BS Number Wise: Will winner take all in the brokerage wars?

Latest data shows rising concentration of clientele among top ten players

Technology companies are increasingly seen to be winner-take-all. Limited competition survives even as the big keep getting bigger.

Is a similar dynamic playing out in the Indian brokerage industry? It has been going through a bruising few years, and the pandemic has only accelerated trends that were already in motion. The latest February data suggest that the top few brokerages are at the cusp of accounting for nearly 80 per cent of active clients.  

Rising concentration has been driven by discount brokerages like Zerodha which have increasingly captured market share even as traditional brokerages moved to upgrade their technology prowess and adjust to changing market realities. The top ten brokerages accounted for 79.9 per cent of those trading on the stock exchange as of February 2022.This is a 22.2 percentage point increase in market share for the top ten since the financial year 2017-18 (FY18) as seen in chart 1.

The rush to cash in on individual clients is not surprising. They have accounted for the largest share of the value of stocks changing hands in the cash segment of the stock exchange. They account for 3.5 times the share of foreign institutional investors and 4.7 times the share of domestic institutions like mutual funds (see chart 2).

The individual investor is also the second biggest player in the derivative segment after brokerages which trade on their own account-called proprietary traders. The derivatives segment comprises of instruments which bet on stock price or market direction and are typically short-term in nature.

Traditional brokerages allowed investors to trade by charging them a percentage of the transaction value. Discount brokerages charge a fixed fee irrespective of the transaction value. In some cases, they offer zero brokerage for trade in certain segments. They offer fewer bundled services, focusing on trade execution and not on research reports and other services.

That said, while discount brokerages attract more clients, others continue to make more money. An October 2021 HDFC Securities ‘Discount Brokers’ report showed that their share of broking revenue still lagged that of bank-based brokerages. This is because of lower average revenue per user (ARPU), said the report by authors Krishnan ASV, Sahej Mittal and Deepak Shinde.

“Our analysis suggests that despite discount brokers commanding a higher...market share of 29/49% in FY20/FY21, revenue market share (RMS) has been disproportionately lower at 20/27% respectively. This is primarily because of lower ARPUs compared to bank-owned and traditional brokers,”

Their projections also suggest that discount brokerages may command the largest share of broking revenue by FY25. Banks and traditional brokerages for the majority of the market (see chart 3).

In other words, discount brokerages will come out on top-just not in a battle where the winner takes all.