Discount Brokers Face Tough Times as New Rules Change the Game, Life Changes Under New Regulations

Discount brokers in India are facing a big change after new rules took effect on October 1. Previously, brokers collected transaction fees from traders and kept some discounts from the exchanges for themselves. However, the new rules require brokers to send all transaction fees to the exchanges, forcing them to raise their own fees, which may drive away some customers.

Angel One, a leading discount broker, has ended its zero-brokerage policy for equity delivery transactions. It now charges a flat ₹20 per order or 0.1% of the transaction value, whichever is lower. Zerodha, the second-largest broker, has not made any changes yet.

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Tejas Khoday, co-founder and CEO of FYERS, a discount broker, explained that these flat charges will cut into profit margins. To cope, brokers may introduce new fees in areas like equity delivery. He added that brokers will need to focus on keeping customers happy by improving their trading platforms and support, rather than just competing on low fees.

Under the new “true-to-label” rules, brokers must pass all collected fees to the exchanges. These changes coincide with an increase in securities transaction tax (STT) on futures and options.

Nirav Karkera, head of research at Fisdom, mentioned that many customers who chose new-age brokerages for their low fees might now look for alternatives. With the changes in fees, these brokerages could see a drop in revenue and will need to rethink what they offer to attract customers.

Angel One did not comment on the changes due to a silent period before its quarterly earnings report. Zerodha is waiting to see how the market reacts to the new rules.

Since the Securities and Exchange Board of India (Sebi) announced the new rules on July 1, shares of BSE Ltd, the only listed exchange, have risen nearly 65%. This increase is partly due to the upcoming initial public offering of rival NSE and the expected benefits from Sebi’s new rules.

Ajay Menon, managing director and CEO of Motilal Oswal Financial Services, noted that the true-to-label rule will create more uniformity among brokerages. With exchanges cutting the discounts they used to give to large brokers, revenue for these brokers is likely to drop.

Menon also believes these changes signal the end of the era of free services in discount brokerage, which was aimed at reducing excessive trading in futures and options.

Zerodha founder Nithin Kamath stated on social media that equity delivery will remain free for now, and they have no immediate plans to change their brokerage fees.

Kranthi Bathini, director of equity strategy at wealthMills Securities, warned that these changes will reduce brokers’ profit margins in the medium to long term. He suggested that investors should be ready for rising costs for services that were once free.

In addition to the fee changes, the market regulator has announced new measures to stabilize India’s derivatives market. This includes limiting the number of weekly expirations per exchange to one from the current five, raising the minimum contract size for index futures and options from ₹5-10 lakh to ₹15-20 lakh, and increasing margin requirements. These changes will take effect on November 20, 2024.

Kamath mentioned that if traders who typically trade weekly do not switch to monthly trading, this could impact around 60% of futures and options trades and 30% of overall orders at Zerodha. He said they would reassess their pricing structure based on how the new rules affect business after November 20. The full impact on trading volume and customer behavior is still uncertain.