Zee Business Exclusive: Trading charges will go up? No more free services from discount brokers?

Discount brokers like Zerodha, Groww, Angel One and Upstox may be forced to increase their charges, as market regulator SEBI has proposed to exchanges that the transaction charges should be flat for all brokers irrespective of the volumes that they generate. Discount brokers are brokers that offer only trading facilities to the clients without providing research reports or advisory services.

Regulator's mandate is transparency in charges  

The market regulator’s primary concern is lack of transparency, as brokers charge clients at the highest slab but do not pay the entire amount to the exchange, because after a certain turnover threshold, based on slabs, brokers get incentives from exchanges to increase the turnover. The differential amount billed to clients and paid to exchange is a net saving, and for discount brokers, this saving is substantial given that they are the biggest volume generators. However, exchanges and brokers may face some operational issues in the billing as well as payment of taxes, because the brokers are billed monthly by exchanges but clients are issued contract notes on a daily basis.
 
Regulator wants a level playing field  

Due to high competition, exchanges offer turnover-based discounts. Such incentives or discounts are also in practice in markets like the US. The regulator, which has been receiving feedback from markets about such practices, wants exchanges to sort out this issue. Another concern that is often raised is a huge jump in the options trading turnover. As discount brokers charge minimal amounts on such trades, more and more people are attracted to trading instead of long-term investing. Many discount brokers charge a fixed amount, to the tune of say Rs 20 per transaction.
 
Cheap brokerage, trading cost blamed for options jump

The options premium volume, including stocks and index, has been increasing over the years but a significant jump has come only after the COVID-19 pandemic. The options premium volume has surged from around Rs 8.5 lakh crore in 2018-19 to Rs 13 lakh crore in FY20, Rs 32 lakh crore in FY21, and Rs 69 lakh crore in FY22. In FY23, the options premium turnover staged a surge to Rs 119 lakh crore, and FY24 closed with a premium volume turnover of Rs 151 lakh crore.

“In this arrangement, since the cost of transacting is low due to no or very low brokerage and low transaction charges, the incentive to churn with small spreads is too lucrative to ignore. All this has fuelled high turnover on options which is a cause of concern," said an industry insider. 

“There is a loss to government also in the current set of things, as Big HNIs with a large margin requirement trade with prop brokers and have an arrangement, where they are not charged brokerage and pay only transaction charges which otherwise they would have anyways paid, but in the process of zero brokerage, the government is losing GST," said another industry source. 
 
Experts are pointing to one more concern of risk build-up. Many of the prop brokers have offices across the country that are managed by people shown as employees by the prop broker but working for another small prop broker. They save on margin and also take advantage of discounted transaction charges and almost zero brokerage. SEBI is equally concerned with such arrangements as they may pose risks.  

Discount broking trending model

Seeing the gain in the discount broking business, many traditional broking firms are creating a separate vertical or a company to push low brokerage products. Many traditional and bank-promoted brokers have also replicated the discount broking model. Angel One, an old and well-known brokerage house, was among the first to spot the trend to remodel its business towards discount broking. Discount brokers are credited for making it easier and cheaper for people to come to market, invest, and trade. 

Exchange charges | How do they work?

The biggest exchange, NSE charges a fixed fee of Rs 2,500 for options up to Rs 3 crore, and then there are incremental charges that are directly proportional to the turnover achieved by the broker. If a broker generates a monthly premium turnover of Rs 100 crore, it is charged at Rs 49.50 per lakh and if the premium goes beyond Rs 100 crore and up to Rs 750 crore, a lower rate of Rs 47 per lakh is charged. In case the turnover in options premium is more than Rs 750 crore and up to Rs 1,500 crore, an even lower rate or Rs 42 per lakh is billed to the brokers. Similarly, if the turnover is greater than Rs 1,500 crore but less than Rs 2,000 crore, the exchange bills the broker at Rs 37 per lakh. Brokers who generate monthly premium turnovers of more than Rs 2,000 crore are charged a flat rate of Rs 29.50 per lakh.

The secret of making money

A discount broker generating a premium volume of more than Rs 2,000 crore per month charges its clients Rs 49.50 per lakh but pays Rs 29.50 per lakh to the exchange while Rs 30 per lakh goes to the broker's pocket as savings. Based on such savings, brokers are in a position of offering lower brokerages, and attract more and more traders as well as investors.   

The second big blow to the discount brokers

Earlier, SEBI made it mandatory for all brokers to upstream the client's money to clearing corporations so brokers could not enjoy interest on client money. However, brokers with huge volumes were making a substantial income from such floats.

Now, they will also not be able to make any money on the transaction charge front as the exchanges will have to charge all brokers at a flat rate irrespective of volume. This may force them either to increase charges or find some other alternative to increase their profits. This will be the second blow to discount model brokers.

Too much concentration with discount brokers

One more concern raised by stakeholders is that due to the discount broker’s low brokerage and transaction charges model, the business has shifted to them. All big five players currently enjoy close to 60 per cent market share. According to industry insiders, many small-time brokers have to shut their shops because of fierce competition from discount brokers and partly on account of the huge compliance burden. Many brokers have stopped retail trading and do only proprietary trades instead.

Some operational issues

Brokers may also face issues as they are used to calculating STT, GST, and other taxes and charges on a monthly basis but if implemented, they may have to do all these filings for 20-21 days in a month instead of once a month.  

The regulator has discussed the proposal with exchanges, brokers, and other stakeholders, and sought their views. Further rounds of discussions are expected before the proposal takes the final shape, but one thing is sure, the regulator is in no mood to let it continue.

Zee Business wrote to SEBI and both the exchanges, NSE and BSE, but no response was received at the time of publishing this article.