Impact of New Regulations on Brokerage Firms in India
As of October 1, a revolutionary change has taken place in the Indian brokerage landscape with the introduction of a new “true-to-label” regulatory regime. This shift mandates that brokers must transfer all exchange transaction fees collected from traders directly to the exchanges, eliminating any discounts they previously retained for fetching significant volumes. This change is set to alter the fee structures of many brokerage firms and may dissuade customers from continuing their trading relationships.
Changes in Brokerage Policies
Leading discount broker Angel One has recently announced the termination of its zero-brokerage policy for equity delivery transactions. It will now charge a flat fee of ₹20 per order or 0.1% of the transaction value, whichever is lower, for cash delivery trades. Conversely, Zerodha, India’s second-largest broker, has yet to make alterations to its fee structure and remains in a wait-and-watch mode, as indicated by Mohit Mehra, vice-president of primary markets and payments at Zerodha.
Challenges Ahead for Brokers
The new structure is believed to place significant pressure on brokers’ profit margins. Tejas Khoday, co-founder and CEO of FYERS, emphasizes that while profit margins may shrink, brokerage firms must adapt by enhancing their platforms, customer support, and overall trading experience instead of merely competing on the basis of low fees.
Potential Customer Shift and Competitive Landscape
Nirav Karkera, head of research at Fisdom, predicts a notable churn in customers who initially gravitated towards new-age brokerages due to their low-cost offerings. He suggests that brokers focusing primarily on low fees may witness a decline in loyalty, leading them to reconsider their business strategies and value propositions to maintain their customer base.
The Future of Brokerage and Market Dynamics
Ajay Menon, managing director and CEO of Motilal Oswal Financial Services, acknowledges that the new uniform fee structure will lead to significant changes in the brokerage ecosystem. He notes that the elimination of discounts by exchanges is a direct hit to broker revenues and indicates a fundamental shift from an era marked by free offerings to a landscape where such practices are curtailed.
Long-term Market Strategy and Changes in Other Regulations
In a related development, the Securities and Exchange Board of India (SEBI) has implemented further measures to temper excessive speculative trading in derivatives. These measures include reducing the number of weekly expiries per exchange, raising contract sizes for index futures, and increasing margin requirements on expiry day, all set to take effect on November 20, 2024.
Zerodha’s founder, Nithin Kamath, has reassured users that equity delivery will remain free for now, but acknowledges that significant changes may become necessary depending on the market’s response to the new regulations. The overall implications of these adjustments on trading volumes, customer behavior, and broker pricing remain uncertain.
Conclusion
As the Indian brokerage environment adapts to these new rules, the dynamics of trading, customer loyalty, and market competition are bound to shift. With brokers striving to offer enhanced value beyond low fees, the true measure of success will depend on their ability to create a compelling, transparent, and customer-centric trading experience in the evolving regulatory landscape.
