Coronavirus pandemic accelerates consolidation among stock brokers

Technology helping newer, more agile playe sto add customers faster

The Covid-19 pandemic may be accelerating a process of consolidation among stock brokers.

An analysis of data from the Securities and Exchange Board of India’s monthly bulletins shows that more and more of the trading turnover has been coming from fewer brokers since the pandemic.

The top ten brokers accounted for 44 per cent of the BSE cash segment turnover in December 2019. It has since risen to 55.9 per cent according to the latest data (for July). It has risen from 40.4 per cent to 45.3 per cent on the National Stock Exchange. The share of the top ten brokers was closer to 30 per cent for both exchanges in December 2015. 

Technology has played a bigger role during the lockdown noted Alok C Churiwala, managing director of brokerage firm Churiwala Securities. Traditional brokerages can take two or three days to complete formalities for a new customer. The same person can start trading through a mobile phone in minutes. Technology-led players capitalised on this during the lockdown when people were largely confined to their homes, pointed out Churiwala. The fact that many charge close to zero brokerage makes it harder for smaller players to compete and the trend is likely to continue, he said.
 

 “The complexion of the industry is going to change,” he said.

The regulator’s move to allow electronic know your customer (e-KYC) facilities helped, noted Rajesh Baheti, director at the brokerage collective known as the Association Of National Exchanges Members Of India (ANMI).

“In the last one year the one big change that has happened is Sebi allowing e-KYC,” he said. This allowed customers to be authenticated sans paperwork. Smaller brokerage also had trouble adapting to making their service available on mobile phones where a lot of the trading is now happening, he said. This allowed larger players, who had their mobile platforms in place, to capture a larger share of incremental trading volumes. Trading volumes and participation from retail investors has gone up during the lockdown.

Nearly 5 million new accounts have been opened this year. There were 39.4 million investor accounts in December 2019. This has since risen to 44.3 million accounts in July. A large part of these have been opened with new players.

 

Nithin Kamath, founder and chief executive officer at Zerodha Broking said that legacy players often find it more difficult to change their existing way of doing business than a new player who can come in with a clean slate. This is also the case globally with new entrants often having better technology platforms than older ones, according to him.

“It’s a problem across the world,” he said.

He added that the number of retail clients may not necessarily translate into similar dominance in trading volumes. "A large portion of the overall volumes tend to be driven by a small number of large traders. They may trade through brokers different from the ones which have a large retail client base," he said.

The regulator did not disclose the names of the top ten brokerages in its data of trading turnover concentration mentioned above.

"The regulator’s move towards tighter margin rules might mean that traditional players lose out on such customers too," Kamath said.