25% dabba traders shift to organised platforms

Discount brokers see 15% growth in new clients and 20% jump in trading volumes after the note ban

About 25 per cent of dabba traders, who provide illegal, off-market trading facilities, have shifted to organised exchanges, fearing action such as demonetisation and raids by the Securities and Exchange Board of India, the regulator.

As a result, discount brokers have turned out to be beneficiaries of this shift owing to their low transaction costs compared to full-service brokers.

Three leading discount brokers — Zerodha, Samco Securities and 5paisa.com — which account for most of the market share, have witnessed a 15 per cent growth rate in their client base and 20 per cent growth in business volumes over the last three months.

Trade sources estimate there are 25-30 dabba operators each in all major centres such as Mumbai, Surat, Ahmedabad, Vadodara, Nashik and Indore. Their business came to a standstill because of the liquidity crisis following demonetisation in November.

“A lot of traders have shifted to exchanges after demonetisation. So, not only discount broking but also full-service brokers have seen a sharp increase in enrolments after the note ban. Dabba traders deal in cash, which went out of the system after demonetisation. Since they want to remain in business, they are coming to the organised system of trade. We have witnessed 15-20 per cent growth in new members’ enrolment and 20-25 per cent growth in business,” said Nitin Kamath, founder and chief executive officer, Zerodha, India’s largest discount broking firm with a market share of around 50 per cent.

The IIFL discount brokerage arm, 5paisa.com, expects big opportunities in growing the discount brokerage market in India. Discount brokers like 5paisa are online stockbrokers, offering cheap brokerage plans to retail and institutional investors in India.

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Planning to list the company on stock exchanges in July this year, 5paisa estimates that the discount broking market will contribute 50-60 per cent of the retail turnover in the next two-three years. This prediction is backed by the fact that the concept of discount broking in India has been borrowed from the US, where 70 per cent of retail volumes happen through discount brokers.

According to Prakarsh Gagdani, chief executive officer, 5paisa.com, "With technology and mobile penetration at the forefront, retail broking in India is poised to witness a tectonic shift. Discount broking will not just grow exponentially and take a large chunk of the market share in next three-five years but will also expand the retail participation in stock markets.”

After demonetisation, 5paisa.com added around 100 members, with its business volumes increasing to Rs 15,000 crore per day now from Rs 12,000 crore per day early November. 

"The major benefit for traders is the cost of transaction, which works out to nearly a third of dabba trading and less than a fourth of full service brokers. So, the shift from the unorganised to organised trade has been happening more aggressively now than ever before,” said Jimeet Modi, founder and chief executive officer, Indian Trading League (Samco Ventures), which is estimated to have a market share of 20 per cent in discount broking.

While the number of regular brokers declining over the past three years, discount brokerages have been gaining popularity with retail investors as they offer a flat brokerage rate, irrespective of the trade size as compared to traditional full-service brokers, who charge a certain percentage of the trade value.