Everyone pays the same fee: Why stock brokers will start charging you more | Personal Finance

New Rule, New Landscape:

Under the new regulation, all discounts are gone. Everyone, regardless of trading volume, will pay the same fee to the exchange. This seemingly simple change could have a ripple effect on the market. Discount brokers built their reputation on offering low fees. They often achieved this by taking advantage of the previous volume-based fee structure.

What this means: 

“Market infrastructure institutions like exchanges currently charge slab-wise fees from stock brokers based on their turnover. The higher the trading volumes brokers generate, the lower their fees are. Exchanges offer this discount to increase trading across segments including derivatives. Brokers charge investors through a similar volume-based structure. The difference between the fees levied on investors and what is paid to exchanges is their additional revenue stream or rebates,” said Value Research in a note. 

But now, the market watchdog does not want brokers to make this extra cash at the expense of investors. Moreover, the move is aimed to curb the mad rush seen in derivatives and improve transparency of the overall market cost structure.

Why is this a problem?

Brokers often relied on these discounts to make money, especially in the derivatives (options & futures) market. 

With the discounts gone, discount brokers face a dilemma. They can either:

• Raise fees: They can increase their fees to cover the higher exchange charges. This might make them less competitive compared to traditional brokers.
• Drop zero-payment plans: Some discount brokers offer zero-payment plans for specific trades. These plans might become unsustainable with the new fee structure.

Potential Outcomes:

Sacrificing Margins: If brokers raise fees, their profit margins might shrink.

Losing Clients: Higher fees could push some cost-conscious investors to switch to alternative brokers offering lower fees.

Previously, stock exchanges (MIIs) charged brokers a set fee based on the total value of trades they handled (turnover). This fee started at Rs 3.25 per every Rs 1 lakh worth of trades, but it became cheaper for brokers with a higher trading volume. This system essentially gave a discount to busy discount brokers, potentially allowing them to offer lower fees to their clients.

“The likely loss of income from rebates is already evident from the slump in shares of brokerage companies, especially those that heavily rely on derivatives. For instance, Angel One, which commands almost 20 per cent market share in the F&O segment and earns 70 per cent of its brokerage charges from derivatives, saw its price crash 9 per cent a day after the SEBI circular was issued. Others like Geojit Financial and SMC Global declined about 7 and 4 per cent the same day. The increase in costs for investors may also hit trade volumes in F&O, denting derivative revenue,” noted Value Research. 

Who will bear the brunt? 

Investors who trade stocks and derivatives might have to pay higher brokerage fees.

Potential Fee Increase: The main concern for retail investors is the possibility of higher brokerage fees, especially for derivatives trading (options & futures).

Impact on Discount Brokers: Discount brokers, known for their low fees, could be particularly affected. Their competitive edge might be blunted if they have to significantly increase their fees to match the new exchange charges.

“The rebates earned by brokers form a major chunk of their derivative business revenue. Since the regulatory move pulls the brakes on this source of money, brokerages may be forced to increase prices across the board, even in the spot market. Discount broker Zerodha’s founder Nikhil Kamath said the company may have to discontinue its free brokerage structure in the cash segment and increase brokerage charges in the F&O segment. Hence, investors across market segments will now have to account for these increased costs when calculating their expected returns,” noted Value Research. 

 Brokers will need to adjust their business models to cope with the standardized fee structure. This might involve rethinking their fee structures for clients, potentially leading to higher charges across the board. Instead of relying solely on transaction fees, brokers might focus on offering additional valuable services like investment advice, research reports, or portfolio management tools to attract and retain clients.

“While exchanges currently levy regressive slab-wise fees (higher the turnover, lower the fees), brokers usually charge their customers at the highest prescribed slab rate, resulting in excess profit residing with brokers, especially discount brokers, which is accounted as ‘ancillary transaction income’. Our analysis of Angel One’s disclosures suggests that this revenue stream contributes about 8 per cent to revenues and a material 20 per cent to pre-tax profits, which is likely to be vulnerable to the Sebi’s mandate that calls for a complete pass-through from customers to MIIs,” said a note by HDFC Securities.

Brokerage Motilal Oswal said that brokerages would devise ways to offset Sebi’s blow. “Angel One has multiple levers to offset this change: increasing the brokerage rates by Rs 3 per order and levying account opening charges as other brokers do.”