Zerodha, India’s leading discount broking platform, has said it will have to end the free brokerage system and increase charges for futures and options (F&O) trades after markets regulator Sebi mandated uniform charges irrespective of volumes.
Sebi on July 1 issued a new circular mandating all market infrastructure institutions, like stock exchanges, to be “true to the label” in how they levy charges. According to the Sebi circular, “If certain MII charge is levied on the end client by members (i.e. stock brokers, depository participants, clearing members), it should be ensured by MIIs that the same amount is received by them.”
It also mandated that the charge structure of the MII should be uniform and equal for all its members instead of slab-wise viz. dependent on volume/activity of members.
“This circular has a significant impact on brokers, traders, and investors,” Zerodha co-founder and CEO Nithin Kamath said in a post 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,” Kamath said.
Exchanges often charge a lower fee to brokers if they generate high volumes. Brokers, in turn, charge traders little to no fees, which has contributed to a surge in trading across segments like derivatives that the Securities and Exchange Board of India (SEBI) wants to curb. The new fee structure kicks in from October 2024.
“Stock exchanges charge transaction fees based on the overall turnover contributed by brokers. The difference between what the brokers charge the customer and what the exchange charges the broker at the end of the month is a rebate, which goes to brokers. Such rebates are common across the major markets in the world,” Kamath added.
These rebates account for about 10 per cent of Zerodha’s revenues and anywhere between 10-50 per cent of other brokers across the industry. “With the new circular, this revenue stream goes away,” he said.
“We were 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,” Kamath added.
On Wednesday, shares of few listed brokerages Angel One (-1.33%), SMC Global Securities (0.91%), and Dolat Algotech (-1.75 per cent) continues to remain in the red territory. Shares of major listed brokerages had declined on Tuesday between 3 per cent and 8 per cent.
However, Motilal Oswal (+0.71%) and Geojit Financial (up 3.62%) saw a recover on Wednesday.
Some of these stocks have jumped 50%-124% so far this year due to a surge in trading activity, with the blue-chip Nifty 50 and S&P BSE Sensex indexes trading at all-time highs.
Tejas Khoday, CEO and co-founder of discount broking firm FYERS, said, “The exchange transaction charge, which constitute between 15%-30% of large brokers’ revenues and more than 50% of discount brokers’, is crucial for their sustainability.”
A 100 per cent pass-through of exchange transaction charges threatens to destabilise the discount brokerage business model, Khoday said.
(With inputs from agencies)
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