Moneycontrol Pro Panorama | Are the days of low or zero brokerage behind us?

In this edition of Moneycontrol Pro Panorama: Adequate rainfall in July crucial to curb food inflation, investor concerns on promoter exit, low FDI calls for fresh thinking, powerful narratives can change economic discourse, and more

Shishir Asthana

July 03, 2024 / 15:45 IST

Has low-cost brokerage fostered a gambling mentality in the market and increased volatility?

Dear Reader,

Whichever side of the argument you land on, there's no denying that technology-driven, low-cost brokerage has played a pivotal role in attracting millennials to the market. However, the debate continues: has low-cost brokerage fostered a gambling mentality in the market and increased volatility?

One school of thought contends that low-cost brokerage encourages reckless trading behaviour. Yet, it's hard to imagine any rational trader continuing to trade solely because the brokerage fee is zero. Every transaction involves capital, and if a trader's capital diminishes after a series of trades, logic dictates that she should cease trading. After all, the goal is capital appreciation, not merely saving on brokerage fees, which are deductible when filing taxes.

The recent circular by the market regulator, which mandates all Market Infrastructure Institutions like stock exchanges to be "true to the label" in how these levy charges, has shed light on the true nature of low-cost broking. It turns out that low or no-cost brokerage wasn't exactly what it appeared to be. While clients weren't directly paying brokerage on their transactions, exchanges compensated brokers for generating volume. Bigger brokers often passed some of these benefits on to their high-rolling clients, but most retail traders were unaware that their trades were generating income for brokerages.

Exchanges charge transaction fees to brokers, who then pass them on to their clients. The exchanges' turnover-based fee structure means that brokers with high turnover pay lower transaction fees compared to smaller brokers. However, many brokers do not pass these savings on to their clients. Instead, they charge the maximum possible transaction fee and pocket the difference.