Sebi targeting F&O froth but longer term investors may get caught in cross-firing
Sebi's new regulations on F&O trading aim to standardize charges and reduce excessive profits for brokers. This may lead to higher costs for long-term investors and potential changes in brokerage models. Retail participation in options trading is being closely monitored for its impact on savings.
Markets regulator 's move to protect household savings from being diverted to speculation in the or and options (F&O) segment by asking stock exchanges to impose uniform charges may end up raising the cost of buying and selling stocks in the cash market for longer term investors.The reason why many discount brokerages like are able to charge zero for equity delivery investments is only because they have been offsetting it against higher charges being earned in the options market.
Stock exchanges currently levy regressive slab-wise fees (higher the turnover, lower the fees), but brokers usually charge their customers at the highest prescribed slab rate, resulting in excess profit residing with brokers.
This rebate, accounted as "ancillary transaction income" in the books of discount brokers, forms about 10-50% of revenue for many such brokers.
Sebi has now directed exchanges and market infrastructure institutions (MII) to discontinue the practice of charging turnover-linked slab-wise fee structures, and levy uniform transaction charges instead.
As exchanges start charging "true to the label", brokers will lose incentive to generate huge turnovers in the F&O market. Estimates done by SAMCO Securities show that the revenue loss could be as high as Rs 2,000 crore for brokers as a result of the move.
Many discount brokers are now contemplating tweaking their business model by increasing charges even for equity delivery which is presently free of cost in many cases.
Zerodha Founder Nithin Kamath, who pioneered the discount broking model in India, is the first one to openly admit that the startup may have to introduce a brokerage fee for equity delivery investments which has so far been subsidized with revenue from the F&O world.
"In all likelihood, we will probably have to let go of the zero brokerage structure for equity delivery trades which we have been able to offer for the past 9 years," Kamath said, adding that all brokers may be forced to tweak their pricing models to adjust to the new reality in a few months.
Arun Chaudhry of m.Stock by Mirae Asset says the omission of transaction-linked income can potentially impact revenue pool by 10% to 50% of financial intermediaries who are already operating on very thin margins.
"The impact of this could be multifaceted for cost optimisation, indirectly on the services offered to clients and directly through increase in brokerage charges. For some, this might result in forced innovation and turning to alternate sources of income," he says.
Sebi has set up a working group to study and address the concerns about the steep increase in retail participation in options trading.
"Household savings are increasingly being directed towards non-productive activities, particularly speculation. This has resulted in a significant surge in F&O trading over the past six years. While the overall turnover was Rs 210 trillion in FY18, it has surged to Rs 500 trillion in FY24,” Sebi chairperson Madhabi Puri Buch had said recently.
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Source: Stocks-Markets-Economic Times
