Photo: Bloomberg (Bloomberg)
Photo: Bloomberg
(Bloomberg)

Online discount brokers wooing retail investors back to market

Brokerages taking advantage of lower overheads to offer rates much lower than those charged by traditional houses

Mumbai: India’s brokerages are increasingly turning to online discounts to woo retail investors, wary since the 2008 crash, to the equity market by taking advantage of lower overheads to offer rates that are much lower than those charged by traditional houses for such traders.

While a traditional brick and mortar broker has to charge for rentals and employee expenses, online discounting broking firms save on such costs. Lower brokerage commission also encourages traders to capture small moves and helps them make money even amid low market volatility.

The 2008 market crash led to several investors, traders and even brokerages going out of business but those who kept costs to a minimum by relying more on online support and less on branches have been able to grow. Many of them don’t employ extensive research teams as they don’t offer advisory services.

One such firm, Zerodha Stock Broking Ltd, started operations in 2010 and offers broking services at a flat 20 per transaction. Its 25,000 clients rack up about 4,000 crore in average daily turnover.

Online discount broking gained popularity as a concept in the US in the late 1990s and early 2000s, and now dominates the business. It will do so in India as well, according to Zerodha founder and CEO Nithin Kamath.

“We believe that what we have started is just the beginning and, five years from now, most of the brokers in India will follow suit," he said.

Traditional broking firms have started slashing rates but these are still not as low as those charged by the online ones.

Another broking firm that started off soon after the 2008 crash and added clients at a brisk pace is RKSV Securities Ltd, started by three traders with experience in the US markets who moved to India.

“Being used to the kind of platforms, pricing models and service provided by American brokerages, we were shocked to see the Indian ones lagging (behind) in all three aspects," said Shrinivas Viswanath, one of the three promoters of RKSV.

“Investors and traders were still reeling from the burns of that year (2008). Exchanges had also witnessed a sharp drop in traded volumes. We did our part to encourage equity investing by slashing the costs of trading and providing exceptional support via phone and email," he recalled.

The broking house generates an average traded turnover of 2,500 crore per day. Encouraged by this, RKSV is planning to introduce discount broking in commodities trading in a few weeks.

Viswanath also expects the model to become ascendant as traditional brokers shifting online to cut costs.

“They (traditional brokers) invest in relationship managers, who act as a medium between the trader and the market. We remove all middlemen. We live in an era where broadband internet is growing rapidly," Viswanath said.

Industry estimates put the number of Internet users in India at 125 million, although how many of them have genuinely high-speed access is unclear.

Action Financial Services (India) Ltd, a publicly traded Mumbai-based broking firm, launched a rate war in December by cutting its fee to one paisa for every transaction. The brokerage has been adding clients at a brisk pace, besides fielding a surge in enquiries, since the cut.

“The time since 2008 had been bad for all industries and more so for brokerage houses, as investors were wary of putting money in the stock market. We also suffered along with other brokerages. The number of accounts also fell from their peak before the market crash. Ever since we started with our new scheme, the trajectory has changed and new clients are being added daily," the brokerage said in an e-mail.

“The clients have found the concept very (innovative) and there has been a stream of enquiries. Our last campaign got over in December 2012 but we get enquiries every day," it added.

Fees on delivery-based equity trades have come down to 0.1-0.3% from 0.75-0.5% over the past one year. For intra-day equity trades, the charges have come down from 0.05% levels a year-ago to about 0.03%. In the same period, trading commissions in the futures segment have fallen from 0.05% to 0.03%.

Key Indian stock indices have rallied amid strong global markets and are up at least 3% in the year so far. The 50-share Nifty of the National Stock Exchange of India ended last week at a 28-month high. However, retail investors are still staying away from the market. Between the two Indian depositories, there are just 16.2 million demat accounts.

“The Indian brokerage industry’s flat revenue pool at 10,500 crore for FY12-13 compared with FY11-12 despite the strong growth in options volumes remained a concern. The cash volumes and futures continued to slide and were lower even in absolute numbers during this period compared with the previous fiscal," said rating agency Icra Ltd’s report in March.

The agency has, however, revised its outlook on Indian brokerages to “stable" from “negative" as broader retail participation shows signs of revival.

While traditional brokerages offer discounts to large clients with substantial transaction volumes, they charge retail traders more. This is the gap that online discount brokerages are trying to fill.

“Every client at Zerodha gets the same deal—be it a person with 1,000 or 1 crore in his account. He gets access to all our tools of trade without any conditions on brokerage generated or the account size," said Kamath of Zerodha.

Online brokerages also let serious traders customise accounts. Zerodha allows users to develop their own trading systems or devise a rule-based entry and exit strategy that can be tested to ascertain the win-loss ratio.

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