Retail participation and higher volumes boost broking business in 2020

The number of active investors has gone up 30-40% for most top brokers after the Covid outbreak

The increased retail participation and the surge in cash and derivatives volumes helped boost the income of brokerages in 2020.

The year saw the emergence of the ‘Robinhood’ phenomenon, with retail investors opting for direct stock purchases during periods of a sharp correction. This was helped by a reversal in sentiment as the indices staged a sharp recovery after May, and ended 2020 with gains of more than 80 per cent over March 23 lows, largely driven by easy liquidity across the globe and the resulting deluge of overseas inflows.

“Investors have become better informed and are betting on frontline names, rather than mid- and small-cap stocks. The number of active investors has gone up 30-40 per cent for most top brokers after the Covid outbreak,” says B Gopkumar, CEO, Axis Securities.

Features like e-KYC to open demat accounts, simple-to-use interface, and on-the-go trading facility with mobile app have enabled tech-savvy millennials and young working population to participate in the financial ecosystem.

The overall derivatives turnover on the exchanges in December touched a record high amid a surge in volatility and greater institutional participation, especially from overseas investors. The daily average turnover in the F&O segment for December stood at over Rs 31.4 trillion, a 2.6 per cent gain over the previous month and 58 per cent higher than the average turnover clocked for the entire year, the exchange data showed. Delivery percentage showed a year-end rise and was at 39 per cent in the last two months, the highest since April 2019, the data showed.

Sebi’s recent guidelines on leverages and peak margins, however, may make it tough for brokers in the months ahead. According to the new norms, a short-margin penalty is levied if brokers fail to secure the minimum margin for intraday positions. From June 1, brokers have to collect a minimum margin of 75 per cent of the prescribed limit, which will increase to 100 per cent from September 1.

“Until recently, leverage offered by the platform was the key revenue driver for any brokerage with some of them offering as high as 50-100x to sustain the high brokerage charges. However, with Sebi’s recent guidelines on leverages and peak margins, the leverage offered by brokerages will now be standardised and may put pressure on revenues,” said Tejas Khoday, co-founder and CEO, FYERS.

According to him, with traditional brokers entering discount broking, the pricing structure is no longer the differentiating factor to attract and retain new traders on the platform. So, other value-added services with personalised offerings may be the way forward for a sustainable business model.

Consolidation among brokers is set to accelerate as new compliance requirements kick in and select players bulk up on market share.

The top 10 brokers by active clients account for nearly 71 per cent of the client base, out of total 256 brokers, the data collated from the NSE shows. The top 20 account for an 83 per cent share (75 per cent in March 2020 and 70 per cent in March 2019).

“Smaller brokers will find it difficult to gain market share or grow because of the new margin norms. The entry barrier will be higher because of the surge in compliance costs, which will stop the influx of small brokers,” said Gopkumar.

 “Large traditional players will become bigger as they are riding on their brand value and building the momentum. As traditional brokerages' high cost-structure makes it difficult for them to transition entirely towards low-margin online broking, there may be consolidation to operate at a bigger scale and to lower costs,” added Khoday.

The aggregate brokerage industry income stood at Rs 21,000 crore in FY20, registering growth of about 8 per cent over the Rs 19,500 crore in FY19. In FY21, the industry’s aggregate revenues are expected to increase to about Rs 23,000 crore, according to ICRA.