Can we envision a market where trading is more transparent, cost-effective and accessible to all participants?
In the fast-evolving landscape of financial markets, the equity derivatives segment presents unique challenges that stem from high transaction costs, fragmented infrastructure and limited access for retail investors. A recent Securities and Exchange Board of India (SEBI) study highlighted a stark reality: 91% of individual traders are fighting a losing battle, not just against market volatility, but against a hidden adversary: transaction costs.
This disproportionate financial outcome is further skewed by the rise of algorithmic trading, with 97% of foreign portfolio investors (FPIs) and 96% of proprietary traders generating profits through advanced trading algorithms.
This technological divide not only exacerbates the profit gap but also undermines the fairness and inclusivity of the market. The result is a system where the majority of participants incurs losses while a select few reap substantial profits. Such figures raise critical questions about the fairness and sustainability of the current trading ecosystem.
The complexity of the current system can be traced to the market’s evolution over the past few decades. Initially designed to provide hedging opportunities and enhance market efficiency, the derivatives segment has gradually become entangled in a complex web of intermediaries, including brokers, clearing houses and depositories. While these entities were originally introduced to ensure market stability and transparency, their cumulative fees have created a financial barrier that is difficult to overcome.
Given this backdrop, it’s crucial to explore whether technological innovations can disrupt the status quo. Can we envision a market where trading is more transparent, cost-effective and accessible to all participants? The time is ripe for a technological revolution that can address these issues.
The Fintech Possibility
Recent advancements in financial technology have opened up new possibilities for market infrastructure. One particularly promising avenue is the concept of digital asset representation. At its core, digital asset technology enables the creation of tokenised representations of traditional financial assets. This seemingly simple concept unlocks a world of possibilities.
Complex assets become divisible, democratising access to high value investments. Rules, rights and obligations can be embedded into the assets, creating programmable financial instruments. Ownership and transactions can be monitored with unprecedented transparency in real time. And by tokenising assets and leveraging smart contracts, the entire lifecycle of a derivative trade—from execution to settlement—can be automated, improving efficiency and reducing errors.
The true revolution lies in automation.
Digital assets can execute trades instantaneously, settle transactions in near real-time, update ownership records automatically and enforce compliance rules without manual intervention. This automation cascade promises to eliminate inefficiencies that have long plagued traditional financial systems.
Not Just Compelling, But Imperative
The adoption of digital asset systems is not just technologically compelling, it’s economically imperative. Streamlined processes slash operational overheads, leading to significant cost reductions. Real-time settlements minimise counterparty risks, enhancing overall market stability.
Most importantly, new products and services become possible, expanding market opportunities and opening avenues for revenue growth. For service providers and asset managers, this represents a dual benefit: lower costs and new revenue streams.
Imagine a financial market where trades settle in seconds, not days; where compliance is automated and error-free, where assets flow freely across borders and platforms, and where innovation flourishes unencumbered by legacy systems. As digital asset technology matures it will play an increasingly crucial role in shaping the derivatives market. By leveraging smart contracts, decentralised exchanges and synthetic assets, digital asset technology can reduce costs, enhance liquidity and provide equitable access to market opportunities.
The future of derivatives trading lies in decentralised, tokenised and automated platforms that democratise access and enhance the fairness of financial markets. The result? A significant reduction in transaction costs, allowing traders to retain more of their hard-earned profits.
Revolution Doesn’t Stop
But the revolution doesn’t stop at cost reduction. Envision a world where compliance checks and settlement processes occur almost instantaneously, powered by intelligent, self-executing contracts. These ‘smart contracts’ can automate complex procedures, reducing the need for manual oversight and slashing operational costs. In this new reality, trades settle in moments rather than days, dramatically reducing counterparty risk and freeing up capital for more productive uses.
The implications of this shift are profound. A more accessible derivatives market can lead to better price discovery, increased liquidity and more efficient risk transfer mechanisms. It can empower individuals and small institutions to manage their financial risks with tools reserved for large, well-sourced entities. The democratisation has the potential to reshape the entire financial landscape, creating a more resilient and equitable system.
However, realising this vision requires more than technological innovation. It demands a concerted effort from all stakeholders in the financial ecosystem. We need to develop a robust regulatory framework that encourages innovation while ensuring market integrity and investor protection. This is not a task for regulators alone.
It requires a collaborative approach, bringing together regulators, industry stakeholders and technology providers. Together, we can create a regulatory environment that fosters new-tech adoption while addressing legitimate concerns about security, privacy and market stability.
The future of equity derivatives is digital and that future is within our grasp. Let’s seize this moment. Let’s transform the market. Let’s create a financial system that works for everyone. The time for action is now.
The writer is founder, MAI Labs. Views expressed are personal