Brokers shut shop on falling volumes, compliance costs

The number of brokers operating in the cash segment has halved in the last eight months as declining cash market volumes and high compliance costs has forced nearly 3,000 brokers to shut shop.

In the eight months to November last year, the broker count declined to 3,187 from 6147 in March 2015, data collated from market regulator Sebi shows. The sub-broker number declined to 36,848 from 42,351 in the same period, a declined of 5,500.

“Business is moving to larger brands, compliance costs have risen significantly in the past few years and margins have declined. All this has forced many brokers to shut shop,” said Rahul Rege, business head - retail, Emkay Global Financial Services.

The proliferation of discount brokerages, which typically charge a flat fee of Rs 20 per trade, has also been instrumental in driving down costs.

According to experts, cash volumes in CY15 declined on average by 20 per cent over the previous year. “In 2015, the action shifted to intraday trading from delivery-based trades, which is the bread and butter for most brokers,” said Kamlesh Rao, CEO, Kotak Securities.

For the cash market, rates vary between 10 paise and 30 paise for delivery-based trades and below four paise for intra-day trades. Charges in the options segment are Rs 20-50 per lot.

According to industry observers, a lot of entrepreneurs turned sub-brokers in the period between 2003 and 2008, believing it was a good business to get into. That’s not the case any more. “The franchisees have to put in three times more effort to earn half the money they would have earned in 2007. This has made the business unviable for many,” said Rege. “Earlier, the clients were inclined towards trading and one simply had to be a facilitator; now it’s all about providing value.”

The decline in participation from retail and high net worth individuals (HNI) investors has also impacted stock brokers. "Retail investors are bulls by nature and their participation comes down drastically when the market tanks or is range-bound," said Prasanth Prabhakaran, head, retail broking, IIFL. “Investors that entered at high levels are stuck and sitting on losses.”

To make matters worse, most of the retail money in 2015 came in through the mutual fund route, and not direct equity. The assets under management of equity mutual funds rose to Rs 3.6 lakh crore in December 2015 from Rs 2.8 lakh crore a year ago.

While the Sensex rose 6.7 per cent between January and March last year, it steadily fell thereafter, with year-to-date losses of 5.6 per cent. A deficient monsoon, shaky global markets, subdued corporate earnings and a slowdown in China were key reasons for the market’s underperformance.