July 4, 2024
New Delhi, India
SEBI’s New F&O Rules Raise Costs for Stock Brokers
Introduction Starting October 1, 2024, the Securities and Exchange Board of India (SEBI) will implement new rules requiring all stock exchanges, depositories, and clearing corporations (collectively known as Market Infrastructure Institutions or MIIs) to charge brokers uniform transaction fees. This change replaces the current system where fees vary based on the broker’s trading volume, benefiting those with higher trading activity.
Impact on Brokers Currently, stock exchanges like BSE and NSE charge brokers such as FYERS, Zerodha, Groww, and Upstox fees based on their trading turnover. Brokers with higher turnover enjoy lower transaction fees. The new uniform fee structure means these brokers will now face increased costs.
Revenue from Rebates Brokers earn a portion of their revenue from the difference between what they charge customers and what they pay to exchanges, known as a rebate. Nithin Kamath, head of Zerodha, mentioned that rebates account for about 10% of their revenue, up from 3% four years ago due to a surge in options trading. The new rule will significantly impact their earnings from these rebates.
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Market Reaction Following SEBI’s announcement, the stocks of several brokerage firms dropped sharply. Angel One’s stock fell by 8.72%, Geojit Financial Services by 6.68%, and Motilal Oswal Financial Services by 4.19%. This decline reflects market concerns about the potential negative impact on brokerage firms’ profitability.
Challenges for Brokers Brokers, particularly discount brokers, rely heavily on rebates for their revenue. Larger brokers derive 15-30% of their revenue from rebates, while deep discount brokers depend on them for over 50% of their revenue. Without this income, brokers may need to start charging brokerage fees or increase existing fees to stay in business.
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Potential Consequences for Traders In the short term, traders might benefit from lower costs. However, brokers are likely to increase fees eventually to compensate for the lost rebate revenue. For example, the base fee for options trading is ₹5,000 per crore, but brokers with high turnover might currently pay ₹4,000 per crore, keeping the ₹1,000 per crore difference as income. This income is now at risk.
Strategic Adjustments Brokers are exploring ways to adapt to the new rules. Nithin Kamath hinted that Zerodha might introduce fees for equity delivery trades, which have been free for the past nine years, or increase F&O brokerage to cope with the changes.
Conclusion SEBI’s new F&O rules enforcing uniform transaction fees will increase costs for brokers, impacting their revenue from rebates and potentially leading to higher fees for traders. Brokers will need to innovate and diversify their services to maintain profitability under the new regulations.
Disclaimer:
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