Low-cost brokerages thrive by wooing high-value traders with ultra-low commissions
Even as falling retail trading volume has forced many brokerages to wind down operations, one set is still thriving — the low-cost, or discount, brokers.
Discount brokers such as Zerodha Stock Broking Ltd and RKSV Securities Ltd have prospered mainly by wooing high-value traders with ultra-low commissions.
They levy a flat brokerage fee of Rs 15-25 on each trade instead of a percentage fee on the value of the trade. Some even offer unlimited trading for a fixed monthly fee.
This concept is a hit with big traders who like to churn their portfolio aggressively intra-day, as it allows them to keep most of the gains they make.
Shaurya Malhotra, who does proprietary trading in stocks for a steel merchant, says shifting to a discount broker has brought down his brokerage free from Rs 20,000 a month to less than Rs 2,000.
“I do not need any investment advice as a lot of it is available free,” he says.
Explaining the discount broking model, Nithin Kamath, founder of Zerodha, says: “The concept of discount broking is simple — cater to clients who trade online, save on costs and pass the cost benefit back to the client.
“We don't spend on advertising and rely completely on word of mouth advertising. The only cost we incur is on client-support and technology.”
To keep costs to the minimum, these brokers rely entirely on the online trading platform and technology, while traditional brokers typically operate in multiple cities through branch offices.
Raghu Kumar, co-founder of RKSV, adds: “Low-cost brokers are here to stay. The old way of doing business is dying. It is not a coincidence that HSBC (InvestDirect) and India Infoline shut their retail broking operations. We will see more of these in the coming months.
“Because of these closures, we are expecting more customers in the future. We can keep our costs streamlined. As the client base grows, we grow, too.”
Kamath of Zerodha explains: “We have over 32,000 clients today, adding around 2,000 clients a month with an average daily turnover of around Rs 3,500-4,000 crore on the exchanges.
“We have a team of around 85 people with two centralised offices in Bangalore. A traditional broker who does similar turnover would probably be working with 2,000 people and with over 200 branches.”
The story is similar for RKSV, which claims around 15,000 clients and increasing at the rate of 10 per cent every month.
Alok Churiwala, Vice-Chairman, BSE Brokers' Forum, concurs: “Stock broking has become an economically unviable option due to falling brokerages, intense competition and over-regulation. With intensifying competition, there is no lower floor to brokerage.”
Traditional brokerages are, however, not oblivious of the shift and are not averse to following suit.
S. Venkateswaran, Partner at Maconochie and Co, says: “We are in the process of shifting our retail clients to the online-only model with flat brokerages.
“Many larger brokers are already offering flat brokerage of less than Rs 10 per contract in the currency derivative segment.”