Regulators may soon stop exchange passbacks to brokers; discount broking stares at disruption: Sources

The fund house said that its two offices in Mumbai (Prabhadevi and Bandra) are functioning normally and are at full capacity.

Discount brokers and deep-discount brokers may soon see their businesses disrupted, and investors may see their broking charges rise, if the regulator brings parity on exchange transaction charges. While this regulatory move has been in conversation for over a year, market insiders say that it now closer to a rollout.

Discount brokers are those who offer no-frills service by charging a low fee, of around Rs 20 per transaction, and deep-discount brokers offer a similar service with even lower or at no fee at all.

Also read: Exclusive: Sebi to review exchanges’ pass-backs to brokers; move may dent business models of discount brokers

If stock exchanges are asked to charge all brokers the same transaction charges, unlike now when exchanges charge based on the turnover value, then these brokers stand to lose a large part of their revenue.

Discount brokers will need to raise their user fee and deep-discount brokers will need to overhaul their business because their model will no longer be sustainable, said Tejas Khoday, founder of discount brokerage FYERS and Governing Board Member of Bombay Stock Exchange Brokers' Forum.

How passbacks work

Exchanges charge brokerages a transaction fee. But they offer discounts on this fee based on the turnover value the brokerages channel in. Higher discounts are offered for higher turnover value.

The brokerages, however, charge their clients the full transaction fee. Therefore, they get to keep the discount benefit and this forms a large part of their revenue--discount brokers earn between 15-30 percent of their income and deep discount brokers earn 50-75 percent of theirs, according to sources.

If the parity comes through, then the brokers stand to lose this income.

The discounted transaction fee was offered to drive volumes. But insiders say that the regulator is now concerned about the volumes in the F&O segment and the losses traders are incurring.

Second blow

This would be a second blow delivered to discount broking after the regulator ruled that brokers should upstream client funds to the clearing corporation.

Earlier discount broking firms also used to earn interest from fixed deposits and other instruments made from investor funds. But last June, the regulator said that client funds should not be kept with the broker but forwarded to CCs on end of day (EoD) basis.

In a consultation paper released last February, on the need to upstream and downstream client funds directly to and from clearing corporation, the regulator had said that as of January 6, 2023, approximately Rs 46,000 crore of investor funds was held with brokers and clearing members. The paper added that anecdotal evidence suggests that there maybe more funds with the brokers and clearing members.