Discount broking not yet, say brokerages

Volumes need to pick up a lot more to make discounts sustainable, they say; some concerned at widespread financial implications

A discount broking trend might take a while to catch on. At least three major retail broking entities, and many smaller ones, have adopted a wait-and-watch approach on this, according to sector officials Business Standard spoke with. Discount broking is where brokers offer to charge only a flat fee (often less than the price of a packet of biscuits) irrespective of the size of the trade. The recent announcement by IIFL to launch web-based trade terminals at a flat fee of less than Rs 10 had drawn a large amount of attention from investors and sector players alike. But a sector-wide adoption of the discount brokerage model does not seem in the offing.

“When the market does well, the sector tends to experiment with different strategies like zero brokerages or charges per transaction. The markets have become very competitive but we are not in a hurry to adopt this strategy,” said Motilal Oswal, chairman and managing director, Motilal Oswal Financial Services.

The discount brokerage strategy often involves a web-based platform for users to trade on, without any research or advisory services. Clients are charged a flat fee for each trade, irrespective of its value.

Volumes could be the biggest deterrent to the success of this strategy, sector officials said. Discount brokerages do well in markets where trading volumes are large because the client only pays for using the platform. Subsequent charges could be levied for additional services such as calls to a call centre or offline trades conducted. While IIFL introduced discounted brokerages last month, Zerodha and RKSV have been offering these for over a year.

Optimism in the economy and expectations of improvement in corporate earning numbers have seen indices surge as much as 30 per cent since the beginning of this year. Rising retail participation has pushed volumes to lifetime highs. For the current calendar year, average daily turnover is Rs 2.79 lakh crore. In 2007, prior to the downturn, it was about a fourth of this, at Rs 66,874 crore. That volumes are headed up, sector officials accept. Yet, they feel the volumes in the sector are not high enough for brokerages to look at slashing costs.

“Volumes are definitely going to be on the higher side. But it will be a long time before we see the kind of volumes that are needed for the discount brokerage model to succeed. It could perhaps take another five years for the market to reach that level,” said B Gopkumar, head of broking, Kotak Securities, which is also not keen on implementing this strategy. However, brokerage firms, especially those which derive a majority of their business from this activity, are concerned that if the strategy is adopted by larger brokerages such as IIFL, it could become the sector norm. And, hit brokerage revenues.

“All of us are waiting to see how it would pan out and whether it would be accepted by clients. We are not keen at this point but if it does become popular, brokerages will be forced to adopt it and revenues will definitely take a hit,” said the head of a domestic brokerage.

Increase in retail participation has meant higher operational costs for brokerages, with additional personnel, funds and technology being brought in. At a time like this, lower brokerages would make little business sense for smaller brokerages.

“While the strategy is aimed at making trading more efficient and effective, the fear is that it could lead to some undercutting by brokers trying to sustain the business. If the undercutting becomes uneconomical, it could lead to unethical practices where the ultimate loser will be the client,” said Alok Churiwala, vice-chairman, BSE Brokers’ Forum.

SLOW START

• Discount broking refers to brokers charging a flat fee to clients for use of their web-based terminal
   
• Fee charged is irrespective of the size of the trade
   
• Discount broking popular in developed markets where volumes are high
   
• Volumes in India might not support discount broking, say industry players
   
• Most brokerages have chosen not to opt for discount broking on concerns it could hit revenues