The Invisible Czars
ows of computer screens and a hodgepodge of wires make it look like any common office. Simple folk wearing half-sleeved shirts and sandals peck away at the keyboards without losing thread of their relaxed chatter. Soon a round of milky chai is served. It is difficult to believe that this is the place where a mini stock market legend has unfolded in the recent years.
In India’s fiercely competitive stock derivatives market, where millions of options and futures contracts are traded for the profit of a few paise at a time, there is one name that spells sheer power. Be it options writing or trading for arbitrage between the spot market and futures, market experts point to just one firm as the most formidable and nimble player. And it is not a foreign brokerage or a local big bull. It is actually a name not many have heard of. Dolat Capital.
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Image: Vidyanand Kamat
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SIBLING SYNERGY: Physiotherapist Pankaj Shah (seated right) and commerce graduate Shailesh Shah (seated left) have built Dolat Capital into the country's premier derivatives trader. Brothers Harendra Shah and Rajendra Shah take care of operations | |
It is at the nerve centre of this extremely low-key Mumbai-based brokerage — its dealing room is in suburban Andheri — that we are witnessing the 50-odd traders wind up another long-and-short day. We have come here to unravel the mystery of what makes Dolat Capital one of the most successful derivative traders in the country. It is a place no journalist has stepped in before, but Shailesh Shah, one of the four brothers who own Dolat, has agreed to open it up for us.
“Our business is a simple one. There is no big trick in it,” says Shailesh as he checks the final tally of trading positions left open at the end of day’s trading. “We are traders with a good discipline. We don’t take unnecessary risks.” But this alone doesn’t explain how this old-world firm has built up a proprietary trading capital of Rs. 550 crore, one of the biggest in India, and come to account for 5-7 percent of the open interest in the derivatives market. Not to mention the dealing room’s daily turnover of Rs. 1,500- 2,000 crore, with each trader working with a limit of Rs. 3.5 crore of capital, again among the biggest in the industry.
“They understand the market from the ground level,” says Sanjiv Shah, executive director of Benchmark Asset Management Company. “During times of extreme volatility all these years, I have heard of several brokers being in trouble. But I have never heard of such a thing about Dolat.”
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| Image: Vidyanand Kamat |
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Late 1950s: Standing on the kerb outside the BSE, Dolatrai Shah provides informal options trading. He attracts members inside
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Derivatives trading is just seven years old in India but Dolat’s business has been around for more than five decades in different forms. Every decade or so, Dolat has redefined its business and shifted early to emerging trends. In fact, the firm may already be calling the peak of profit potential in derivatives and moving on to newer and more rewarding opportunities. It is in this evolution that we hope to glean clues for what makes Dolat tick.
The Man on Dalal Street
Dolat’s business was literally born in the kerb around Bombay Stock Exchange (BSE) in the 1950s (“Morarji Desai was the finance minister then,” says Shailesh). Dolatrai Amritlal Shah, a matriculate and the son of a stock market dilettante, started offering options trading to investors outside the exchange building. He had to do this informally because derivatives trading was illegal those days. He had no membership to the elite club of BSE, but dealers would come out to trade with him.
“My father used to provide daily expiry of option contracts, an innovation those days,” says Pankaj Shah, Shailesh’s elder brother.
The business thrived and by 1970, Dolatrai gained enough confidence to apply for BSE membership. BSE members resisted him saying he was an outsider who operated in illegal options trading. Dolatrai met the then BSE chairman, Phiroze Jamshedji Jeejeebhoy, who used his veto to give him a card. Dolat was in business, officially. “I joined my father’s business in 1976 and we started looking for what we can do and how we can grow,” recalls Shailesh.
The equity culture in India was just beginning. Trading was largely confined to a handful of shares and a large number of other listed companies were bought and sold very infrequently. Dolat became a market maker off ering both buy and sell quotations for these stocks. Within a decade, it became the largest market maker for public sector and multinational company shares. At the peak, it was handling as many as 500 stocks.
The 1990s were a testing time for stock brokers in India and Dolat was no exception. In those days, trading was done through the open outcry system with brokers shouting out orders to each other. Dolatrai and his sons belonged to that old world, but the advent of National Stock Exchange in 1992 ushered in trading on computer screens. A few years later, paper shares were phased out in favour of digital records in the dematerialised, or “demat”, form. Many stock brokers could not make the transition and faded out.
“When electronic trading came in, we were seriously worried,” says Shailesh. Operating computers was not the forte of Dolat’s traders. It was then that the Shah brothers tried to get a foreign institution as a partner in the hope the computer savvy foreign firm would help them sail through. But no foreign brokerage wanted to tie up with Dolat. Left with no choice, the brothers decided to plunge into electronic trading anyway. They bought computers and got people to run them. This modest investment would prove to be just the first step in Dolat’s technology adoption.
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