By Amit Gupta, Co-Founder & CEO, TradingBells
Headquartered in Indore, TradingBells is a technology driven stock, commodity & currency broking company. It provides brokerage free stock trading solutions with the best possible trading platforms.
Stock Broking industry dates back to the 2nd century BC in Rome which was the first time any shares were bought or sold. In India, it started formally in 1875 with the setting up of Bombay Stock Exchange. Since then, the profession has come a long way and to have become a $1 billion industry in this country.
Stock Brokers used to be an elite group of BSE members for a long period of time. Becoming a broker was extremely difficult for many, mainly due to the high capital layout involved. This changed dramatically in the past couple of decades since NSE was setup in the 1990s and a lot of trading started moving to the online platforms. Transparency increased and trading costs reduced which helped the trading public in general. Introduction of Derivatives trading helped in devising hedging and other trading strategies.
During this period, the number of brokers increased exponentially due to relaxation of entry barriers and the increasing market size. However, over the past 5 years this industry has gone through a major consolidation phase.
There is a decline in the number of stock brokers in India. This decline can be attributed to a number of reasons. Tightening of regulations can be seen as a major factor, with introduction of a number of KYC and other compliance norms. SEBI and the government are making every effort to ensure investor safety. Regulations are important to ensure the stock markets are used in the right way as a savings and investment avenue, as against a platform for speculation or gambling.
Another reason is the advent of new discount broking players which have taken the traditional broking houses by surprise and have put a major pricing pressure on the old school broking players. Increasing technology costs have also affected all the broking houses as the customers have started to demand better and swift technology and the whole industry is inching towards automation of processes; which is important for the growth of financial markets in India.
Also, the revenues from core broking activities have declined significantly, by almost 7 to 8 percent in FY 16. Derivatives volumes have taken a hit as SEBI has increased the minimum lot size of futures and options contracts to keep small investors at bay from these arguably risky trading instruments.
The Silver Lining – Every industry, at some point in time, goes through a consolidation phase. Stock broking is no different. The efficient players are still going strong and are taking full advantage of the situation by acquiring new customers aggressively. A lot of big players have diversified themselves into other businesses like NBFC, Real Estate or Asset Management. This has given an opportunity to the mid-sized and emerging brokers to capture the growing and untapped markets.
Of the 125-crore people in India, only 0.6 crore people invest or trade in the stock, commodity or currency markets. In China or the US, this sub-set is more than 10 percent. SEBI, stock exchanges, brokers and other market intermediaries are burning their midnight oil for investor education and it has started to yield results. New investors are entering the markets either by way of direct investments or through the mutual funds route. Other assets like real estate or gold have not yielded as much returns as the equity markets in the past 5 years and a lot of people are beginning to understand this. Additionally, the liquidity offered by the stock markets is not available with most of the other investment avenues. The tightening of the compliance norms by SEBI has resulted in transparency in the markets and increased public’s faith in the integrity of the whole industry.
The Way Forward for Brokers – Indian stock broking industry is undergoing a shift. A lot of existing customers are quickly moving to the newer discount broking players which offer very cheap pricing with basic broking services coupled with excellent trading technologies. Regular traders and investors are finding these models extremely cheap and attractive. On the other hand, the traditional brick and mortar broking houses are focussing more on developing newer markets. They are now building better & transparent customer support systems. They have also realised that to survive and compete in this industry, they need to gradually become more efficient by reducing their overheads. Simpler Aadhar based account opening norms will ensure smooth and efficient KYC adherence. Complimentary third party products like SIPs, mutual funds and insurance are other newer products which offer diversification options to the existing customers.
The times are very opportune for all the discount brokers as well as full service brokers in different ways. The stock brokers who become efficient by focussing on technology, reducing unwanted costs and improving customer support in their domain will emerge to be the new leading players in future.