‘Will have to let go of zero brokerage or..’: Zerodha’s Nithin Kamath on impact of SEBI’s transparent pricing move

Zerodha co-founder Nithin Kamath sees Sebi’s new transparent pricing circular having a significant impact on brokers, traders, and investors. The new circular, which mandates all market infrastructure institutions, such as stock exchanges, to be “true to the label” in how they levy charges could make brokers across industry tweak their pricing, he says. 

Stock exchanges charge brokers a transaction fee based on the total turnover they contribute in a month. The higher the turnover, the lower the transaction fee. This differential, known as a rebate, is common across major global markets. Essentially, the rebate is the difference between what brokers charge their customers and what the exchange charges the brokers at the month’s end.

“In the US, brokers earn by selling the order flow to one of the thirteen exchanges or a dark pool, with decisions typically driven by the payment offered.”

For brokers here, these rebates contribute about 10% of the revenue. This can vary between 10% to 50% for other brokers in the industry. “Over the last four years, our rebate revenue has grown from approximately 3% to 10%, primarily due to the increase in options trading turnover. Currently, 90% of our rebate revenue comes from options trading. However, with SEBI’s new circular, brokers will no longer earn these rebates,” Kamath further wrote in a blog. 

“We were one of the last remaining brokers that offered free equity delivery trades. We could do this because F&O trading revenues were subsiding equity delivery investors. With the new circular, we will, in all likelihood, have to let go of the zero brokerage structure and/or increase brokerage for F&O trades,” Kamath said. 

Options trading turnover has surged dramatically in recent years, drawing regulatory scrutiny. Sebi has set up a working group to address concerns about the steep rise in retail participation in options trading. “The hope is that exchanges will pass on the benefit to customers by charging the lowest slab, minimizing the impact of increased F&O brokerage,” Kamath says.