As many as 3,018 sub-brokers shut shop in July, latest data put up on market regulator Sebis website show. In the first four months of FY14, the sub-broker count is down by 4,200. Notably, the number of sub-brokers had stood at 83,808 at the end of FY11, which means 17,766 sub-brokers have ceased operations in the last 29 months.
A tough market situation and escalating operating costs have made it unviable for sub-brokers to run their business, said Prasanth Prabhakaran, president, retail broking, IIFL. The mortality rate of sub-brokers is high as they typically function without a sales team and depend on a handful of clients to get them business. Once these clients stop trading, survival can become difficult.
According to Sandip Raichura, head, retail, Prabhudas Lilladher, sub-brokers working with weaker brands have suffered the most. Those focussed on a pure execution-based model have taken a greater hit than those who have diversifed into selling third-party products such as mutual funds and company fixed deposits.
Retail investors have stayed away from the market for nearly three years now, according to broking officials. The recent underperformance of mid-cap stocks has further taken its toll on investor confidence. Sub-brokers who aggressively pushed mid caps or even penny stocks to clients find themselves in a tough spot. If a client's portfolio declines 70-90% in a span of six-to-eight months, it's hard to restore his confidence, said Raichura.
The BSE Mid Cap index declined 7% in July and is down more than 11% in FY14. In contrast, the benchmark BSE Sensex shed just 0.25% in July and is up 2.3% in FY14.
Plunging cash market volumes have also impacted revenues. Average daily cash turnover on the NSE stood at R10,582 crore as on July 31, 2013. In June, the turnover had touched R10,397 crore, the lowest in the past five years, according to Sebi data. Similarly, average trade size has declined 23% to R18,946 in July from R24,608 at the end of FY10.
The cash delivery segment contributes the most by way of revenues to brokers. At present, brokerage for cash delivery ranges between 0.08% and 0.25% of the total traded turnover, much higher than the rates for intra-day trades (0.01%-0.03%) and futures trades (0.005%-0.015%).
Experts believe that with the stock market continuing to face multiple headwinds, sub-brokers will continue to face tough times in the coming months. Retail participation is unlikely to improve any time soon, said Prabhakaran. A recent Prabhudas Lilladher report said the market is likely to remain volatile over the medium term.