Division between broker associations over minimum brokerage rates

BSE Brokers' Forum asks Sebi to fix a minimum rate; ANMI says it should be market-determined

BSE Brokers’ Forum and Association of National Exchanges Members of India (ANMI), the two leading association of stock brokers, are divided over the idea of setting a floor brokerage rate.

BSE Brokers’ Forum has written to the market regulator, Securities and Exchange Board of India (Sebi), proposing a minimum brokerage rate as it believes discount-broking is distorting the market. ANMI says the charges should be market determined.

At present, broking houses are free to charge any below an upper ceiling of 2.5 per cent.

DISPUTE OVER MINIMUM BROKERAGE

• BSE Brokers’ Forum asks for minimum brokerage rate from Sebi
• ANMI believes a minimum brokerage rate could be counter-productive
• Demand for lower limit on brokerage rates due to rise in popularity of discount-broking model
• Discount broking offers flat fee for a client, irrespective of trade size
• Analysts believe discount broking is here to stay

“A cross-section of brokers is worried about the discount-broking model as it impacts them adversely. Several of them had written to take up the issue. Brokerage charged by firms is the smallest component of all levies and taxes, that also shouldn’t be taken away,” said Alok Churiwala, vice-chairman, BSE Brokers’ Forum.

“Prescribing a minimum brokerage rate may be counter-productive. Besides, brokerage rates have already come down a lot, so fixing a lower limit would be difficult. If there is a lower limit, it should come from broker consensus and not through regulation,” said Gopal Agarwal, president, ANMI.

Discount broking is a business model whereby brokers offer to charge only a flat fee (often less than the price of a packet of biscuits), irrespective of size of trade. The two most popular brokerages offering discount services are Zerodha and RKSV Securities.

Brokers are feeling the heat as more and more net-savvy investors prefer the low-brokerage model adopted by Zerodha and RKSV. 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. Any additional service provided is paid separately by clients.

With equity markets moving up and broking channels gradually moving online, investors are getting more comfortable transacting online. The incidence of online trading, including internet and mobile, have seen a near 10 per cent rise in the past year. Exchange data shows internet-based deals, including mobile- and algo-trading, account for 36 per cent of all those in the equity markets, up from about 25 per cent a year ago.

Officials said with growing popularity of the online medium and increasing demand for hand-held devices, the number of online-based clients is expected to move up further. As online trading picks up, discount broking would be the natural fallout, analysts believe. This is where firms like Zerodha and RKSV have first-mover advantage, said sector officials.

“Whether you like it or not, it is happening. Earlier, you paid for the entire gamut of services but clients are now willing to pay for only the services they want. Eventually, clients will evaluate the value of execution, research and advisory separately and pay keeping that in mind,” said Rahul Rege, business head – retail, Emkay Global Financial Services.

In November last year, IIFL had launched a discount brokerage model with a flat fee of Rs 10 irrespective of size of transaction. Brokers were skeptical about the success, many believing it would not be able to generate enough volumes to sustain the model.

But the recent representations by the BSE Brokers’ Forum and discussions within the sector point to a growing concern about the discount brokerage model replacing the traditional one. Quite a few are worried that this could lead to many smaller players shutting shop.