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The stockbroking industry has undergone structural change since the pandemic. Initially, there was a spike in trading accounts as people stuck at home took to trading, but the euphoria is waning. There is a moderation in client additions, directly and indirectly. Mutual funds participation by retail investors is also coming down.
HDFC Securities recently hosted a call with Somnath Mukherjee (Business team —Founder’s Office, Zerodha Broking) for a raincheck on the changing landscape of the retail broking industry. The interview throws light on how the industry is changing due to policy changes announced by the market regulator SEBI.
While the Zerodha official pointed to a sharp moderation in new client additions, he also pointed out that customers were opening multiple broking accounts due to various logistical and technical issues.
Though data show that 65 percent of new accounts are from beyond the top-15 cities, their IP (Internet protocol) location indicates that 70 percent of the customers reside in tier-1 cities. Customers have started migrating back to their workplaces or moving out of smaller towns for job opportunities.
Options volumes have picked up after SEBI reduced the leverage in the cash intraday segment after the introduction of peak-margin regulations. Intraday traders in the cash market at traditional broking houses have moved to the options segment. Traditional brokers used to give their clients an intraday limit of 40-50 times. By migrating to options, especially out-of-the-money (OTM) options, the customers can take an exposure of 100 times.
High intra-day volatility is considered as the main reason for higher volumes in the options segment, which now contributes to over 99 percent of total derivatives' business.
The industry is expected to see tougher times ahead. If SEBI goes ahead with its plan of returning idle client funds, then brokerage rates will rise as the loss of float income can trigger a price hike. Zerodha is open to considering a charge of Rs 20 per order of delivery trades or increasing intraday or derivative trading charges to compensate the loss.
The bigger issue that the interview highlighted was SEBI’s thinking in terms of retail exposure to leverage in the options segment. The market regulator believes that exposure to leverage in this segment is significantly higher than the customers’ net worth. SEBI could put a cap on exposure limit based on net worth, just as is the case in the US where a customer placing more than seven 7 trades in a day needs to maintain a net worth of $25,000.
If the market remains depressed and SEBI goes ahead in aggressively controlling market exposure, then the cost of trading will increase and volumes can suffer. The going is likely to get tough for stockbrokers in the near future.
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Shishir Asthana
Moneycontrol Pro
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