Stock Market Brokerage : World is going away, India is getting back

The history of brokerage started in 16 century as an axillary service before finding as a main stream business. By nature brokerage is a conflict of interest to basic law of service. The reason to sell or buy influence the efforts of person or institution and could be biased subconsciously. With time, the brokerage or commission have become a way of business expansion. Still there was a catch, it was included in net price to be paid by the client. That's where MRP concept came in. Companies shall sell the product at MRP and operations, marketing, commissions etc shall be calculated internally. Since the differential is product driven, the cost to value is subjective to the user preference with some impact from the brand ambassador. Look at soap, chips, candy, cars, TV etc. This rule is mostly applicable on new items since second hand market has different dynamics.?

While all this is going on, financial market was no exception rather one of the early adopters. Here the demand and supply along with market forces were driving the commissions. Of course this had a catch too. The commissions were not part of the product like MRP. Unlike insurance, mutual funds, trading in stock market has multiple stake holders. Though the price of stock or derivative is fixed but the over head cost impacts the client. To name, Govt taxes as STT, Exchange transaction fees, SEBI fees and broker fees. Though first three are fixed as regulatory cost but brokerage became a function of service level. In global markets, the trend is generally little ahead of us. Starting from traditional brokers to per trade or discount brokers like Etrade etc to commission free brokers like Robinhood, Webull etc.

In the last few years, India is having exponential growth in retail participation. Number of demat accounts, maximum users on mobile app, the trading volumes, SIP, MF etc are some of testimony and there is no looking back. All thanks to Digital India, Start Up India, Aadhaar, UPI, EDIS, BSE MF Star for Mutual Funds, T+1 settlement, we have made a remarkable progress. So one thing is for sure, there has been genuine interest by retail investors to keep stocks and MF as a preferred asset class. To make this work, there was only one catalyst, technology. For any industry to evolve Government and regulators play very critical role. The evolution increases some risk as well. It's like a two sided sword. Industry wishes to build value product and push for wider financial inclusion and regulators has to keep the risk and compliance under control. For this SEBI has been very proactive and kept a commendable balance. Even in the last few years, industry went in the over drive mode for all the technology upgrades including Mobile Apps, Cloud Solutions and compliance implementation which were long due. Big thanks to SEBI for the push and industry to make it work. As a joint effort, industry and regulators think and work in the betterment of clients. Ironically, while technology was taking care of scalability, the back end process had huge dependency of technology vendors. In India, OMS/RMS software takes care of live trading risk and control where as Back Office software does trade settlement and create data files for OMS including limits for the next working day. Since both are poles apart so any implementation is a time consuming and expensive too. In other words, the cost of doing business & compliance has gone high many fold. This is totally fine until you spend from what you earn.

There are only 3 revenue stream for any broker. First, brokerage which has been negligible recently, rather in our case it's Shoonya. Second is float revenue. The client funds kept with Stock broker were sent to Clearing Corporations (CC) as FD or BG as well. Lastly, transaction volume incentives. With recent single day Quarterly statement, there has been around 15% hit on the broker revenue. Giving funds back to the clients on single day has increased operation cost by around 11% as all funds have to be paid after huge checks on Friday and Saturday followed by receiving back from clients and resend to CC before market opens. The bigger trouble is the funds received during Monday. As per expectations, clients want limits immediately as funds have reached broker account but limits are given?to the broker when funds reach CC which delays & impacts client's the opportunity.?The recent SEBI consultation document to upstream the funds to CC in cash only may be another huge impact, even bigger than Quarterly settlement on single day. The float revenue loss could be around 25 to 30%. Though the idea is well thought but it's like one's loss and other's gain. Since the SEBI consultation paper was out and mentioned about surplus exchange margin may be placed by CCs in very low risk and liquid overnight money market instruments, one humble suggestion could be to compensate by sharing the float revenue between CC and broker. This way, funds would be safe as expected and shall be win win. Not to miss, the operational time it will take for clients to add funds, physically transfer funds and get limits. It shall move from client account to broker bank account to CC account and additional process of payout at EOD from CC to Broker and Client. Lastly volume incentive, which is around 20 to 25 % of total PnL (depending on trading volume of broker)

Based on recent survey, clients lost money in FO trading but we have not included over all taxes and brokerage cost on the top. So any increase in brokerage would have adverse effect on clients trading. The cost of trading will further increase and break even will be more harder. Even during recent Budget by Honorable FM, there was a mention about ease of compliance in capital market. To add to the agony, we are talking about extended trading hours.

The role of regulators is perceived as a Grand Father, whom we all strongly believe, trust and respect for wisdom & role of responsibility towards clients, economy and country at large. At the same time, there is a level of expectation for sustainability, scalability & EoDB by industry along with Easy of Doing Investment by clients. With the advantage of technology on the side, enhanced reporting mechanism and many great initiatives, industry has moved to a different level and more compliant. A pat on the back of Brokers will keep them as genuine brand ambassador and motivate to add new & existing investors and value for the growth of India.

So, in other words where global stock market is moving away from brokerage, India may be pushed back for higher brokerage or alternative revenue models. Interesting times ahead.?