Broking industry heading for evolution: ICICI Securities

Chennai | Updated on December 25, 2019

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Discount brokers with dominant market share are changing the business model, says ICICI Securities report

In the wake of changes undertaken in the domestic stock markets and broking industry, evolution in the business model is imminent, says ICICI Securities (I-Sec) in a research report on broking industries.

“In our view, the Indian broking industry is set to witness a gradual shift from transaction-based model to service- or fee-based model, offering services such as wealth management and investment advisory,” the report said.

Apart from advisory services, a focus on fund-based activities, including margin funding and loan against shares, which the brokers are engaged in, is seen to increase further, offering brokers a sustainable earnings avenue, according to I-Sec.

The emergence of discount brokers offering low brokerage on a per-order basis has led to a shift in the market share of active clientele.

The market share of the top 10 brokers in terms of number of clients moderated to 63 per cent in September 2019, against 65 per cent in July 2019, it added. “Gaining market share, RKSV and 5Paisa are new additions in the top 12 list of brokers in terms of clientele. Both have climbed three places in ranking to 9 and 11, respectively,” the report further said.

With respect to active clients as a percentage of total clients, Zerodha dominates with 69 per cent, while for other players the statistics stands in the range of 24-32 per cent, according to the I-Sec report.

The report further said the increase in clientele and orders boosts the top-line in terms of brokerage fees. However, the sustainability of this growth is yet to be seen.

Negligible impact

“While a low cost enables discount brokers to maintain business parity, a sustainable rise in volumes remains the key driver for discount brokers to make meaningful profitability,” it added.

SEBI’s new norms on bringing margin for cash buy/sell order will have a very negligible impact on online brokers, as they had always asked retail clients to bring margin money before a buy order placement and sell is allowed only from delivery, it said.

Events like the Karvy Stock Broking scam create a trust deficit and can lead to large brokers gaining market share, it further opined.

Options rule the roost

The Indian stock market has been witnessing a continuous rise in volumes traded, from FY15 to Q2 FY20. However, there has been a growing divergence between the cash and derivatives product segments.

According the broking house report, “While the proportion of cash segment has remained steady at 3 per cent of total volumes, options as a product has been gaining prominence with the share in total volume rising from 79 per cent in FY15 to 88 per cent in FY19 and 92 per cent in Q2 FY20.”

Published on December 25, 2019

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