Full-service brokers look to join discount squad

Approach discount brokers to understand and run web-based platforms

At least a dozen full-service brokers have approached discount counterparts to understand their business, say sources. Two are among top-10 full-service brokers, in terms of number of active clients.

Experts said it is difficult for full-service brokers to run discount divisions. A person says discount brokers charge 10 per cent of what a full-service broker does. So, margins of full-service brokers could be hit, he adds. IIFL and Asit C Mehta tried discount broking, without much success, experts said.

A broker is an individual or firm that charges a fee for executing buy and sell orders of an investor. A full-service broker provides a large variety of services, including research and advice. Discount brokers offer  web-based platforms, without research and advice. Clients are charged a flat fee for each trade, irrespective of its value. Zerodha charges a Rs 20 per trade. Commissions at full-service brokerages are much higher than those at discount brokers.

“Discount and full-service broking are two ends of the spectrum and cannot be compared. Full-service broking is a capital-intensive business that requires high-quality manpower. Discount broking is execution-driven, low-cost, and internet-based,” said Prasanth Prabhakaran, head, retail broking, IIFL. “The discount model could end up cannibalising the existing full-service client base".

Full-service brokers charge fee as a percentage of the total turnover. For the cash market, rates vary between 10 paise and 30 paise for delivery-based trades, and below five paise for intra-day trades. “Discount brokers charge 10 per cent of what a full-service broker does. So, full-service brokers margins could be hit. Moreover, customers that come to the discount platform might demand the same kind of service as other customers get,” said Vikas Singhania, executive director, Trade Smart Online, a discount broker.

Building credibility and scale are other challenges. “Unless you scale up, you can't make money. Pricing, whether the charges are Rs 10 or Rs 20 per trade, is not much of a differentiator now. What matters are the product, platform, and tools,” said Nithin Kamath, founder, Zerodha. Zerodha claims to have 76,000 clients and does a daily average turnover of Rs 7,000 to Rs 10,000 crore. Trade Smart Online has a daily average turnover of Rs 2,500 to Rs 3,000 crore and has 17,000 clients.

A few months ago, market regulator Securities and Exchange Board of India (Sebi) rejected brokers' plea to set a floor to brokerage rates. It felt the move was anti-investor. At present, broking houses are free to charge anything below a ceiling of 2.5 per cent of the total turnover. Competition and the rapid increase in the number of discount brokerages have driven down full-service brokers' costs to clients. The challenge is to attract retail clients and bring back those who had burnt their fingers during the 2008 crash. Retail clients mostly do delivery-based trades, where fees are the highest.

GOING FOR BROKERS

• A broker is a firm that charges a fee for executing buy and sell orders of an investor
   
• At least a dozen full-service brokers have approached discount counterparts to understand their business model, say sources
   
• Experts said it is difficult for full-service brokers to run discount divisions
   
• A person says discount brokers charge 10 per cent of what a full-service broker does
   
• So, margins of full-service brokers could be hit, he adds
   
• IIFL and Asit C Mehta tried discount broking, without much success, experts said