Corporate File

Brokerages grapple with changing dynamics

PALAK SHAH | Updated on May 09, 2021

VIVEK BENDRE   -  The Hindu

The pandemic heightens digital vs traditional tussle

Digital-first and discount brokers, who charge zero to flat fees on equity trades, such as Zerodha, RKSV Securities (Upstox) and 5paise, continue to eat into the business of traditional brokers. The top two players now have over 36 per cent market share in the retail broking segment. But traditional brokers are not giving up yet.

As of January, India had over 1.64 crore ‘active’ investors and stock market traders. The market share of Zerodha was 19-20 per cent — a 55 per cent jump from a year ago, while Upstox boasted 11-15 per cent — a near-100 per cent growth , an ICICI Direct Research report says.

Fintech companies have mushroomed in the broking, financial, investment and trading space. Apps like Groww in the broking space; Kuvera, Orowealth, Money View, IndWealth and 7Prosper in wealth advisory; Scripbox, FundsIndia, ArthaYantra, RoboCapital and Finpeg in robo advisory; and start-ups such as SmallCase are gaining significant traction. They provide online investment advice based on algorithms, without human intervention, and basket investing and trading gateway.

In response to this, the traditional brokers, who have earned a fortune in the past, are changing course. Sharekhan, Angel and Kotak Securities have metamorphosed as discount brokers and are growing their digital business. Angel, with its discount plans, is now the third largest retail broker with over 8 per cent market share and 13.2 lakh active clients; Zerodha has 31.4 lakh, Upstox 18.5 lakh, HDFC Securities 9.2 lakh and Kotak has 7.2 lakh.

Zerodha, Upstox and Angel have 50-88 per cent of their clients from tier-2 cities.

Market regulator SEBI’s recent changes to the margin collection regime have aided the likes of Zerodha and Upstox. The number of clients involved in options trading in derivatives in the index and stock options segment has grown by 25-50 per cent. The new SEBI rules were effective from December 2020. Options are riskier since retail clients treat it like lottery. SEBI’s peak margin requirement has also reduced business for traditional brokers as it restricts them from extending leverage. Collection of upfront money for buying and selling of stocks is mandatory now.

Jimeet Modi, founder, Samco Securities, says, “Peak margin requirement has cut overall leverage risks but its unintended consequence is that retail clients have shifted to the riskier options segment. In effect, client capital is at significant risk sometimes. Discount brokers like us benefit due to competitive pricing versus full-service brokers.”

Nikhil Kamath, founder, Zerodha, says all brokers will play a discount game but only those who keep pace with technology and innovation will win.

On the frequent tech glitches and need for disclosures, Kamath says, “Traditional brokers had more down time than Zerodha. In most instances, Zerodha is down only for a few minutes, but down time for traditional brokers has even lasted several days. No full-service brokers will remain in India, like it is happening in the US.”

Zerodha has suffered glitches with its flagship trading platform Kite. Recently, the data of Upstox customers was hacked but the brokerage said client securities were safe. Experts suggest that brokers who hold so much client data should be banned from proprietary trading, given the conflict of interest.

“Brokers must disclose the quantum of proprietary trading, profit and loss, balance sheet, borrowings,” says Modi.

ICICI Direct says the Indian broking industry is evolving to make a distinction between transaction charges and a fee-based model for services like wealth management and investment advisory. The pandemic is hastening this shift. Apart from advisory services, margin funding and loan against shares are fetching earnings for brokers.

Published on May 09, 2021

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