Brokers exit cash segment, numbers drop by a quarter over 12-month period

High regulatory expectations and advent of discount broking have made old-style brokerage businesses unviable

More than 700 brokers have exited the cash segment since May 2018, shows data by the Securities and Exchange Board of India (Sebi). The markets regulator provides information on regular brokerage registrations in the cash segment, as well as on corporate brokers with registrations for the same. 

The number of registered cash market brokers declined from 3,028 in May 2018 to 2,253 in May 2019. Similarly, corporate brokers saw a decline from 2,641 to 1,954 over the same period. The equity derivatives segment saw a smaller decline, from 2,569 to 2,429 — a decline of 5.4 per cent.

Cash segment brokers saw a quarter of their numbers wiped out over the mentioned period. 

Some of the exits, said an expert, could be by brokers with inactive memberships looking to close down operations. For others, the reason could be industry-wide pain. 

Uttam Bagri, chairman of the BSE Brokers’ Forum, suggested that a number of brokerages may be exiting in light of the pressure that business has been facing. 

“Stock brokers are facing a double whammy of very high regulatory expectations and rapidly changing market dynamics, making business unviable,” he said. Revenues have been hit by the entry of discount broking, which has significantly lowered execution cost and made old-style brokerage business models unviable, according to industry experts. 

The cash market deals with buying and selling of actual shares in listed firms. The derivatives segment involves taking positions on price movements through futures and options contracts —considered more speculative given their short-term nature. 

Derivatives account for over 90 per cent of the trading turnover on bourses.  The share of the cash market has been shrinking. A paper floated by Sebi — Discussion Paper on Growth and Development of Equity Derivatives Market in India — mentioned the difference. 

“It is observed…that between the period FY05 and FY17, the compound annual growth rate (CAGR) for turnover in the cash market was 11.39 per cent, while the CAGR for turnover in equity derivatives was 35.10 per cent… It was also observed that the ratio of turnover of equity derivatives to equity cash rose from 1.54 per cent to 15.59 per cent, during the aforesaid period,” the paper stated. 

Vijay Bhushan, President of Association of National Exchanges Members of India (Anmi), said the fall may not be as large as the headline numbers suggest, but could be affected by brokers surrendering residual memberships at erstwhile regional and national level bourses, in which trading is limited. 

“Smaller brokers are exiting because of the compliance requirement being very stringent, and because brokerage levels have been declining for many years now,” he said. 

Extra expenditure in the form of technology adds to costs. These are better borne by those in derivatives, as mid and large brokers opted for memberships when derivatives began, and they have been better able to weather the headwinds given their deeper pockets, according to Bhushan.