The Hindu Business Line : Innovations in online broking

If you are an avid online investor, there is some good news for you as far as broking charges are concerned. The desi online brokerages have come up with a host of new products at competitive rates. Flat brokerages are in and value-based brokerage models could soon lose out. The broking community is at the threshold of a transition from the value-based fee regime to a flat fee one. With the likes of Kotak Securities.com and ICICI Direct introducing products with a flat fee, the future will see a host of other players offering more such products priced attractively. To appreciate the implications of the much-talked-about flat fee, one needs to understand what value-based brokerage is.

Value-based brokerage

This service is what most brokers offer. The broker charges you a fixed percentage of the total turnover as brokerage. This percentage would differ based on the volumes and the type of transaction. The percentage-based (value-based) fee is applicable for both buying and selling of shares.

Most Indian online brokers follow a slab structure, wherein the percentage charged reduces with increase in the value of the investments.

This model is economical for investors who are market rookies and trade rarely. It fits the profile of long-term investors, for whom a higher brokerage may not affect the profitability of the investments. The value-based model also suits high net worth individuals, who transact in huge volumes and thereby benefit from the lower brokerage in the slab structure. But if you happen to be an active player with a not-so-high turnover, you are probably shelling out more money as brokerage compared to what investors elsewhere in the world are paying for similar services.

So as an active retail investor, you stand to gain nothing if your total volumes fall short of the next slab in the brokerage structure offered by your broker.

Moreover, in a scenario where the broker earns only if the client trades, a lot of pressure may fall on your dealer to make you transact during times of your inactivity. The practice of `churning' further underscores the concerns about this situation.

Flat-Fee brokerage

The flat fee model charges the clients a fixed brokerage for a specified period, irrespective of the frequency or value of transactions.

So, if you are a very active trader, then flat fee broking products may suit you better. This kind of a fee structure helps you play the market better, without paying a higher brokerage. It successfully keeps a tab on the trading cost incurred (compared to the value-based model), and at the same time helps you get the broker's services and advice.

The flat fee also helps your broker earn a nominal amount during times you don't trade, thus putting an end to the `No trade, No pay' scenario .

Consequently, it reduces the pressure your dealer might put on you, when you remain inactive (non-traded) for some time.

Those of you who stand to benefit from such products should remember that markets may not always support your trades, and during such times don't force yourself to trade just because you have paid the fee.

In the Western markets, where almost 50 per cent of the cash market trades are done online, the success of the flat fee model can be attributed to the popularity of Internet trading.

The products offered by the brokers are attractive in terms of the charges and the wide range of investors they target. In India, where an estimated 12-15 per cent of the total cash market volumes are done online, the flat fee regime has a long way to go. The products offered are still at a nascent stage and cater to the needs of a specific group of investors only.

Why the transition?

At a time when Internet broking is emerging as a popular trading tool, scalability and accessibility have become realistic goals for the broking houses. The broking industry is thus attracting a lot of new players. With such entrants as ABN AMRO Asia Equities, Religare and, the much talked about, R-Trade, competition is set to become tougher for the established players.

The introduction of flat fee products may either be a pre-emptive move by market leaders to maintain their market presence or a hurried move to retain their existing client base. Whatever reason, it certainly is good news for investors, who now have a wide range of choice to select their brokers, investment products and brokerage structure, based on individual investment needs.

The Choice is yours

But before you decide on the type of account that suits you best, make a guesstimate of how you plan to use it, the expected trading activity and the money you plan to invest over time. If you have already been using a value-based broking account, compare your brokerage with what you might pay if you switch to the flat-fee product. Only if the switch looks attractive in terms of the brokerage vis-à-vis your expected returns, opt for a flat-fee product.

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