'A Rs 2,000-cr hit': All about the note that has Nithin Kamath & other brokerages in a tense huddle

On Tuesday, Zerodha co-founder Nithin Kamath said his company may be forced to end its zero brokerage structure following Sebi's move of uniform fees. 

The circular, issued on July 1, mandates that stock exchanges and other market infrastructure institutions levy charges in a way that aligns with their labels, aiming for transparency and fairness.

While Kamath in a post on X mulled brokerage fee for equity delivery investments, shares of listed stockbroking firms also reflected the anxiety around the circular. Shares of Angel One, Motilal Oswal Financial Services, Geojit Financial Services have seen considerable decline since the past two days.

Nilesh Sharma, president & executive director at SAMCO Securities, elaborated on the implications of this directive. Exchanges typically charge brokers transaction fees based on their monthly trading volumes.

These fees, which form a significant portion of an exchange’s revenue, were collected by brokers from clients at the highest slab rate, allowing brokers to profit from the difference. 

However, SEBI’s new rule will end this practice, ensuring that the total amount collected by brokers is paid to the exchanges without any undue gains.

Sharma pointed out that this change will remove the incentive for brokers to generate high trading volumes, likely reducing market-making activities. 

The expected hit to the broking industry’s revenue could be around ₹2,000 crore, leading to increased brokerage rates as firms struggle to maintain profitability, he said.

Currently, brokers benefit from volume-based discounts on transaction fees, but with the new Sebi mandate, these rebates will disappear, Kamath said in a blog on Tuesday. For Zerodha, this could mean raising brokerage fees for F&O trades, impacting their business model significantly.

"In the US, brokers earn by selling the order flow to one of the thirteen exchanges or a dark pool, with decisions typically driven by the payment offered," Kamath said. For brokers here, rebates contribute approximately 10% of revenue, though this can range from 10% to 50% for others in the industry. "Over the last four years, our rebate revenue has grown from around 3% to 10%, primarily due to the increase in options trading turnover. Currently, 90% of our rebate revenue comes from options trading," Kamath said.

Options trading turnover has surged dramatically in recent years, attracting regulatory scrutiny. SEBI has established a working group to address concerns about the steep rise in retail participation in options trading.