I'm glad that Zerodha is financially strong in a challenging environment. But why the change in minimum brokerage?

Zerodha
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@nithin got this email from Zerodha. I’m happy that Zerodha has such a formidable balance sheet given the times we’re in. But what’s the idea behind the change in minimum brokerage? Not that I am complaining, I wanted to know the reasoning behind it.

Zerodha logo

Firstly, I hope all of you are staying safe and using this lockdown period to enjoy time with your family. If you wish to utilise this period to learn something new about trading, investing, or markets, in general, check out Varsity and LearnApp. You can also discuss and interact with other traders and investors on Trading Q&A.

I wanted to quickly update you on a few things

How safe is Zerodha?

I have answered this many times, but it keeps coming up. With a general concern on the health of financial services firms after the recent stock market meltdown, I thought maybe it prudent to update you on why you should not be concerned about your relationship with us.

  1. We are a zero-debt financial services company. There is no borrowing of any kind.
  2. There is no credit risk, less than 5% of our own capital is lent to customers in any form.
  3. Our own funds in the business are greater than 25% of all client funds put together.
  4. Our ratio of ‘complaints to active clients’ is among the least on the exchange.
  5. We are profitable as a business and have enough reserves to sustain, even if there was an extended downturn in the economy.
  6. We haven’t spent any money on marketing and advertising. The month of March was our largest till date in terms of new client account opening, thanks to our million-plus happy customers who help us spread the word.

COVID-19 and our operations

We have been working from home since March 12th, much before the official lockdown was announced by our honourable Prime Minister. The operations have been running smoothly and we are in a position to extend this if required. Our support SLAs have been revised indefinitely to 72 hours per ticket instead of the usual 24 hours. This is the worst-case scenario and we will strive to answer your queries as quickly as possible. The SLAs will be restored once the larger COVID-19 situation is resolved. Most queries that we receive are already answered on our Support Portal, do try searching for the answer before creating a ticket.

Other updates

  1. The equity intraday and F&O pricing are being revised from 0.01% or Rs: 20 (whichever is lower) to 0.03% or Rs: 20 (whichever is lower). This does not change the flat pricing rate of a maximum of Rs: 20 per order and equity deliveries continue to remain free. See the revised brokerage calculator.
  2. For all non-POA customers, sell orders that result in the debit of shares from the Demat account (CNC SELL), will now have to be confirmed with the Kite 2-Factor PIN when placing orders. This is in accordance to instructions we’ve received from regulators. Read more here.
  3. We’ve amended our terms and conditions to incorporate 2-Factor PIN and biometric authentication mechanisms. Refer to the “Security precaution and password” section.

Stay Safe,
Nithin Kamath

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Hey thanks @RahulKhanna

Firstly this change in minimum brokerage doesn’t make a difference to Futures or Options contracts. All of them have a contract value of many lakhs ( Options contract value = (Strike+premium)*lot-size), so the brokerage remains the same - Rs 20/executed order. Equity delivery remains free as well, so nothing changes. The only difference will be for those who trade intraday equity. There are a few reasons why we had to do it

  • There is a fixed cost to execute every trade. For example, our connectivity to the exchanges has a certain message capacity, our data centre costs, etc. We have our clients execute a lot of very small value equity intraday trades where the earnings don’t add up to the costs. For example, if someone bought for Rs 1000, 0.01% is Rs 0.1. The minimum cost to execute every trade for us is the same. So we had to increase this, in the above example, instead of Rs 0.1, it will now be Rs 0.3. As the size of the trade becomes bigger, we anyways give the benefit of not having to pay more than Rs 20 per executed order.
  • Unlike equity delivery trades which bring no risk on the table as the customer puts in 100% of money upfront, intraday trades also bring in risk on the table. When clients have taken positions using leverage if the stock falls more than the margin that is provided, the risk shifts to the brokerage firm. In essence, it is almost like an insurance business, the brokerage you earn should be enough to cover for black swan events when brokerage firm can lose money because of the customer running a debit and not paying up the money. These low-value trades were bringing in risk too, which we realised over the last 3 weeks of market meltdown.
  • The traditional brokers anyways charge quite high, but the largest low-cost brokers that we compete with were also charging a minimum of between 0.05% to 2.5%, much higher than the 0.03% we now charge.

So yeah, the minimum brokerage had to be increased to cover for the minimum cost of executing a trade.

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I hope FnO brokerage doesn’t increase if not decrease in nearby future.

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Dear NITHIN,

GREETINGS to YOU ALL. Writing to You for the 1st Time.

THANK YOU VERY MUCH FOR Leading us All (Your Clients) from the Front, way AHEAD of ALL in Your Business / Service.

Your Mail Yesterday, 6-Apr-2020, 9:42 PM - Important updates — April 2020, has prompted me to write to You.

Surely I & All are IMPRESSED about the 6 Points INFORMATION under - How safe is Zerodha ?, that You have shared with us, but …

My Query is the Why the INCREASE in Equity Intraday Minimum Brokerage from 0.01% to 0.03% ? (I Invest & Trade in Equity only).

I Read Your Reply today to the Same Query but I still feel You should Charge 0.01%. In fact with INCREASE in Your Clients & Every Clients Volume of Investment & Trading, I expected this Charge to DECREASE.

You have Justified the INCREASE by giving example, if someone bought for Rs.1000, 0.01% is Rs.0.1. The minimum cost to execute every trade for You is the same.
But what if someone bought for lower than or equal to Rs.1,99,000. For Rs.1,99,000 at 0.01% is Rs.19.90, but at 0.03% is Rs.59.70 and then Tax based on this Amount.

Your USP has been Your Charging Much Lower than ANY Low-Cost Broker. In spite of which, with Your Over 10 Years Success in this Business / Service as Reflected in Your Letter, last 3 weeks of Market Meltdown should not prompt You to INCREASE.

So I Request You PLEASE DO NOT INCREASE the Equity Intraday Minimum Brokerage from 0.01% to 0.03%.

Regards & Lots of Love.
Arun.

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@Arun_Bolangdy I guess you are confused. The maximum brokerage is Rs 20, no changes to that. So if you buy for 1,99,000 it will be only Rs 20 itself (maximum brokerage).

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Hello Nithin,
I am very much impressed with the way you handle customer queries by yourself and try to provide genuine solutions.
Here, with your increase in intraday charges, well, I can’t really understand your logic. I just have one question Nithin? You yourself said that have enough cash reserves, and you already are a profitable company, then how come it suddenly became loss making in intraday? Second, in the example you gave, shouldn’t the outright solution is to decrease the leverage? If the loses are related to volatility, in any case , a guy buying one share of 1000 with 0.03% charges won’t protect your investment.
Also, sorry to be on your face, it’s just an action correlated to the increase in demand , and the greed of earning more charges since a large chunk of new customers are joining your platform at this time.
You have all the right to do so, since it’s your business, and you have the right to decide what price works for you, but as somebody who just recently joined your platform looking at your attractive intraday charges, I feel cheated.

Sorry if it offends you. Just being honest.
Regards

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@Nithin , does it mean the maximum total brokerage we would see in contract note for a single intraday equity trade would be 40 rupees? (20 INR each on buy-side and sell-side, respectively?)

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Yeah, exactly how it has been for the last 10 years.

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Dear NITHIN,

Thank You Very Much for Your Reply to my Query.

But SORRY, in my Mail to You today afternoon, my Query was getting Longer & taking Time to Express, so I Deleted Some Expressions, Stopped Elaborating on Points in Mind & Mailed what I thought I conveyed Clearly, but Your Reply Conveys I have Not Conveyed Clearly. Hope I am now able to further Query Clearly below :

You Replied to my Query -
“The maximum brokerage is Rs 20, no changes to that. So if I buy for 1,99,000 it will be only Rs 20 itself (maximum brokerage).”
I understand, NEVER Rs.59.70 (irrespective of the %) as expressed by me earlier.
Also, Considering at Revised 0.03% or Rs.20 (whichever is lower), so whenever I Buy for Rs.66,666.67 (at 0.01%, Rs.2,00,000) or above, Brokerage is Rs.20 (maximum).

In Your Reply - in Your Reasons WHY YOU HAD TO INCREASE -
as You had expressed - “We have our clients execute a lot of very small value equity intraday trades where the earnings don’t add up to the costs & You gave an example - if someone bought for Rs.1,000, 0.01% is Rs.0.1. The minimum cost to execute every trade for us is the same. So we had to increase this, in the above example, instead of Rs 0.1, it will now be Rs 0.3. As the size of the trade becomes bigger, we anyways give the benefit of not having to pay more than Rs 20 per executed order.”

Considering I have executed a lot of very small & big value equity intraday trades thru Zerodha, against Your given example of Rs.1,000 (small value) at 0.01% is Rs.0.1. I gave You example of Rs.1,99,000 (big value, but lower than Rs.2,00,000); so I gave You an example - if someone bought for lower than or equal to Rs.1,99,000. For Rs.1,99,000 at 0.01% is Rs.19.90, Yes but at 0.03% is Rs.20 (maximum brokerage) (but Never Rs.59.70 as expressed by me earlier) the Buy value being above Rs.66,666.67.

So I wanted to convey - at Revised 0.03% or Rs.20 (whichever is lower), whenever I Buy for lower than Rs.66,666.67, I have to Pay 3 times more than the Earlier Brokerage & the relevant Tax based on this Amount.

So for All Your Small Clients like me & Big Clients, Otherwise & Now during Present Times, to always Trade Rs.66,666.67 or above at 1 Time in 1 Stock is not always possible. You will see from my Trades executed till date, whenever possible I have Traded Big Values. So when You say -
“The minimum cost to execute every trade for us is the same.” - i.e. irrespective of very small or very big value equity intraday trades (like Rs.100 or Less or Rs.1,99,000 or More).

Hence I said in my earlier Mail & now I say again after putting down my above points -
“I Read Your Reply today to the Same (my) Query but I still feel You should Charge 0.01%. In fact with INCREASE in Your Clients & Every Clients Volume of Investment & Trading, I expected this Charge to DECREASE.” I expected the DECREASE much before Your yesterday’s Letter.

“Your USP has been Your Charging Much Lower than ANY Low-Cost Broker. In spite of which, with Your Over 10 Years Success in this Business / Service as Reflected in Your Letter, last 3 weeks of Market Meltdown should not prompt You to INCREASE.”

You have rightly expressed in Your yesterday’s Mail, Neither marketing, Nor advertising, but Your million-plus happy customers have helped You in making You India’s biggest stock broker BECAUSE of YOU offering the lowest, cheapest brokerage rates for futures and options, commodity trading, equity and mutual funds.

In fact Your Mail to ALL Your Clients Yesterday, 6-Apr-2020, 9:42 PM - Important updates — April 2020, sharing with us about the 6 Points INFORMATION under - How safe is Zerodha ?, which we may have Read elsewhere Justifies the Request - PLEASE DO NOT INCREASE the Equity Intraday Minimum Brokerage from 0.01% to 0.03%, but if possible DECREASE it.

Hope I am Clear now.

Regards & Lots of Love.
Arun.

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Guys, we as a country and the world is probably getting into a recessionary period, the kind none of us have ever seen before. Businesses who aren’t prepared and don’t fix things that could have been ignored in a world which was normal will not be able to get through this recession. It is not just us, you will see many businesses doing these adjustments. Like I mentioned earlier, there is significant risk +effort that goes behind every intraday trade, and we need to charge a minimum brokerage that covers this.

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@nithin just wondering that at this time brokerages are way lesser previous decades but then also it hurts traders and sometimes forms substantial cost element in their business then how the traders in your time when you were trading managed it.

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Gardening is my hobby. I love to grow & protect trees. I love to play, sit & rest under my planted trees and I enjoy the flowers & fruits which drop naturally following the rules of the nature. In the same manner, I’m a value investor by heart.
Suppose, I’ve started deploying a strategy: do value investing often, sell never. Considering my value investments as non expiring Options trade. My investment will vanish only if that company goes bankrupt & cease to exist.
Please, tell me how you will earn regular profits by maintaining my accounts forever?

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DEAR SIR WHY U INCREASED BROKERAGE CHARGES FROM 0.01% TO 0.03% (almost 3 times increase) this will create big problem for small trader he has o pay a lot for per order if is brokerage per order is less than 20 rs. kindly think about brokerage reducion. due to less brokerage only i have join ZERODHA but now u have increased. his is not good for us

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Answered here

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While keeping brokerage low is important, it doesn’t incrementally make a big difference beyond a point.
The real cost for a trader is the impact cost - the money you lose in the bid-ask spread every time you enter and exit. Since this isn’t visible, most traders ignore this. For example on a day like today, you can lose 2 points in the bid ask spread of Nifty futures, if you bought and sold once. That is Rs 150/lot. Assuming you traded 5 times in a day with 4 lots, that is Rs 3000 in impact cost. If you had say Rs 5lks, that is almost 1% of the capital. Whatever trading strategy you use, it has to cover for this cost, otherwise you end up having a slow death by overtrading.

One of the issues of running a low cost brokerage business is that traders think they can get in and out fast many times and forget to take into consideration the impact cost. This maybe wouldn’t happen as much if the brokerage was higher. So yeah, questionable if low brokerage really helps a trader or not, especially if the trader doesn’t consider impact cost. :slight_smile: It has been on our list of things to figure how to alert traders before taking a trade with a potential impact cost, so they get in only if they know that they can recover atleast that much.

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@RajibLDr while we earn from active traders, our true north as a business is to be the catalyst to get a lot more Indians to move from physical assets which doesn’t help the economy to back Indian businesses by investing and sticking with them. Along with great products, education, we think zero brokerage (knowing there is no cost) can be an enabler. The AMC charge of Rs 300 covers portion of the cost and the rest we are letting go thinking that it can help us reach our goals. The reason we can also do it is because unlike the leveraged intraday/derivative traders, we don’t take any credit risk on equity delivery customers like you, who transfers money first and then buys stocks only with that money.

But that said, if tomorrow this recession that we are all about to face gets really bad and if push comes to shove, we might have to introduce a flat brokerage fee for equity delivery customers as well. Hoping that doesn’t happen.

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Hi i used to trade from zeroda.my id is YN6650…my name is vinod karki…i am very small day intraday trader…zerodha suddenly hike brokrege 3 paisa insead of 1 paise…its cost effect to trade strategy…my every trade volume below 1 lac. Its brokrege cost increse triple n difficult to generate profit…n m decided i will swift my account from zeroda…

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With us at Zerodha, you first transfer money and then buy stocks (equity delivery trades). We don’t allow people to buy without bringing in 100% of the capital. So there is no credit risk.

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Indian’s love investing in land and gold. When money gets invested into these assets, they are not helping the real economy in any way. If instead, the money was invested in a business, the business is creating jobs, paying taxes, adding to GDP, etc - helping the real economy. So what I meant is, we want to be an enabler for this switch to happen.

This is our point of view, but we could be wrong as well. Don’t have the bandwidth to search and cite academic references.

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Yes specially in case of futures or high volume trades but in case of low cost options for a person with limited capital brokerage can effect much more then impact cost. For example support a person shorts bank nifty option for 10.5 rupees and covers it in say 0.5 , in this trade rs 40 brokerage would be 20% of profits earned . Also as such impact cost in these kind of options are only 0.2-0.3 points. Yeah if capital size along with position size is big enough then it won’t be a problem.
I myself paid more then 3 lakhs brokerage in last two years which if I now see is not a small amount and definitely had made its impact😕

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