Changing Dynamics of Stock Broking Industry in India. What lies ahead?

Changing Dynamics of Stock Broking Industry in India. What lies ahead?

The stockbroking Industry in India is changing faster than ever before. From a 14-day settlement cycle to T+1 settlement, from an Outcry system to transparent online price dissemination, and from trading through a dealer over the phone to the use of APIs and Algorithmic Trades, the industry has been constantly reinventing itself. We find Moore’s Law in action, with every passing year the trading volumes on exchanges, the computing power - processing thousands of orders in a fraction of a second, has been growing significantly. The trading volumes and number of contracts traded daily on Exchanges are nearly 100 times more than what they used to be a few years ago.

The last 3 years have seen an unprecedented jump in the Investor base. COVID-19, internet and mobile penetration, and growing awareness about trading and investing in stock markets, and IPOs are some of the key factors that led to this growth. Around 4% of the population holds demat accounts basis unique PAN, however, the number is over 120 million otherwise. With increasing awareness, the number is likely to grow, and industry players feel the number can surpass 250 million by 2030.?

In the last 3 years, we have seen multiple regulations and policies being rolled out by the Market Regulator and most of them have been implemented. The Market regulator (SEBI) and exchanges are trying to keep pace with the changing business environment. Most of the recent regulations are aimed at ensuring the protection of retail investors (most of them have entered markets for the first time during the COVID pandemic) from fraudulent practices. For Market Intermediaries, with stricter penalties including debarment of members for a few months, adherence to compliance has become a prerequisite to conducting business. In years to come, I believe the stock broking industry will undergo a paradigm shift. The shift has already begun. With my limited experience and understanding, I have tried to share some thoughts on what has changed and what lies ahead:

1.?????Broking Industry has moved beyond pricing, additional exposure limits, and Tips. In the days to come, the successful players will not be the ones who charge zero brokerage or figures out a way to provide additional limits to their users or provides intraday calls resulting in more turnover or trades (I personally believe that the probability of such tips working is a function of the market sentiment) but will be the ones who create a moat or an edge. The edge can be through faster execution capabilities through innovation in technology and infrastructure, customer experience, wealth management, Portfolio Management Services, or a combination of some of these. Copying features can ensure short-term visibility but creating an edge is a long-term game.?

2.?????Compliance or regulatory arbitrage is going to be a thing of the past. Compliance is going to become a function as crucial and important as Tech, Risk, or Sales and Marketing.

3.?????With the Account Aggregator framework going live soon, onboarding clients will be much easier than before. Single KYC across all financial products may lead to wider participation.

4.?????Today we have interoperability across exchanges and clearing corporations. You can buy shares in one exchange (NSE) and sell in another (BSE), and vice versa. The settlement takes place seamlessly. In a similar manner, Clients will be able to choose a broker with whom they want to trade or invest without going through the onboarding process again. ?Clients will be empowered to shift their accounts from one broker to another like we select the mobile operator today without changing our mobile numbers.

5.?????Brokers who fail to keep pace with the expectations of their customers and regulations would be left with a choice of either to shut their business or get merged with a larger entity. The industry is already witnessing a churn out. Those willing to adapt to change need capital to build technology and infrastructure. Industry status to Stockbroking will enable entities to raise capital/debt at viable rates, a relook at it is essential now. ?

A vibrant, well-regulated, and strong Capital Market creates trust and confidence and results in the mobilization of capital for the Economic growth of a country. We, the market Intermediaries, being an important link in the ecosystem have an important role to play. I believe the industry is all set to grow manifold, what we need is to embrace change. As Charles Darwin says-

“It is not the strongest of the species that survives, not the most intelligent that survives. It is the one that is the most adaptable to change.”