Your stock broker may charge more

The fee brokers charge clients is likely to head north following the markets regulator’s decision to curb the pool of clients’ money or float lying with the brokers.

On Wednesday, the Securities and Exchange Board of India (Sebi) gave its nod to a broad framework for Application Supported by Blocked Amount (Asba)-like facility being made available to investors for secondary market trading. The facility is based on blocking of funds for trading in the secondary market through Unified Payments Interface (UPI) and is aimed at bringing greater transparency and security to client funds lying with brokers.

Gurpreet Sidana, director & COO at Religare Broking, believes that brokers may have to accommodate and change their business model over time as Sebi’s move may hit the treasury income of most brokers and that loss may be substantial once the mechanism is fully implemented. “It is certain that brokerage will go up. Having said that, clients will also get the benefit of the interest on the blocked amount which was earlier lying with the brokers. So, eventually, for clients at large, it may be a zero sum-game but brokerages may have to adjust pricing models to sustain margins,” Sidana said.

“In the long term, brokers will have to innovate to find other sources of revenue generation. This will primarily come from giving value-added services (at a price) to customers for their better experience and safer trading,” Deepak Singh, chief business officer, Reliance Securities, said.

The direct settlement mechanism with Clearing Corporation (CC) will provide client-level settlement visibility to CC, helping avoid the risk of mingling of clients’ funds and securities.

Sebi’s move may impact new-age brokers, too, as their float income as a proportion of revenue may be higher than other diversified brokers. Their share of UPI payments is also likely to be higher.

While the UPI block mechanism to allow trading with funds lying in the bank account is optional for brokers, the ability to collect fees from Clearing Corporation and potentially lower regulatory burden due to non-handling of client funds would probably mean that most brokerages will offer it, according to Nithin Kamath, founder, Zerodha, the country’s largest broker. “Funds lying in the customer’s bank for trades would mean higher risk for brokers and a hit on the float income, which would be subsidising the charges today. I guess the industry will end up charging higher fees for all transactions coming through the UPI block route to make up for it,” he said in a tweet on Friday.

He added that using UPI blocks for secondary market transactions may remain optional for the customer. “Offering only one route for the entire country to fund transactions will be extremely complex. Such a large dependency will also be a systemic risk to our capital markets,” Kamath said.

Under the proposed framework, stock brokers will be allowed to either directly settle the brokerage with the UPI clients or opt for CC’s facility to deduct standard rate of brokerage from the UPI block of the clients. The framework would be implemented in a phased manner to facilitate smooth transition in the market.

“Given increasing regulatory compliance and associated cost, larger brokerages are expected to gradually garner market share while consolidation is expected to continue with the alignment of small brokers with larger established player. Further, higher compliance expense could trigger upward revision in brokerage rates, though timing and extent of price revision of the same is difficult to guess,” according to a brokerage report by ICICI Securities.