Subdued retail participation and higher mix of low-yield options continued to hit revenues of major domestic brokerages in the second quarter. However, with the markets on a roll, the situation was better in the second quarter than in the first.

For the quarter ended September 30, 2010, net profit for most of the brokerages have declined year-on-year but improved sequentially. While net profit declined 70% for Motilal Oswal and 28% for Indiabulls Securities, it was up 37% for Edelweiss Capital and 14% for IIFL.

?High activity in the options segment continues to impact yields,? said Rashesh Shah, chairman and CEO, Edelweiss. Combined overall daily volumes for BSE and NSE were Rs 1,21,000 crore in the second quarter of which only Rs 19,000 crore or roughly 16%, have been cash volumes. Cash volumes were about 24% a year ago and about 30% during the bull run of 2007. This has hit the yields of brokerages ? for example, blended yield for Motilal Oswal shrunk to 4.8 bps (basis points) in Q2 from 5.3 bps in the first quarter.

?The broking industry has been facing multiple headwinds for the past two quarters. The wage bill has also been increasing but the situation seems to have bottomed out,? said Nirmal Jain, chairman, IIFL. Shah also added that costs had been under pressure because of increased competition. ?I see this continuing at least for the next couple of quarters,? he said.

However, the last few months have seen a strong growth in the investment banking and advisory businesses of most leading brokerages. ?As the economy recovers from the financial crisis, this trend is expected to continue. The credit business has also been doing well and the housing finance segment is expected to boom,? said Anshuman Jaswal, senior analyst ? capital markets, Celent. The institutional businesses of some domestic brokerages have also benefited from robust FII inflows, he added.

In keeping with this optimism, share prices of most brokerages have recovered over the past four months. For example, Edelweiss Capital, IIFL and Religare Enterprises have seen a spurt of more than 20% in their share prices.

Brokerages also ventured into new territories in the second quarter. As part of the firm?s focus on collateral-based lending, IIFL entered into the business of financing medical equipment for hospitals. Motilal Oswal entered into the mutual fund business by launching its first mutual fund product Shares M50 Traded Fund. Edelweiss is gearing up to start its insurance business in March 2011 through a joint venture with Tokio Marine Holdings and has set aside Rs 20-25 crore for marketing and brand building activities during FY11.