Throughout history, from barter to fiat money, monetary systems have uplifted global living standards, offering even the needy a chance at a better life. With the decline of kingdoms and the rise of governments came laws and regulations that fostered the formation of companies. The stock market emerged as a vital medium for expansion and debt management, allowing widespread ownership of businesses. Brokers facilitated these transactions, driving further innovation. 

Yet, while regulations aim to enhance safety and fairness, they can also stifle business acumen. A recent example is SEBI’s crackdown on the discount broking industry, illustrating the delicate balance between regulation and entrepreneurial freedom in financial markets.

How did Discount Brokers emerge as a game-changer in the broking Industry?

Over time, the stock market grew to epic proportions as people’s incomes improved, populations increased, and awareness increased, attracting people from all over the country. The increased trading in markets had an impact on discount brokerage firms, which disrupted the broking industry by introducing disruptive pricing models and technological innovations. 

Previously, traditional full-service brokers dominated this market, charging high fees and commissions, making stock trading expensive for individual investors. However, discount brokers changed all of that by offering per-trade fees at significantly lower costs, sometimes even zero commission trades on certain products.

This made it affordable for any aspiring trader or investor who could not have done so because of cost-related issues. Furthermore, discount brokers used technology to make processes more efficient, so they provided their customers with simple online platforms and mobile applications for easier trading, as well as research tools like real-time data and analytics, which allow investors to learn about market changes firsthand.

Their emergence forced traditional brokers to reconsider their fee structures and enhance their technological offerings to compete. This competition ultimately benefited consumers by driving down costs and enhancing service quality across the industry.

Discount brokers reshaped the broking industry by making it more accessible, affordable, and technology-driven, empowering a broader range of investors to participate actively in financial markets.

F&O Frenzy: The trap for the inexperienced and toll on mental health

In India, the Futures and Options (F&O) segment has garnered immense popularity, driven by quick profits and leverage. Leverage is a double-edged sword; if the market moves in an unexpected direction, the trader’s account is squared off. This has become a trap for inexperienced traders, leading to significant financial losses and taking a toll on mental health.

Many novice traders are drawn to F&O trading because of the potential for high returns with little upfront capital and a short time frame. The complexities of derivative products such as futures and options require a deep understanding of market dynamics, risk management, and derivatives pricing models. Typically, these derivatives are used for hedging and arbitrage, which require more capital, and the majority of traders take a naked position, leaving them vulnerable. 

Majorly, the psychological impact of F&O trading can be severe. The high-stress environment, constant monitoring of price movements, and rapid decision-making contribute to anxiety, sleep disturbances, and emotional distress. Addiction to the adrenaline rush of trading can exacerbate issues, resulting in compulsive trading behaviours and financial instability.

Regulatory bodies like SEBI have introduced measures to protect retail investors, including margin requirements and educational initiatives. However, the frenzy behind quick profits attracts inexperienced traders, which is a clear recipe for disaster and institutional investors prey on these inexperienced traders. 

SEBI Overlook on F&O Situation & Current Implications for the Discount Broking Industry

The Indian market regulator, SEBI, recently implemented uniform charges throughout the industry. Previously, broker products were based on volume-based charges. The regulator mentioned the process where the aggregated charges are collected from the end clients by the members (stock brokers) daily and pay MII (stock exchanges) every month based on transaction volume. This might confuse the clients and result in incorrect or misleading disclosure to the end client regarding the charges.

Making a level playing field for all market players can be difficult due to differences in market size and the existing slab structure of MII. To ensure greater transparency, the SEBI has directed MIIs to collect all charges levied on end users, which must be True to Label, as opposed to the previous case where it was based on volume or activity based on members. End users must now pay all MII-implemented charges in full.

This is one of the measures to reduce volume activity as more traders enter the stock market. The new-age companies, which are discount brokers, were able to offer discounts for specific volumes generated. This rule would be effective on October 1, 2024. This could have an impact on brokerage firms, which generate large volumes. 

Industry Leaders view on the impact

Large customer bases and discount brokers can withstand this impact, whereas midsize or small brokers may struggle because one of their revenue streams is disrupted. One of the prominent brokers, Nithin Kamath, Co-founder of Zerodha who is vocal about the operations of the brokerage industry came out with an explanation, the difference between the charges of broker and exchange was the rebate part which was one of the parts of brokers income.

It would account for 10-50% of revenues across the industry. F&O trading revenues were offsetting the zero equity delivery charges. There is a chance of those zero delivery charges going away or increasing F&O Charges to offset it. 

The stock broking industry is prone to regulatory risks and certain requirements to be done to operate as a business. High regulation brings high uncertainty as well as opportunities for some. This shift shows the frenzy in the markets and during the bull run. The F&O segment accounts for 80-90% of the total revenue of most discount brokerage firms.

Some of the Top Discount Broker Stocks in India affected by SEBI’s ruling

1. Groww
2. Zerodha
3. Angel One
4. Upstox
5. ICICI Direct
6. Kotak Securities
7. HDFC Securities
8. Motilal Oswal
9. SBI Securities
10. Paytm Money

Future of the Stock Broking Industry

With the restrictions and the growth of the broking industry, there is an inherent risk from exchanges. These brokers can earn more based on higher volume due to increased market awareness, particularly among the young, who, unlike earlier generations, are overcoming preconceptions about investing in the markets. 

However, if technology advances and fund settlements become more streamlined, investors and traders may be able to conduct their transactions directly with the exchange, removing the need for brokers. There are further complications concerning the settlement of shares and funds, and exchanges cannot deal without brokers. Changes can occur over time since the industry is already concentrated, with a large number of firms selling identical products. 

Conclusion

At the end of the article, we discussed some of the reasons for SEBI’s latest verdict on discount brokers. These activities are implemented to calm the market frenzy and educate consumers about the risks linked with it. The industry appears to be already concentrated, with several brokers entering the market. 

However, surviving in the broker market is difficult due to margin requirements and deep discounts to gain new clients, which can lead to financial losses for the organization. On the other hand, as more people invest and raise awareness, the industry is expected to develop.

Some brokers, such as Angel One and Motilal Oswal, are also looking to expand their exposure to wealth management, which could be the next phase of growth for these companies. What do you think about the industry’s growth? Let us know your views in the comments section below.

Written by Santhosh 

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