Tech, compliance costs push brokers to exit door
According to Sebi, 203 brokers and 4,540 sub-brokers have closed shop since January
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Mumbai: India’s stock markets continue to witness the exodus of brokers and sub-brokers despite rising turnover and higher stock prices, as cutting-edge technologies and costlier compliance drive many smaller firms out of business.
According to the latest monthly bulletin from the Securities and Exchange Board of India (Sebi), 203 brokers and 4,540 sub-brokers have closed shop since January while the benchmark S&P BSE Sensex gained 20% during the period. There has been a marginal fall in the number of registered brokers in the equity derivatives segment as well.
To be sure, the number of registered brokers and sub-brokers fell last year too, when the Sensex gained nearly 9%. According to Sebi data, the number of brokers and sub-brokers fell by 714 and 16,549 respectively in 2013. Market intermediaries point to higher compliance costs and new technologies driving out brokers. The smaller firms have also lost business to organized brokerages with a wide reach and large client base, offering full product suites.
“Compliance and surveillance has become tighter with time and hence investments towards the same have also increased,” said Vishal Gulechha, head of equity product group at ICICI Securities Ltd, one of the largest domestic brokerages with three million customers.
Norms put in place by the capital market regulator mandate an internal code of conduct for all intermediaries. For instance, none of the employees including temporary staff and voluntary workers is supposed to circulate unverified information related to companies and stock prices. The compliance officer of the intermediary has been made responsible for all such acts as part of Sebi’s efforts to tighten compliance requirements for brokerages to safeguard investors.
Technology is playing an increasingly important part as well. “Brokerages have to spend a huge amount on technology,” said Vinay Agrawal, executive director (equity broking) at Angel Broking Pvt. Ltd. “There is a lot of competitive pressure and small players find it difficult to afford the kind of technology required to meet the investor and business needs.”
Brokerages have been investing in technology ever since software-based trading such as algorithmic or algo trading became popular. Algo trading refers to using software codes to automate and enhance order-matching processes. According to BSE Ltd, the share of algo trading has increased from 8% in July 2012 to 28.77% in July 2014.
“Exchanges keep enhancing their technology and the brokerages have to keep pace. We have a whole bunch of pre-defined strategy-based software and many medium- and large-sized brokerages are interested in it,” said Hitesh Hakani, director of Greeksoft Technologies Pvt. Ltd, a firm specializing in developing strategy-based software, explaining the increased tech costs faced by brokerages.
Brokers who haven’t embraced new technologies are under intense pressure from falling cash volumes and rising costs, said Gulechha. According to him, ICICI Securities, which once had just one trading platform, now has platforms for iOS, Android, Windows and Microsoft Silverlight devices as well as for slower Internet connections.
The average daily turnover in the cash segment of BSE has increased from Rs.2,160 crore in January 2014 to Rs.2,663 crore in August. The National Stock Exchange of India Ltd has seen turnover rise from Rs.11,114 crore to Rs.14,808 crore in the same period.
Some market participants, however, feel that most entities exiting the business are small-time entrepreneurs who were into proprietary trading.
“There were a lot of small players who mostly did proprietary trading or serviced a very small set of rich individuals. With many such investors opting for organized large brokerages, the business obviously took a hit. Their closure did not impact the market or the investor base as such,” said the director of a domestic brokerage firm on conditions of anonymity.