A new breed of discount brokers, charging investors only a flat fee for trades in the currency, stocks and commodities exchanges, has emerged, as full-service stockbrokers face dwindling revenue with retail investors turning their back on them.
Discount brokerages charge a fixed rate of, say, Rs 20 per transaction, whether the value of shares transacted is Rs 5 or Rs 5 lakh or Rs 5 crore. With full-service brokers the practice is to charge brokerage in proportion to the value of shares traded. Put simply, higher the transaction value, the higher is the broking charge.
Zerodha, Compositedge, RKSV and Achievers Equities, among others, have emerged in the past two or three years. They attract small investors and are willing to trade on their behalf in stocks, equity derivatives, currency derivatives or commodities for a fixed fee, irrespective of the volume of transaction.
Their emergence comes at a time when several big full-time brokers, including HSBC, Brics Securities and IIFL, have decided to exit retail broking. Many other full-service stockbrokers, such as Geojit BNP Paribas, Edelweiss Securities, Emkay Financial Services and Motilal Oswal Securities have seen lower volumes, especially from their retail/small investor segment. Even brokers such as Sharekhan, ICICIdirect and Indiabulls are seeing declining growth in their retail broking units.
Geojit BNP reported a loss of Rs 56.84 crore in the September quarter; in the June quarter it had made a Rs 5.89 crore profit. The situation is better in Motilal Oswal Financial Services where the net profit in the September quarter rose to Rs 16 crore from Rs 5.34 crore in the June quarter. Emkay Stock Broking posted a net loss of Rs 2.46 crore (Rs 2.29 crore loss in the previous quarter). India Infoline’s profit fell to Rs 12.11 crore from Rs 12.80 crore.
After the 2008 crash triggered by the global financial crisis, Indian stocks are yet to recover though other global markets such as the US, Japan and Europe have breached their peaks hit five years ago. This has forced retail investors to keep off the stock market, preferring to park their money in fixed deposits.
In the US the entry of discount broking firms such as E*Trade, TD Ameritrade and Charles Schwab in 1990s had forced big brokers such as Goldman Sachs and Bank of America to shut down their retail broking divisions.
But a similar trend may be seen in India, according to Nitin Kamath, founder of Zerodha, India’s first discount broker. “In India I see both discount brokers and full-services coexist with different business models,” he told Financial Chronicle.
According to him, Zerodha has a client base of 7,000 and clocks a daily turnover of Rs 4,000-5,000 crore in trades in currency, commodities, equities and equity derivatives. “We command nearly 70 per cent of discount broking business in India,” he claims.
India has over 20 million individual demat accounts, but a significant portion of these are either inactive or dormant.
The work discount broking houses do, like processing trades and all post-trade activities, are the same fore very transaction, whether worth Re 1 or Rs 1 lakh or Rs 1 crore. This explains the logic of their existence.
“We are catering to a knowledgeable investor who is comfortable with the computer at his home,” said Satish Kumar Dutt, co-founder and MD of Composite Edge, another discount broker, which charges Rs 18 per trade.
Though no foreign player is present in this space, E*Trade was present indirectly as a stakeholder in ILFS Investmart, which was acquired by HSBC. HSBC recently announced its plans to shut down the retail broking venture.