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00:00We are in conversation with Jameet Modi, the founder and CEO of Samco Securities.
00:04Jameet, good afternoon.
00:05Thanks for taking the time out.
00:07I want to better understand your point of view from here.
00:10And if I'm not mistaken, Samco Securities also provides a discount brokerage and you
00:16guys also follow a discount brokerage model.
00:20What's the way ahead?
00:21Should we see one of these leading brokerages, increased brokerages?
00:25Firstly, do you think that it will mean a substantial amount in terms of increase in
00:30brokerages and what's the way forward for the sector?
00:33So, first of all, thank you very much, a very good afternoon to you as well.
00:40If you look at the impact, you know, just to take a step back and understand what is
00:43the impact of the circular, so far, market infrastructure intermediaries, which is basically
00:50the stock exchanges, they used to provide volume-based discount to brokers.
00:55So, you know, up to a, let's say a monthly turnover of 1250 crore rupees, brokers used
01:01to be charged 3 rupees 25 paise per lakh of turnover.
01:05And then beyond that, you know, for the next 1250 crores, you used to be charged 3.10 and
01:08so on and so forth.
01:09So, basically, as in, when your volume expanded and you cross the thresholds, the charge that
01:17the exchange would levy to the broker would go down.
01:21And however, obviously, because the broker didn't know, you know, which client contributed
01:26attributed to the, which block of turnover brokers would end up leaving a flat 3 rupees
01:3225 paise rate to end customers.
01:36So, this volume-based discount that exchanges used to offer that resulted in an additional
01:41fee income for the entire broking industry.
01:44Now, the, our estimate is that the quantum of this fee income across all the segments
01:49is about 2000 odd crores.
01:53That easily will be, so, you know, even if the initial max slab rate of the NSE is 3.25,
02:00the actual yield that NSE sort of enjoys is only 3.01.
02:04So, there is a fairly large delta that is there, that is currently the income of the
02:10brokers.
02:11Now, because of this circular, SEBI has instructed the exchanges and all MIS that you've got
02:18to levy a flat rate.
02:20So, probably the MIS will go back and say, okay, I think our blended rate is 3.10, 3.15,
02:24whatever that rate will be.
02:26And we are now going to levy this rate to all brokers, irrespective of the size, and
02:30we're going to stop offering volume-based discounts.
02:33Now, because these volume-based discounts are going to go away, and there is going to
02:37be an impact of 2000 crores on the profit pool of the industry.
02:42Our sense is that brokerage rates will have to be hiked.
02:47In certain cases, which are more F&O oriented brokers, brokerage rates maybe have to be
02:51hiked by up to 25% so as to be able to set off the loss that is caused due to this circular.
03:01So, our sense is that today, let's say if you're paying 20 bucks per order on an F&O
03:09transaction, you should be ready to end up paying 25 or 30.
03:15But what will effectively happen?
03:17I think at the customer level, it's going to be a set off of sorts in the sense that
03:24your transaction charges that were getting charged to your account will probably go down.
03:28Brokerage will probably go up.
03:31And on a net-net basis, you will still end up paying the same.
03:36So, I don't think the brokerage industry is looking at this as an opportunity to hike
03:41price and increase the profit pool.
03:43I think price hikes will probably only be taken to the extent of making sure that this
03:482000 crore pool that is evaporated because of the circular, that is restored so that
03:54the balance in the industry is maintained.
03:56Fair enough.
03:57You know, actually, a lot of questions based on your answer, Jameet.
04:00So, firstly, my question is, you spoke about Rs. 3.15 and thereabout.
04:07That's for your delivery trades.
04:09That's for cash market trades.
04:11What about option trades because, and again, you know, the distribution of option turnovers
04:16will be different across various brokers.
04:19And if you are suggesting that even in terms of your options trade, if your brokerage were
04:24to go from Rs. 20 to Rs. 30, I want your assessment on whether or not this will have a long-term
04:32impact on a lot of these option traders.
04:34And I ask you why.
04:35It's because there is, the popular choice, of course, here is selling out-of-the-money
04:42options.
04:43That's what a lot of retail traders do.
04:45And if you're going to sell out-of-the-money options, naturally, those premiums are going
04:48to be relatively higher.
04:50And I know that, you know, on relatively larger volumes, it may not make as much of a difference.
04:56But when you have relatively smaller players, smaller retail traders, they may just see
05:01a little bit of an impact.
05:02Do you think that that impact can, in fact, come through, or do you think that it won't
05:07matter as much?
05:09So I don't think for a retail investor, it's going to matter at all, actually.
05:13Because what's going to happen?
05:14So the same slab-wide structure is applicable in options as well, right, I think, where
05:19that's Rs. 50 per crore and so on.
05:21And then, you know, as volume increases, that 50 goes down to 47, 43, etc., etc.
05:27So my sense is that, you know, the retail investor was anyway going to get charged,
05:34was being charged Rs. 50 as exchange transaction charges.
05:39That probably, because of the exchanges working, will come down to maybe 47.5 or 48 or whatever
05:46that number is.
05:47I don't know what that number is today.
05:49And that probably will get offset by a slight increase in brokerage from 20 to maybe 25.
05:54So I don't think, at an aggregate level, for retail investors or traders who are trading
06:00in the options or the futures market, there's going to be a material impact, same as for
06:04futures as well, right?
06:05I mean, where the rate is currently 1.90, and it falls by 10 bps as volume increases.
06:13So life is probably going to be the same for retail traders and investors.
06:19Because I think the bulk of the impact will probably be borne by brokers who offer a mix
06:27of retail and institutional stock prop services, stock to prop trading.
06:33So today what happens, when you're doing prop trading, typically in your prop trading account,
06:39you end up getting charged, you know, effectively the lowest slab as far as the exchange transaction
06:47charges is concerned.
06:48Because the retail trader is actually subsidizing your prop trading activity.
06:54And for retail itself, you can probably hike brokerage rates and net out that impact.
07:00But that subsidization that was happening for both prop trading as well as institutional
07:05broking, that will probably go away.
07:07And so we believe the largest impact, if at all, even after price hikes, there will be
07:12a residual impact that will be left, that will predominantly be faced by stock brokers
07:18who are involved in proprietary trading, as well as also offer institutional broking services.
07:23All right.
07:24Okay, so, Jameet, I can conclude that at least as far as your relatively smaller retail traders
07:29are concerned, they won't have as much of an impact as far as their activity goes.
07:35From there on, Jameet, you know, the other aspect here is that over the past few years,
07:40there were a handful of brokers who in fact did offer zero brokerage, of course, and that
07:44was naturally on deliveries, as well as 20 rupees per lot in the F&O segment.
07:50But some of them, some of those brokers have now shifted back to slightly higher and elevated
07:57broking levels.
08:00Why is that case?
08:01And does the new change, which will, of course, be effective from the 2nd of October, you
08:08know, change dynamics for the industry as a whole?
08:13So, see, as I see over the past few years, you know, over the past 5-6 years, the compliance
08:22requirements that brokers have had to undergo has gone up substantially.
08:27I think there has been several good regulations that have been introduced in the interest
08:33of the investor.
08:34But obviously, in order to comply for those regulations, the cost of compliance for brokers
08:39has gone up.
08:40Now, since the cost of compliance for brokers have gone up, brokers who maybe 5-7 years
08:45ago were offering extremely low or zero rates of brokerage, it's become practically unaffordable
08:53from an economics and a business point of view to be able to operate at those rates.
08:57And therefore, in order to be able to make sure that the business continues to be viable,
09:02brokers have probably taken price hikes.
09:05I think even the proposed price hike that I'm talking to you about is essentially a
09:10forced price hike that will be an impact on account of compliance-related changes and
09:16in order to comply with new regulations.
09:19So by and large, if you look at, you know, the trend of brokerage rates in the industry
09:25over the past 15 years, it has gone down.
09:28I think the broking trading has become cheaper over the past 10-15 years.
09:34I mean, you know, when we started off in 2015, we used to charge Rs. 20 per executed order.
09:40We don't even charge per lot, we charge per executed order.
09:43We still charge Rs. 20 per executed order.
09:46That's practically been 10 years of operating at the same prices without taking any price
09:52hikes because we enjoyed the benefit of economies of scale.
09:57But I think now, as I said, there will be a time where regulatory changes will require
10:01us to take certain hikes and to make sure that the business continues to remain viable
10:05and the profit pool of the business as well as the profit pool of the industry sort of
10:10remains intact.
10:11Right.
10:12Jameet, a final question then.
10:13Is there a significant difference between the charges from a full-service broker as
10:20compared to a discount broker at the moment?
10:22That's one.
10:23And if there is, and even if there isn't, do you think there could be a certain migration
10:29of certain clients moving on to full-service brokers if we do see a little bit of an increase
10:35as far as broking charges are concerned?
10:38Secondly, is that, you know, we've had a few glitches here every now and then, at least
10:44I'm talking about Zerodha because that's been reported widely and because, not just because
10:49of this, largely because of the pressure on the system as a whole.
10:52And you know, if you do see a little bit of migration coming in, do you think that there
10:55could be a smoother way in terms of operations?
11:00How do you see both these aspects here?
11:03So as far as the, you know, the first part of the question is concerned as to whether
11:10we'll see a migration back from discount to full-service, I don't think so.
11:14I think the difference, I mean, even if you still look at it, we are talking about what
11:20price is going from 20 bucks to 25 bucks or 30 bucks.
11:23So if you're placing a one lakh rupee order, if you're still paying a full-service broker
11:27half a percent on delivery, you're paying 500 bucks, wherever you're still going to
11:31pay 20 or 30.
11:32So the difference is still very, very large.
11:35The savings of operating with a discount broker still continue to remain large.
11:40So I don't think that reverse migration is going to happen from discount broking back
11:44to full-service brokers, unless full-service brokers, you know, have some other services
11:49to offer such as research, relationship managers, etc., etc., which could result in justifying
11:57the higher brokerage that they charge an investor, stoker, trader.
12:01So simple answer is no, I don't see that trend reversing.
12:05Now, secondly, I don't think it's fair to comment on a specific broker, but in general,
12:11I think what happens is that that's true for every broker, every broker, you know, we've
12:17seen from COVID, before COVID, there were 3 crore investors in the market.
12:21Today, there are 10 crore plus sort of unique investors in the market.
12:27And the number of, so that number has gone up more than 3x.
12:31And you know, systems infrastructure has gradually scaled over time.
12:36So, so there is a possibility that sometimes there are glitches, because you're catching
12:41up with the market.
12:42Sometimes you're ahead of the market, sometimes you're behind.
12:44Because that's a very, you know, it's an unknown trend.
12:48So glitches happen, glitches even happen with MIS, right?
12:52You've seen exchanges have challenges, you have depositories have challenges.
12:57So I think it comes with scale, I think the regulator has done a very good job in making
13:02sure that all intermediaries as well as MIS aggressively invest in infrastructure.
13:08So I mean, last year, the regulator says, said that all all brokers above a certain
13:12size had to have a DR site as well.
13:15So that if at all your primary site went down, you could move your operations to a disaster
13:19recovery site, and then operate from that site.
13:22So these are regulation now, all of these infrastructure investments have been made
13:27by the industry.
13:28But obviously, it takes a little bit of time for those steering issues to go away.
13:32And so at each level of scale, we we see some technical glitches at some broker or the other,
13:37which is a part of the game, nobody enjoys it, you know, we, we hate it when that happens.
13:43But we try our best that it doesn't happen.
13:46And as I said, the regulator also is increasingly making sure that, you know, our infrastructure
13:51is equipped to handle continuously higher scale than we have seen.
13:56So our sense is that experience for investors will continue to keep getting better, as the
14:02entire industry continues to make investments in, you know, technology in infrastructure.
14:10And at each level, I think the quantum, the quality of service will go up, I think, if
14:14you compare the past 10-15 years, the quality of service, the quality of infrastructure
14:19has become has been dramatically better.
14:22And I think it will continue to keep improving over the next four to five years.
14:25Right, right.
14:26Well, well, Jameet, that was a very insightful conversation.
14:29We actually did get a lot more clarity on the ongoing issues.
14:33On that note, taking a moment to thank you for joining us and taking us through your
14:36views on the latest with respect to the SEBI and the potential changes that can mean for
14:42the broking industry.
14:43Thanks so much for joining in.