To survive, stressed brokers increase fees

Declining volumes make it unviable for brokers to stay in the business at current brokerage rates

India’s retail stock brokers have decided to go the telecom industry’s way, in terms of product pricing. After about a decade of sharp cuts in brokerage rates amid stiff competition, stock brokers have quietly started increasing the fee they charge retail investors for executing trades. This is because declining volumes have made it unviable for brokers to stay in the business at current brokerage rates.

On some trades, broking firms are now charging as much as 2.5 per cent, the highest permissible brokerage rate and more than twice the amount they were charging earlier. Till recently, brokerage rates stood at 0.5-one per cent.

The higher brokerage rates are being charged on smaller trades in the cash segment, which has seen a decline in activity compared to 2007-08, owing to investor apathy. The lack of direction in the market in the last three years, which has driven away retail investors, has resulted in volumes drying up.

Smaller retail investors, who punch in trades worth a few thousands, are paying higher brokerage rates. Some broking firms are seeking a flat brokerage for transactions below their break-even trade value. These flat charges range between Rs 20 and Rs 35, or 2.5 per cent, whichever is lower. For some of these firms, break-even level of transactions is Rs 4,000-5,000, while for others, it is Rs 1 lakh.

“We are discouraging trades below Rs1 lakh by retail investors,” said the chairman of a Mumbai-based leading firm. The reason for this, he said, was retail investors with trades below Rs 1 lakh ended up losing money. But rivals say it is the unviability to service clients with low ticket sizes that is prompting these firms to stick to large investors.

There is, however, a catch. In case one is taking several small trade calls, charges will go up exponentially. However, if one is buying in bulk, say 50 or more shares at a go, costs will be low.

So, if an investor is buying 50 shares of company A at Rs 2,000, his transactions would be of Rs1,00,000 and the brokerage fee would be Rs 500 (with a brokerage charge of 0.5 per cent). However, if one trades 50 times to buy 50 shares of company A, he would end up shelling out between Rs 1,000 and Rs 1,800 for that.

During the peak of the bull run, broking firms could afford to offer aggressive brokerage rates, as volumes were high at that time. Now, with volumes shifting to low-margin options, firms are hoping higher fees in the cash segment make up for the declining volumes. “Costs are on the rise. It’s a question of survival. High technology comes at a cost. We need to recover that at least. Cash market is the only segment where we can make money. But there is no volume and delivery-based trading is at one of the lowest levels,” said the head of broking at a large broking firms.