Declining volumes, competition push sub-brokers to the wall

From Nifty basket and lot sizes, V. Shah today speaks of shirt sizes to his clients. He is now a garment manufacturer supplying to retail outlets.

Shah is among the numerous sub-brokers, who have abandoned stock broking for other professions to eke out a living.

“If clients do not make money how can we? Given our relationship with them, we cannot suggest stock ideas where they will not make money and this works against us,” he said.

Shah is not alone. Take, for instance, Sanjeev Kumar, who is fed up with the dwindling returns from the sub-broking business.

“Cut throat competition among brokers has brought brokerage rates down to unsustainable levels. This, coupled with a decline in delivery volumes in the cash segment, has made matters worse,” he said.

Nifty and Sensex have seen very short phases of bullishness since 2008, which has made retail investors cautious. This has resulted in drying up of trading volumes in the cash segment, which in turn has hit the fortunes of sub-brokers, who are seen as the last-mile connectivity between brokers and investors.

FALLING TURNOVER

Ashish Choudhary, a retail investor, said, “When one does not know where the market is headed and indices are at 19,000-plus levels, it does not make sense to buy stocks .”

The NSE, which used to log in an average daily turnover of over Rs 14,000 crore, now clocks about Rs 10,600 crore a day. Data from BSE too, show a reduction from about Rs 4,350 crore a day to about Rs 2,120 crore.

The number of sub-brokers too, has tumbled – from 83,808 as on March 31, 2011 to 69,335 as on May 31, 2013 – a fall of 14,473.

Subhash Sharma, Senior Vice-President — Back Office Operations, Gupta Equities, said, “Sub-brokers contribute about 10 per cent of our trading volume.”

According to experts, the concept of franchisees (authorised persons) introduced to improve the last-mile connectivity with investors has also contributed to the decline.

Sub-brokers usually possess the infrastructure to execute and clear trades for their clients while authorised persons source the clients, leaving the trade execution to the broker.

Sharma said it makes sense to have authorised persons as the revenue sharing reverses in favour of the brokers. Brokers usually share 60-70 per cent of the brokerage with the sub-broker while an authorised person gets only 30-40 per cent share.

Moreover, in the case of authorised persons, the liability for his client’s trades rests on the broker, whereas in the case of the sub-broker he is responsible, he said.

RISING COSTS

Sub-brokers are also exiting the business due to escalating operational costs and the cyclical nature of the business. As a result, salary-cuts have become a normal phenomenon.

Prakash Kacholia, Managing Director, Emkay Global Financial Services, said, “The front-end in brokerages is able to cover costs, whereas the back-end cannot. Institutional broking, more often than not, subsidises retail broking. It is time for brokerages to move towards a shared services model for their back-end.”

raghavendrarao.k@thehindu.co.in

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