Once the peak margin rule is in full effect from September, does it justify paying a broker Rs 20 per order? There are brokers (doesn’t do margin funding) who are already charging as low as 5 per order to 0 per lot. Up until now margin funding has been the reason to justify a high brokerage like 20 per order, does Zerodha plan to reduce brokerage? Before people jump in and start saying what about operational costs, you can just go through the income statement of any large broker catering to retail, one reason operational expenses are high (excluding margin funding costs) is because they spend a lot on Digital marketing, running a broking firm needn’t be expensive operationally. @nithin
I DON’T THINK THEY WILL REDUCE THE BROKERAGE AS PEAK MARGINS RULES DO EFFECT THE BROKERAGE FIRMS ALSO AS THE VOLUME OF CLIENT WILL DECREASE AND THE MAIN PROFIT IS UNDER F&O SEGMENT NOT IN EQUITY DELIVERY SEGMENT. @nithin
Hey, @dheeraj.r no plans to reduce brokerage. If anything, if there is a big dip in volume, brokerage rates might go up across all brokerage firms.
It ain’t just about the cost, businesses have to earn and grow for them to sustain. Only if businesses like us are growing will you as a customer keep getting better products over time. As you know, we don’t charge a brokerage for equity delivery trades, we only charge for speculative ones. Running a broking business is almost like running an insurance business. We keep earning small premiums, but every once in a while there is this black swan event when you as a business can potentially lose a lot of money. Brokers can lose money when clients lose more money than what is in their account - this can happen with both intraday stocks and F&O trading.
For example, last year when crude oil went into the negative price, we lost almost Rs 15 crores of our own money. It could have been much larger. Since we earn an X revenue per year, this loss didn’t really bother us. But it potentially could have brought a small broker down. So it is important for your broker to be earning decent revenue to keep you safe (irrespective of where you trade).
Also personally we think for the kind of impact cost that exists in the market today if you are a decent-sized trader this Rs 20 makes no difference in the grand scheme of things. As a business, if we can continue working on helping customers with better execution, we will save a lot more for the customer in impact cost than Rs 20/order.
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Wouldn’t this start a vicious circle?
LowVolume <-> HighBrokerage
Also what is your take on the impact of Phase 2 on volumes at Zerodha? Slippages have been so high after Phase 2 peak margin, it would be really helpful if you could break down the impact individually on Index Futures, Index Options, Stock Futures and Stock options.
Also do you still believe leverage should go down to 1X at the broker level or is it better to maintain the status quo (2X or 4X).
I think where we are at now in terms of intraday leverages could be allowed. Risk on intraday positions is lower and doesn’t get captured in VAR+ELM or SPAN+Exposure. As long as brokers fund with their own capital, it should be okay. But unfortunately, this isn’t in our control.
Volumes as of March 4th. We will get to know the real impact only once the current volatility subsides a bit.
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Sir I feel the best way out is further rationalization of margin for hedged option trade as it is internationally markets need to be sustainable business with roi dropping significantly when leverage is curtailed when traders are trying to become effecient in risk management the ball of exposure margin is spoiling the game pls forward the message to SEBI
But Nithin, with the new reduced leverage levels, Broker’s business has/will also become more safe. Maybe that should ensure reduced insurance safety[hence cost], ensuring a fine balance wrt cost, should the volume drop.
I had written this post sometime back on whether Indian broking industry can survive if many brokers reduced the cost.
https://zerodha.com/z-connect/rainmatter/the-race-to-zero-can-indian-brokerage-industry-survive
Unlike in the US, the main way brokers in India can earn is from brokerage revenue. Today a lot of newer age businesses are competing on the back of funds raised by investors, but as you can imagine that won’t last forever. Eventually everyone has to earn. The only reason it works out for us at Rs 20/trade for speculative trades and Rs 0 for equity investing is because of the large number of trades. None of our competing newer age businesses are in profits. In an environment like this if the overall number of trades drop drastically, the industry will be forced to up the brokerage eventually. It definitely won’t happen until VCs and PEs are funding 100’s of millions of dollars. But that will eventually stop.
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But the thing is margin for hedged option is also going up …earlier for a 500 point spread on Bank nifty it used to be 20k now it;s 25k a 25% rise brings down the no of lots and roi…i know its volatality and all but the vix is also down a lot since march 2020…
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One should also notice that value of contract has gone up significantly from last march, exposure is based on contract value and also premiums are still high.
There are other ways to make money, large brokers receive heavy rebates on volumes especially options and none of these rebates come back to the clients. But anyways market will determine if brokerage should reduce or not, its only a matter of time that one broker reduces it and others will have to follow. Large brokers should stop spending 5-10 crores a month on digital marketing and work on improving the cost structure, just my 2 cents.
Nithin I agree, but then technology is also improving [Without doubt Zerodha Tech Stack is quite solid], hopefully that should keep entire ecosystem sustainable via cost rationalization. Else I fear increasing brokerage and maybe forecasted reduction in liquidity, will become a self fulling prophesy to bottom.
As mentioned above by Nithin, with current rates only no new age online broker is in profits, here we are talking about decrease in revenues in coming months.
sir it is not due to vix it is due to exposure margin claw for hedged option trade sebi is lethargic n cracked what sould be charged maximum risk(loss) or 4 times of max loss this is lunatic cartel sucking out of retail as they dont want them to be profitable