Competition, new technology prompt rate cuts to retain FII business.
Leading domestic stock broking companies have drastically reduced charges in the options segment to win business from foreign institutional investors (FIIs), as electronic facilities reduce the cost of doing trades and competition from foreign brokerages intensifies.
An options contract gives the buyer the right, but not the obligation, to buy (call option) or sell (put option) a security at an agreed price during a certain period or on a specific date.
| THE EXPANDING PIE | ||
| Year |
No of contracts | |
| Index options | Stock options | |
| 2006-07 | 25,15,743 | 52,83,310 |
| 2007-08 | 5,53,66,038 | 94,60,631 |
| 2008-09 | 21,20,88,444 | 1,32,95,970 |
| 2009-10 | 34,13,79,523 | 1,40,16,270 |
| 2010-11* | 50,25,58,857 | 2,70,80,111 |
| * Till Tuesday Source: NSE | ||
The brokerage for FII clients in the options segment had come down to Rs 10-15 per contract lot, compared with Rs 25-30 per contract lot a year ago, said institutional broking executives at domestic brokerages.
“The cost of doing trades in options has come down, as a lot of FII clients are now opting for the direct market access (DMA) facility. This has resulted in a reduction in brokerage,” said Vikas Khemani, head of institutional equities at Edelweiss Securities.
DMA is an electronic facility that allows brokers to offer clients direct access to the exchange trading system through its infrastructure, without its manual intervention. The Securities and Exchange Board of India had allowed DMA in April 2008, the use of which has picked up in the past 18 months.
Stiff competition from foreign brokerages is another reason domestic ones have been forced to reduce charges in the options segment for their FII clients.
“Most big foreign investors have in-house broking. To compete, domestic broking firms have slashed brokerage in options,” said T S Harihar, co-head of institutional derivatives at ICICI Securities.
FIIs like UBS, Morgan Stanley, Bank of America Merrill Lynch, Credit Suisse, CLSA, Citigroup and Deutsche have their own stock broking outfits in India.
Despite the fall in charges, the growth in volumes in index and stock options ensured that the income of the brokers did not take a hit, said Edelweiss’ Khemani.
The volumes in index options have grown about 10 times in the past three years in India, while those in stock options have increased nearly thrice. For example, 502.5 million index options’ contracts have been traded on the National Stock Exchange in this financial year till on Tuesday, up from 55.3 million contracts in 2007-08. In case of stock options, 27 million contracts have been traded in this financial year so far, compared with 9.46 million in 2007-08.
