerodha's Nithin Kamath on why instant settlements are tricky

The US markets made headlines last week by moving to the T+1 settlement cycle, catching up with a system that Indian bourses adopted two years ago, thanks to SEBI's forward-thinking regulations. 

This move has sparked discussions about the next big leap in financial markets: instant settlement.

Nithin Kamath, co-founder of Zerodha, however finds this transition not so easy. "While the shift to T+1 is significant, moving to instant settlement is where things get tricky," Kamath wrote in a post on X. "Approximately 75% of trades are intraday speculative trades. These traders typically don't have the cash or stock on hand for instant settlement."

This reality presents a challenge. Creating a separate segment exclusively for delivery-based trades might seem like a solution, but it comes with its own set of issues. "The impact cost due to lower liquidity in a delivery-only segment would be quite high," Kamath points out. "So, the market would have to balance these factors carefully."

Comparing this to the world of cryptocurrencies, Kamath notes some key differences. "In crypto exchanges, you must borrow to short-sell, but once that's done, you can hold the position indefinitely," he writes. 

"In Indian markets, however, short-selling equities is strictly an intraday activity."

The switch to instant settlement remains a complex puzzle. "Only time will tell how this transition will unfold," Kamath said, highlighting the need for thoughtful consideration and strategic planning in adapting to these changes.