Top Indian brokers lose market share

Competition from new foreign players and share of the options segment in overall market volume on the rise.

Leading Indian stock broking firms are losing their market share due to the increased share of the options segment in the overall market volume and competition from new foreign players.

The share of the options segment in the total equity market turnover increased to 72.68 per cent in the quarter ended March 31 from 54.67 per cent in the year-ago quarter, according to data compiled by BS Research Bureau.

This substantial increase in the options volume has resulted in reduced market share for the equity broking businesses of listed financial services firms such as Edelweiss Capital, Motilal Oswal and Religare Enterprises.

For example, Mumbai-based Edelweiss Capital’s market share in the equity market turnover came down to 3.70 per cent in the third quarter of FY11 from 4.80 per cent in the same period a year ago. The market share for both Motilal Oswal and Religare also declined. However, IIFL (India Infoline) was the exception with its market share going up 4.20 per cent in the third quarter of FY11 from 3.90 per cent in the year-ago period.

“Right now, Indian markets appear to be in a ‘speculative’ phase where the derivative-to-cash turnover ratio is high. This ratio, which used to be about 2.9 times in FY09, has gone up to 6.1 times in the third quarter of FY11,” said Ashish Goenka, who runs institutional sales for India equities at Espirito Santo. “Given the low cash volumes, brokerages are fighting over a smaller pie for now. However, the pie has the potential to multiply manifold, both in terms of volumes, and also fee-based income as the Indian capital markets mature and converge to global markets average in the long term,” he added.

The global average for derivatives-to-cash turnover ratio is about 2.1 times.

According to Edelweiss Capital’s estimate, a large portion of options trading in India is coming from market making and automated trading. “Anecdotally we know a lot of large international funds as well as brokerage houses have very large options trading business or lot of the intraday trading,” Rashesh Shah, the firm’s chairman had said in the third quarter of FY11 conference call with analysts.

The entry of new foreign players like Barclays, Standard Chartered and Espirito Santo is also expected to eat into the market share of leading Indian brokerages, industry officials said.

“These global brokerage houses, which are coming and setting shops in India, will also take their rightful 3-4 per cent market share. This will come from the listed players,” said head of institutional business at a domestic brokerage.

“The challenge in India will be to keep increasing your volume transaction in density and thereby at least retain your share of broking business. And, possibly superimpose on that your investment banking revenues,” he added.

The stock broking commission pool in India is estimated to be around Rs 13,000-14,000 crore at present, a third of which is coming from institutional broking.