Discount brokerages such as Zerodha and Groww will be the worst hit by recent regulatory measures to curb investors’ derivatives gaming, national rating agency Crisil said on Tuesday.
Agency director Subha Sri Narayanan said up to 80 percent of a discount broker’s revenue comes from derivatives trading, while for full-service brokers, the same accounts for less than a third of revenue. .
“With a relatively low proportion of other income sources currently and stricter eligibility criteria for retail customers, discount brokers, which predominantly serve the retail segment, could see the biggest impact, with new customer acquisition also slows down,” Narayanan said.
Its associate director, Aesha Maru, said competitive dynamics will limit the ability of discount brokers to increase brokerage charges, which may otherwise be a mitigant to problems.
The agency said capital markets regulator Sebi’s revised equity index derivatives framework, announced on October 1, will impact trading volumes in the futures and options segment of stock exchanges, ultimately will affect the income and profitability of brokers.
Sebi’s move comes in addition to market infrastructure institutions (MIIs), such as stock exchanges, which revised their transaction charges on September 27, he said, adding that this will also have an impact on profitability, especially of discount brokers.
He acknowledged that, as a mitigation measure, brokers are revamping their revenue and cost models, following the introduction of the new rules.
“However, its ability to do so fully would be limited by severe competition,” the agency noted, expecting operational and compliance intensity to increase for the sector.
Sebi has adopted a three-pronged approach, which includes raising entry barriers for derivatives transactions, which will help it control retail participation in the segment, curbing market volatility due to speculative activity close to maturity dates by limit weekly index derivatives offered by exchanges and create a cushion for risk by requiring intraday tracking of position limits.
The revised transaction fee structure will impact discount brokerages the most, the agency said, noting that a uniform transaction fee for each trading category has replaced slab-based volume charges effective October 1.
The impact of the revised transaction charges will vary by entity, depending on factors such as existing performance structures, the nature of the business and trading volumes on the exchanges, it added.
Discount brokers, which previously derived a substantial portion of their pre-tax (PBT) profits from the difference between aggregate fees charged to end customers and fees paid to exchanges, will be hardest hit, he said.
“This difference arose from the previous block fee structure. Now, with brokers simply passing through transaction fees, discount brokers’ PBT could, ceteris paribus, fall by as much as a quarter,” he said.
Full-service brokers will have less of an impact due to higher yields and diversified revenue streams, he noted.
“Brokers are also looking to expand and strengthen their other product offerings, such as margin trading financing and distribution. However, it may take some time for them to fully recover lost revenue from recent regulatory changes,” Maru said. .
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