Will Trading Fees Rise Exclusive Insights on Discount Brokers’ Shift from Free Services

Exchanges have been advised by capital market regulator SEBI that all brokers should have flat transaction fees, regardless of the volume they provide.

Discount brokers such as Groww, Zerodha, Angel One, and Upstox would have to raise their fees since market regulator SEBI has suggested to exchanges that transaction fees for all brokers should be the same, regardless of the volume they provide. Discount brokers are those who don’t charge their clients for anything other than trading facilities; they don’t give research reports or advice services.

Lack of transparency is the main worry of the market regulator since brokers charge clients at the maximum slab but do not pay the whole amount to the exchange, as brokers receive incentives from exchanges to boost turnover above a predetermined threshold, which is determined by slabs. Since discount brokers are the largest volume generators, the difference between the amount billed to clients and paid to exchange represents a net save. Exchanges and brokers may have operational challenges with regard to tax payment and billing, nevertheless, as brokers receive monthly bills from exchanges while clients receive contract notes on a daily basis.

The regulator desires fair competition.
Owing to intense competition, exchangers provide discounts based on turnover. Similar discounts or incentives are also offered in markets such as the US. The regulator, who has been getting market input regarding these kinds of tactics, wants discussions to resolve this problem. An enormous increase in the turnover of options trading is another issue that is frequently brought up. An increasing number of individuals are drawn to trading rather than long-term investing as discount brokers only charge little fees on these kinds of transactions. A predetermined fee, say of Rs. 20, is charged by many discount brokers for each transaction.

The options spike is attributed to low-cost brokerage and trading costs.
The volume of premium options, encompassing stocks and indices, has been rising over time, but the COVID-19 pandemic has been the catalyst for a notable increase in trade. From about Rs 8.5 lakh crore in 2018–19 to Rs 13 lakh crore in FY20, Rs 32 lakh crore in FY21, and Rs 69 lakh crore in FY22, the number of premium choices has increased dramatically. The options premium turnover increased to Rs 119 lakh crore in FY23, and it ended FY24 with a Rs 151 lakh crore premium volume turnover.

The incentive to churn with small spreads is too profitable to ignore under this structure, as the cost of dealing is minimal due to no or very cheap brokerage and low transaction charges. Concern should be expressed about the high turnover on options caused by all of this, according to one industry insider.

“The current situation also costs the government because big HNIs with high margin requirements trade with prop brokers under a deal where they simply pay transaction fees, which they would have otherwise paid anyhow, and they don’t pay brokerage fees. However, the government is losing GST as a result of zero brokerage,” stated a different industry source.

Experts are drawing attention to yet another risk accumulation issue. Many prop brokers have offices across the nation, run by individuals who are represented as being employed by one prop broker but are actually employed by a different minor prop broker. They benefit from nearly zero brokerage and lower transaction costs in addition to margin savings. Due to the potential hazards associated with such agreements, SEBI is equally worried.

Trending model of discount broking and, Will Trading Fees Rise Exclusive Insights

Several conventional broking businesses are establishing a distinct sector or a business to promote low brokerage products after realizing the potential of the discount broking industry. The discount broking model has also been imitated by other conventional brokers who have bank support. Angel One, a venerable and well-known brokerage institution, was among the first to recognize the opportunity to transform its operations into a discount broking business. Discount brokers are recognized for facilitating people’s access to the market, investing, and trading at a lower cost.

How do exchange fees operate?

For options up to Rs 3 crore, the largest exchange, NSE, imposes a fixed cost of Rs 2,500. After that, there are additional fees that are directly correlated with the broker’s turnover. Brokers are taxed Rs 49.50 per lakh if they earn a monthly premium turnover of Rs 100 crore; if the premium exceeds Rs 100 crore and reaches Rs 750 crore, they are fined Rs 47 per lakh. is billed. An even lower rate of Rs 42 per lakh is billed to the brokers in the event that the turnover in options premium is more than Rs 750 crore and up to Rs 1,500 crore. In a similar vein, the exchange bills the broker at Rs 37 per lakh if the turnover is more than Rs 1,500 crore but less than Rs 2,000 crore. Brokers are liable to a flat fee of Rs 29.50 per lakh for premium turnovers exceeding Rs 2,000 crore each month.

The key to becoming wealthy

Discount brokers that produce premium volume exceeding Rs 2,000 crore monthly charge their customers Rs 49.50 per lakh, but they only pay the exchange Rs 29.50 per lakh, with Rs 30 per lakh going to the broker. .. This is going to be discount model brokers second blow.

An excessive amount of focus on cheap brokers

Stakeholders have also expressed concern about the business shifting to the bargain broker as a result of their low brokerage and transaction charges. Almost 60% of the market is now held by the main five companies. Industry sources claim that a significant number of small-time brokers are forced to close their doors due to the intense competition from bargain brokers as well as the heavy burden of compliance. Many brokers now exclusively execute proprietary trades and no longer engage in retail trading.

A few problems with operations

Since brokers are accustomed to calculating STT, GST, and other taxes and levies on a monthly basis, they can also run into problems if the changes are enacted. Instead of doing all of these things once a month, do them over the course of 20–21 days.

The plan has been discussed and feedback has been requested from exchanges, brokers, and other relevant parties by the regulator. Before the idea takes on its final form, more rounds of debate are anticipated, but one thing is for certain—the regulator will not tolerate it going forward.

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