Low brokerage leads to people overtrading

[ShubhS9]

This is nice research paper that explores how the behavior of investor changes after trading commissions are removed.

We show retail investors are highly responsive to changes in trading commission fees. Using a triple-difference research design around the removal of fees for retail investors on the international retail broker platform, eToro, we show investors responded by trading approximately 30% more frequently, in smaller order sizes, and increasing portfolio turnover. Removing fees also spurred retail investors to reallocate their portfolios and diversify. Retail investors’ gross return performance did not significantly change around the fee removal despite trading more often, but retail investors earned significantly higher returns on a net basis after accounting for fees incurred in the pre-period. Finally, using demographic information, we show removing fees disproportionately affected inexperienced investors with lower deposit amounts and lesser technological sophistication both by expanding the extensive margin of investors and changing trading activity for the intensive margin of investors. Together, our results suggest commission fees play an influential role as a speed bump for retail investor participation, trading activity, and diversification.

You can read the research paper here:

Fee the People: Retail Investor Behavior and Trading Commission Fees

[Ashwin_kumar1]

My most expensive subscription is definitely zerodha! I have no qualms about it because they provide an excellent service for my trading needs. Compare this to the other charges (tax,exchange,etc…), I pay more than 3X of what i pay zerodha. So, it baffles me that people complain about brokerage & overlook the real damage here

[t7support]

Trading is like doing a business. Lower the cost higher the net Profit. Account opening fee, annual maintenance fee and hefty charges for api use is therefore detrimental to the PnL of a trader. Smaller the account size higher the impact on cost front.

Zero oriented brokerage houses will therefore help traders in my view.

[Ashwin_kumar1]

nse charges me more than double of what zerodha does. I honestly don’t see why order matching and occasionally being down and taking zero accountability, costs so much

[t7support]

Brokers exist because NSE, BSE etc exist actual trades happen on the exchange. Brokers are just middlemen. So they have to charge more than the broker.

[VijayNair]

@t7support

Brokers are just middlemen.

Hence the name B-R-O-K-E-R

[Ashwin_kumar1]

Technically, even the exchange is only a broker. A middleman to provide order matching between buyer&seller

[t7support]

A market is a place where buyer and seller meets. It wouldn’t be appropriate to call the exchange / market a middleman.

[Ashwin_kumar1]

@t7support

It wouldn’t be appropriate to call the exchange / market a middleman

Alright, the exchange is a broker for brokers, broker². Which only sounds worse

[viswaram]

This report doesnt make sense as its not researched from Indian stock markets.

Here - if the brokerage is lower, the trader saves more money !

[AlgoEye]

I would agree , here I punch 10 orders for 18k quantity even tough we have enough liquidity in OTMs that I think could be managed by 2 or max 3 orders( even avoiding freak trades) , so every time I am paying 3-4X brokerage for my orders which seems unfair to me . Freeze quantity should be per premium not fix for all premiums.

Even SEBI reports says approx. 20% of PNL people paying in form of Brokerage, STT ,Charges etc. This is huge Fixed cost which I think should be lowered or should be in form of fix subscription model types after certain Turnover etc.

Lowering charges should definitely help traders.

[Chirag1]

To raise this request again, non-data API access should be free, ie. Orders, holdings, positions, funds etc

[Jason_Castelino]

@AlgoEye

would agree , here I punch 10 orders for 18k quantity even tough we have enough liquidity in OTMs that I think could be managed by 2 or max 3 orders

Totally agree on this. On expiry days I change my strikes at least 3 times on both sides. What could do with 6 orders in total with 120 rupees I have to place 60 orders and incur 1200.

[SachinSingh]

Ye freeze limit bas ek kamane ka tarika hai, aur kuch nahi. This talk of doing it for the “safety of the retailers” is just bollocks.

@SachinSingh

Few years back, the max order size used to be 7500, then it reduced to 4950, and now it’s 2800/1800. Also, it never used to get revised at the end of month either. So call it a conspiracy theory or whatever, but many traders including myself feel that this was done to compensate the brokers for the intraday leverage being taken away. In June last year, they first reduced the lot size to 50, then in August, this max order size limit got reduced, and finally in September, the leverage was taken away. People say this was done to prevent freak trades, but that’s just bollocks. Freak trades kept happening after that as well, and still do, though they have reduced.

[Ashwin_kumar1]

Lot size is changed to keep notional value of contracts between 5-10lakhs & freeze quantity to keep notional below 5Cr. If these aren’t changed periodically, then contracts would become too large/small to trade as the underlying value increases/ decreases. No conspiracy here.

If you/ i accidentally press one/two extra zeros in our order quantity, it will be rejected due to insufficient funds. If institutions happen to do this without proper order checks from their risk management teams, it would be disastrous without freeze quantity!

[viswaram]

what logic is that?

How can the rules be set considering the institution in mind? If they have a problem get a software to double check the qty & price.
No system should favor the privileged by looting from the poor.

also the freeze qty is not really getting enforced now - its a disaster because all the brokers offer iceberg orders. ie you place an order for 10000 qty, system will split as 11 orders of 900 and 1 order of 100 for bank nifty.
only difference is that you pay brokerage 12 times instead of 1.

*well i pay zero brokerage intraday, so it doesnt really matter for me now - but i am quite sure looking at my trading pattern my broker will soon do away with this offering

[Ashwin_kumar1]

@viswaram

its a disaster because all the brokers offer iceberg orders

You have to punch the wrong quantity & wrong split! god save you if you can be that stupid😅

@viswaram

How can the rules be set considering the institution in mind? If they have a problem get a software to double check the qty & price.
No system should favor the privileged by looting from the poor.

This favours the privileged? How?

Is anyone who can place orders above the freeze quantity poor? (Assuming you’re selling first ofcourse)

[SachinSingh]

Fat finger trades used to happen earlier, and will keep happening in the future.
And like I said earlier, this is only a recent change, introduced a few years ago.

@SachinSingh

Few years back, the max order size used to be 7500, then it reduced to 4950, and now it’s 2800/1800. Also, it never used to get revised at the end of month either.

Check this old post & compare the freeze quantity to what it was back then to what it is now:

@nithin

This is a restriction from the exchange. Check this link on NSE .

Not to mention, the lot size has decreased too

@SachinSingh

In June last year, they first reduced the lot size to 50,

Someone mentioned that it was higher if you go more back in the day

@Devesh

I remember in early 2009 qty freeze limit for nifty future was 15000 or 300 lots.

[Ashwin_kumar1]

I don’t get it, lot size and freeze quantity are a no brainer.

Of all the stupid shit that sebi and nse introduce, this is of least concern.

[viswaram]

@Ashwin_kumar1

Is anyone who can place orders above the freeze quantity poor?

Poor need not be literal. It here means the cost of doing business.

If person1 is making a profit of 1 lakh by spending 35k & person2 is making a profit of 0.8 lakh by spending 10k - who is poorer ?