Discount brokerage firms feel the heat

Shares of Angel One, the country’s largest brokerage firm, fell nearly 9% to Rs 2,353.90, registering its biggest single-day fall in a month. 

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The decision, which will come into effect from October, comes at a time when the F&O volumes have been rising exponentially. (Reuters)

Shares of discount broking firms fell sharply on Tuesday after the Securities and Exchange Board of India (Sebi) came out with guidelines that market infrastructure institutions or MIIs will not differentiate between big and small brokers (by volumes) and charge them uniform fees. MIIs such as exchanges, clearing corporations and depositories have to redesign the existing charge structure and associated processes to bring in this uniformity.

Shares of Angel One, the country’s largest brokerage firm, fell nearly 9% to Rs 2,353.90, registering its biggest single-day fall in a month. 

Shares of Geojit Financial Services, IIFL Securities and Motilal Oswal Financial Services also declined 3-7%. Among others, 5Paisa Capital, ICICI Securities and Anand Rathi Wealth fell up to 1%.

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Discount brokers generally earn a significant share of their revenues from such charges given their large base of retail customers and lower volume/ticket size. 

Motilal Oswal Financial Services highlighted that Angel One earned Rs 400 crore from these charges in the previous financial year.

Nithin Kamath, co-founder, Zerodha, wrote on X, “With the new circular, we will, in all likelihood, have to let go of the zero brokerage structure and/or increase brokerage for F&O trades. Brokers across the industry will also have to tweak their pricing.”

He added that stock exchanges charge transaction fees based on the overall turnover contributed by brokers. Such rebates are common across the major markets in the world.

“These rebates account for about 10% of our revenues and anywhere between 10-50% of other brokers across the industry. With the new circular, this revenue stream goes away,” he said, adding that Zerodha was one of the last remaining brokers that offered free equity delivery trades. We could do this because F&O trading revenues were subsiding equity delivery investors.”

The decision, which will come into effect from October, comes at a time when the F&O volumes have been rising exponentially. The move, experts said, also aimed at curbing the surge in derivatives trading as there will be no incremental benefit for members for generating high volumes.

F&O trades contribute significantly to the overall market volumes. As a result, even the share price of BSE fell 3.27% to Rs 2,490 apiece.  

While the market regulator has asked exchanges to levy flat fee, it has not specified the mechanism through which this needs to be achieved. it has said the new charge structure should give due consideration to the existing per unit charges realised by MIIs so that the end clients are benefitted with the reduction of charges.

“The impact on MIIs would depend on the eventual pricing they would arrive at. A flat fee structure similar to the current unit economics will not impact their earnings,” Motilal Oswal Financial Services.

Motilal Oswal said Angel One has multiple levers to offset this change. The country’s largest broker can increase the brokerage rates by Rs 3 per order or levy account opening charges as other brokers do, it said.

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First published on: 02-07-2024 at 22:46 IST