Gauging customer satisfaction

Market Insight

Brokerage houses should start looking at improving the retail experience, as it could be the key differentiator in a competitive market.

It can be illuminating to sit in a sub-broker's trading room. The atmosphere makes it difficult to maintain perspective. There will be lots of punters animatedly discussing trades; if you boot up a laptop, you will be mobbed as an "expert" even if you're just playing online chess. TVs tuned to market channels set on mute will be on the walls and people will make wildly creative guesses about the conversations.

Once you are immersed in that atmosphere, you will understand why retail traders always appear confused. The online experience is better because it lowers the physical noise levels. However, most online traders keep their instant messaging on, cyber-chattering with buddies. Others participate in forum flame-wars. Given the parlous state of Indian broadband, online traders also keep their fingers crossed about quality of service.

Very few traders can ignore the noise consistently and make money. As in any other economic activity, the rewards must be commensurate with risks in order for it to be viable. If you believe in the wisdom of crowds, the retail market must be viable since there are so many retail participants.

The potential payoffs are pretty high but so are the risks. The Nifty for example, moves about 2 per cent a day. Nifty futures contracts offer around 15-20 per cent return if you successfully pick up a large part of that daily movement.

Assume some traders will be successful in logging a net return of say, 5 per cent a week "� that's 250 per cent plus per year. However, balancing off the few traders who do make these big returns or more, there will be some losing two or three times their initial margin per annum. Most traders will end up losing some money if not their entire margin.

Actually most Indian traders are not "pure" traders since they much prefer to be long in the cash market. That is because the Indian trading environment is skewed by regulatory bias against short-sellers and the lack of a stock-lending system. That bias could be eased by Sebi's clearance for institutional short sales from February. The watchdog's commitment to allowing short sales will be tested if there are rumblings from North Block following bearishness around the Budget.

Another area of popular retail interest is the IPO, where allotment is treated like a winning lottery ticket. Due to allotment quotas, retail is crucial to the primary market. The next five years will see many big IPOs "� most investments in infrastructure plan to tap household savings.

Most retail IPO subscribers buy, looking to exit within a week of listing. This works in a bull market where most issues list at premium and it is indeed like winning a lottery. In a bear market, even good IPOs are under-subscribed.

Taken together, retail accounts for perhaps 10-15 per cent volume in the cash (secondary) market and maybe, 65 per cent in derivatives. If the MiniNifty/ ChotaSensex take off, F&O retail volumes will swell some more. . That volume is critical for the financial services industry and for media, advertising, etc. Retail participation has grown quickly enough to fuel a big boom in brokerages. Over the past three years, stocks like Indiabulls, Geojit and India Infoline have delivered spectacular returns. There are half-a-dozen others who have a large footprint. Thus far, brokerages have expanded through aggressive marketing, price wars, and the creation of larger geographical networks.

But there isn't much difference in quality of service and there's very little good advice targeted at the retail client. Improving the retail experience could be the key differentiator in an exceedingly competitive market. It wouldn't take rocket science to offer better trading and investment advice, invest in better net and mobile trading platforms and educate retail clients to manage trades better.

Unlike say, telecom where there is user-stickiness due to the lack of number portability, in broking, there is no stickiness at all. As in any other consumer-driven industry, it is cheaper to retain an existing client than to attract a new one.

Until now, recommendations of listed brokerages (and sum of parts valuations of brokerage divisions of financial houses) have all been on the basis of standard balance sheet metrics and growth ratios. But more direct methods of judging customer satisfaction may soon be an important direct input. Especially if there's a slow-down in the stockmarket boom.