Nithin Kamath, co-founder of stock broking platform Zerodha, has highlighted that the Securities Transaction Tax (STT) is a significant cost for traders, affecting trading volumes in various markets.
In a post on the social media platform X, Kamath wrote, “Securities Transaction Tax (STT) is the biggest tax that traders pay, and it’s much higher than brokerage fees. At Zerodha, the STT we collect and pass on to the government is higher than the brokerage we earn.”
Stating the surge in options volumes caused by STT, which is a direct tax applied to each purchase and sale of securities listed in stock exchanges, he noted, “Trading volumes are highly sensitive to the STT. The level of STT also affects whether traders trade more in cash equities, futures, or options. There’s a lot of concern that Indian options volumes have exploded; I don’t think it would be a stretch to say that STT is a big factor in this.”
Role of premium value
He asserted that the STT calculated based on the premium has caused this surge in options when compared to the contract value.
“Until 2008, the STT on options was based on contract value, making it impossible for anyone to trade options. After that, STT was charged on the premium, and options became more cost-effective compared to futures, and volumes shot up,” Kamath noted.
Strategy to increase cash and futures trading volumes
According to him, even though STT rates have led to increased options trading, reduced tax, and increased intraday leverage could benefit cash and futures trading volumes.
“We’ve had several STT changes over the years. This has had a more significant impact on cash and futures than on options because STT was on premium value, and on cash/futures, it was on total value. And yes, the introduction of weekly expiry and restriction on intraday leverage for stocks added a lot of fuel to the fire of option trading volumes,” Kamath wrote.
He further added, “so yeah, I wish we had no STT, but I guess that’s not a solution. But if STT were brought down for cash and futures and intraday leverage were increased (from the minimum 20% now to as much as futures), I think the trading volumes in cash and futures would automatically go up. It is a much better strategy to increase cash/futures volumes than to reduce trading volumes in options.”
