Traditional stock broking firms react negatively to discount brokerages..

Interesting article. Financial broking/trading industry thrives on other companies competing with each other and coming out with new products/services. After all that is what leads to increase in earnings, potential growth etc. The whole idea is let markets function and pick winners and losers based on capabilities/capacities and so on.

But what about when it comes to competition in financial broking industry itself? Of course oppose it:

BSE Brokers’ Forum and Association of National Exchanges Members of India (ANMI), the two leading association of stock brokers, are divided over the idea of setting a floor brokerage rate.  BSE Brokers’ Forum has written to the market regulator, Securities and Exchange Board of India (Sebi), proposing a minimum brokerage rate as it believes discount-broking is distorting the market. ANMI says the charges should be market determined. At present, broking houses are free to charge any below an upper ceiling of 2.5 per cent.

“A cross-section of brokers is worried about the discount-broking model as it impacts them adversely. Several of them had written to take up the issue. Brokerage charged by firms is the smallest component of all levies and taxes, that also shouldn’t be taken away,” said Alok Churiwala, vice-chairman, BSE Brokers’ Forum.

“Prescribing a minimum brokerage rate may be counter-productive. Besides, brokerage rates have already come down a lot, so fixing a lower limit would be difficult. If there is a lower limit, it should come from broker consensus and not through regulation,” said Gopal Agarwal, president, ANMI.

Discount broking is a business model whereby brokers offer to charge only a flat fee (often less than the price of a packet of biscuits), irrespective of size of trade. The two most popular brokerages offering discount services are Zerodha and RKSV Securities.

Brokers are feeling the heat as more and more net-savvy investors prefer the low-brokerage model adopted by Zerodha and RKSV. The discount brokerage strategy often involves a web-based platform for users to trade on, without any research or advisory services. Clients are charged a flat fee for each trade irrespective of its value. Any additional service provided is paid separately by clients.

Why write to SEBI feeling heat from discount brokerages? Let markets and clients figure out whether discount brokerages are of any value or not. Traditional brokerages have picked pounds (not pennies) from clients for many years now. Has been a classic case of where are the customer’s yachts? High time customers get some value from discount brokerages as well.

Applying IO principles one can see the impact of competition right away. Brokerage houses charge above the marginal cost and earn a premium for their services. Discount firms might be just pricing at marginal cost or just slightly lower than MC just to capture the market and then increase it later to MC levels.

One could also model it as a game between incumbent and new entrant. Under such games what matters is the threat incumbent send to the new entrant. If the threat is credible and incumbent will fight the competition then new entrant stays away. If the threat is not credible then new entrant enters and tries to capture some market. In this case, traditional brokerage industry instead of competing is using their lobbying power and push regulator from dissuading the discount firms. It will be interesting to see how SEBI responds. Knowing SEBI it might just ask these firms to compete and let markets figure..

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.


%d bloggers like this: