This year’s Muhurat trading could be realistically auspicious for stock brokers. Starved of business due to ridiculously low volumes and low market sentiment, brokers will get a lifeline from the Bombay Stock Exchange (BSE), under the liquidity enhacement scheme, Phase-II. BSE will pay over Rs 17 crore every month for the next five months to brokers who generate volume in derivative segment.
The exchange, in the first phase, which was a trial round, saw participation from 100 brokers for its liquidity enhacement scheme. BSE spent less thanRs 1 crore, which saw its average daily derivative turnover rise to betweenRs 300 toRs 500 crore from nil.
Such is the way the BSE has structured its second phase scheme that it will not only help brokers save the securities transaction tax (STT), but also generate enough money to add to their bottom line.The exchange will pay betweenRs 4,000 toRs 4,600 to stock brokers for everyRs 1 crore worth of trading volumes generated in equity futures. In options, a broker would be paid betweenRs 2,000 toRs 6,000 for everyRs one crore worth of trade. There are different structures for active and passive orders, which will take care of brokers statutory levies on trading.
Currently,Rs 1,700 is charged as STT on everyRs 1 crore worth of trades in the derivative segment or non-delivery trades in the sell side. On delivery-based trades, the STT isRs 2,500 on both selling and buying. Brokers, even after paying the STT, stamp duty and other small levys, would be left with substantial sum for profits.On a three-year basis, the size of the commission pool for stockbrokers has not grown, although operational costs and competition have. FromRs 15,000 crore in 2008, it went down toRs 9,000 crore and is limping back. There are around 15,000 brokers and over 76,000 Sebi registered sub-brokers in the country.
Among these, there are over 1,200 active brokers on NSE and over 600 on BSE.The broking industry is facing dilemma owing to the lack of market growth and pressure on yields, since the business volume mix is tilting in favour of derivative options. Options trading, which accounts for nearly 75 per cent of equity derivatives, is a low-yield business for brokers. Currently, brokers are scaling down business since it is becoming hard to sustain costs. Large brokers are surviving on the back of automation in business.A BSE official said 386 big stock brokers, including foreign players, had already registered to participate in the second phase of the scheme. The exchange expects to generate in the coming months at least 10 times more volumes than it would in October in its derivative segment. Thus, the 1875-founded Exchange, Asia’s oldest, has sensed some a ray of hope as time and again market players have flayed BSE for not taking steps to revive derivative segment.
BSE’s rival, the National Stock Exchange, too has launched a market making scheme for its global derivative indices including Dow Jones Industrial Average and S&P 500. NSE’s scheme, however, takes care of the STT paid by brokers and leaves very little for them on table as profit. NSE’s global derivative contracts have witnessed average daily turnover ofRs 150 crore toRs 200 crore since its launch last month.
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The cash-segment volumes on both BSE and NSE have declined substantially in the past couple of months. BSE has been the most affected with a fall of nearly 50 per cent in cash equity and even delivery-based trades. BSE’s average daily cash segment volume is down to aroundRs 2,000 crore from overRs 4,000 crore at the beginning of 2011.
Both BSE and NSE were betting on the fact that government would reduce STT charges, which will be additional booster for their market making scheme. Another upcoming exchange, the MCX SX, too has been in favour of removal of STT.