Lack of short-selling distorts price discovery, says Nithin Kamath, Zerodha

Nithin Kamath, Founder and CEO, Zerodha

Zerodha founder and CEO Nithin Kamath has red-flagged distortion in stock market pricing mechanism due to lack of short-selling opportunities.

In an official X post, Kamath said the lack of short selling in Indian markets is causing potential market distortions and unless shorting of stock is made easy in the Indian markets, price discovery will be impaired.

“India has been a structurally long-only market with almost no shorting activity, because borrowing stock to short is really hard and is an offline process,” he said in the post on Monday.

Due to this long-only bias, there is probably very little short-selling talent as well, even if large funds want to start shorting, he said.

The only real way to short stocks until now was to use futures, or maybe options, but there are only 224 F&O stocks, which means you cannot short the vast majority of the problematic stocks, he added.

These contracts expire every month and the cost of rolling over these contracts is significant with liquidity only in the first month contracts, said Kamath on Monday.

Unless this changes, he said there will always be weird distortions in the prices of Indian markets. “Although they have a bad reputation, short sellers are massively under rated. Think of them as janitors; they clean up all the garbage in the markets and make them more efficient,” he said.

Securities lending and borrowing is still an offline process and most brokers do not offer an online option.

“Like everyone, we at Zerodha Online offer it, but you will have to call us to borrow or lend, and there is a process, which means it will never scale. Hopefully, we will have an online platform by the end of the year and stock lending and borrowing will become much simpler,” said Kamath.

The trading volumes in derivatives have declined 20 per cent ever since capital market regulator SEBI cracked down on US-based short seller Jane Street over market manipulation.

The average daily turnover in index options on NSE which dominates derivatives trading has fallen 17 per cent compared to last week.

SEBI disgorged ₹4,844 crore from Jane Street for alleged market manipulation which led to a profit of ₹36,500 crore.

An investigation by the regulator revealed that Jane Street entered into concurrent transactions across various market segments, including cash equity, stock futures, index futures and options in a calculated manner to influence market movements with high frequency trades.

Published on July 14, 2025