Low retail participation and high volumes in the low-yield options segment continued to hit the revenues of major domestic brokerages in the third quarter. The month of December was particularly dismal for brokerages.

The quarter started off well with market volumes and retail participation picking up. But the month of December was a dampener due to negative global cues, flight of FII money and correction in the mid-cap space,? said Sameer Kamath, senior VP and head ? corporate planning, treasury and investor relations, Motilal Oswal Financial Services. ?We do think 2011 will not be an easy year. The broking pain will continue for at least another two to three quarters. There is absence of growth in the market place with increased pressure on cost and yields coming down,? Rashesh Shah, chairman of Edelweiss Capital had said recently in a conference call.

According to Pankaj Agarwal, analyst, Ambit Capital, it was a flat quarter for brokers. ?Brokerage income was mostly flat with a rise of up to 5%, broadly in line with the cash market volumes.?

IIFL?s net profit for the third quarter was at Rs 67.06 crore, up 23.9% q-o-q and 12.7% year-on-year. Edelweiss Capital reported a net profit of Rs 62 crore, a rise of 16% over the same period last year but a 6% decline over the previous quarter. Net profit for Motilal Oswal Financial Services increased 27% QoQ to Rs42.1 crore, as compared to Rs33.1 crore in the previous quarter.

The low-yield options segment continued to hold sway over the high-yield cash segment. Options volume comprised 57% of market volumes in Q3FY11 against 53% in Q2FY11 and 40% a year earlier. ?Investors have shifted their attention to the options market. Intra-day traders have become risk-averse and are reluctant to trade in the first two hours of trading,? said K Jayaraman, consultant and equity research advisor, Bonanza Portfolio.

Also, the contribution of cash as a percentage of the overall volumes has come down to 14% in the third quarter compared with a historical average of 20-25%, according to data collated from the exchanges.

According to Agarwal, it was a healthy quarter for financing or fund-based income of several brokerages. Financing income comprises loans against property or shares, IPO financing and lending for arbitrage. For instance, fund-based income for Motilal Oswal grew by 93% q-o-q to Rs27.6 crore.

A key challenge for the brokerages, according to some market observers, is the rising employee costs, especially on the institutional side. The direction of the market will also dictate the fortunes of brokerages.

While Kamath admitted that while the short term outlook will be driven by FII sentiment, he is bullish about the future. ?Brokerages that invest in technology and people, and focus on the right processes and business models stand to gain in the long-term. The industry will grow as investors increasingly look to the equity market to beat inflation.?