Stocks

Discount brokers gaining share as traders see cost advantage

Tanya Thomas Mumbai | Updated on January 19, 2018

BL08_direct trading

Broking houses derive 74% of income from e-broking

Slowly, discount brokers are chipping away at the market-share of traditional full-service brokers as traders migrate to their lower-cost models. According to estimates provided by one broker, by the end of this financial year, discount brokers will account for about 6 per cent of all online securities’ trading in the country. That’s nearly six times the amount they handled three years ago.

Discount brokers are low-cost online brokers. They offer trading facilities at a fraction of the cost charged by full-service brokers, who charge a premium for offering investment advice and the services of a relationship manager. But the number of people who just want a platform to trade on is slowly rising, with traders being the first to switch from the expensive full-service to the discount model.

This is being driven primarily by the shift to online and mobile trading. Last October, Dun and Bradstreet released a report which estimated that for broking houses, income from online broking in FY15 rose 57 per cent year-on-year. “With 74 per cent share of income of broking houses derived from e-broking transactions,” it said, “e-broking is rapidly replacing the traditional call-and-trade mode of stock broking.”

Shying physical presence

Brokers are also cutting back on their physical presence. The same report said while the number of company-owned offices of equity broking houses declined to 2,621 in FY15 from 2,705 in FY14, the number of their sub-brokers offices declined to 33,762 from 35,150 over the same period, indicating a shift toward Internet-based broking.

Nithin Kamath, Founder and CEO of Bangalore-based Zerodha, told BusinessLine that most of his clients first subscribed to the full-service model before transferring to the low-cost one.

“The first demat account for any investor or trader is linked to his bank account, usually with the broking services of ICICI Direct, HDFC, Kotak or SBI. As they become more active traders, they look for cheaper brokerage and better platforms and move to pure-play brokerages, such as Motilal Oswal or Sharekhan. As their volumes increase, they shift to us to save on their brokerage costs.”

Wide variation in fees

The difference in brokerages charged by these three classes of brokers is stark. Kamath said, “An auction trade at a full-service brokerage can cost between ₹100 a lot and ₹30 a lot. Typically, a trader transacts in 5-10 lots at a time. With us, he can do the entire trade at just ₹40, irrespective of the size of trade or the number of lots. And we charge no brokerage at all on an equity delivery trade.

“Over the last four to five years, we’ve been able to gain credibility. That’s the most important part for a broker, since a trader parks his money with you. Globally, most brokers follow the discount model. I think a few years from now, we will see this in India as well,” Kamath added.

Vikas Singhania of Mumbai-based VNS Finance and Capital Services, a full-service broker with a discount broking arm called Trade Smart Online, said, in the online business, his marginal cost of adding every new client is nil. “I’m not putting in any incremental cost in serving each new client, so my costs remain cheap.” He expects discount broking to account for 15 per cent of the total market by the end of this financial year.

‘Roles are different’

So, are the full-service brokers worried? Not yet, as they too try to shift their customers online and cut down on brokerage charges. Dinesh Thakkar, Managing Director, Angel Broking, said, “Discount brokers offer the plain vanilla option that traders need. But a full service broker’s customer profile is different. We focus on first-time investors, which is a growing market in India. About 10-11 per cent of the population invests in equity in China; the comparable figure in India is still about 1.5 per cent. Even if my traders shift to a discount model, I can focus on getting retail investors who aren’t investing in equity yet.”

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Published on January 08, 2016
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