Discount Brokers Feeling The Heat Of Curbs On Derivatives

Mumbai: Discount brokerages, such as Zerodha and Groww, will be impacted the most by the recent regulatory moves to curb investors’ derivatives play, domestic rating agency Crisil said. Sebi also asked BSE and NSE to limit the products in futures and options (F&O) segment. Following this, NSE has discontinued trading in Bank Nifty from November 13 onwards. This instrument alone accounted for 39% of total F&O trading volume on NSE.

The agency’s director Subha Sri Narayanan said up to 80 per cent of a discount broker’s revenue comes from derivatives trade, while for the full-service brokerages, the same is under a third of the revenues.

“‘With a relatively low proportion of other revenue streams currently and the more stringent eligibility criteria for retail customers now, discount brokers, who cater predominantly to the retail segment, could see the largest impact, with new customer acquisition also slowing,”‘ Narayanan said.

Its associate director Aesha Maru said competitive dynamics will constrain the discount brokers’ ability to hike brokerage charges, which can otherwise be a mitigant in the face of troubles. The agency said capital markets regulator Sebi’s revised Equity Index Derivatives Framework (EIDF) announced on October 1 is hitting transaction volumes in the futures and options segment of stock exchanges, ultimately impacting revenue and profitability of brokers. The Sebi move has come on top of market infrastructure institutions (MIIs) like stock exchanges revising their transaction charges on September 27, it said, adding that this will also have an impact on profitability, especially of discount brokers. It acknowledged that as a mitigation measure, brokers are revamping their revenue and cost models, following the introduction of the new norms. “‘However, their ability to fully do so would be constrained by severe competition,”‘ the agency noted, expecting operational and compliance intensity to increase for the sector. Sebi has adopted a three-pronged approach, including raising the entry barriers for transacting in derivatives, which will help it control retail participation in the segment, curbing market volatility due to speculative activity close to expiry dates by limiting weekly index derivatives offered by exchanges and building a cushion for risk by mandating intraday monitoring of position limits.