Broking yields continue to remain under pressure this year as investors increasingly shift to low-yield options and domestic players slash brokerages owing to increased competition for market share.
According to some estimates, broking yields have fallen almost 25% in the past one year. For the cash market, rates now vary between 10 paise and 30 paise, while for the F&O segment rates could be as low as 0.1 paise or 0.2 paise.
?Brokerage rates are low and it?s become difficult to cover costs at these levels,? said Manasije Mishra, CEO of HSBC InvestDirect.
He added that retail investors were staying away from the market and the number of active traders was falling. ?Competition is driving players to cut rates as they chase the same set of active traders,? said Mishra.
?The rise in competition and greater use of electronic trading technology such as direct market access (DMA) and algo trading has resulted in falling brokerage rates in the last few years,? said Anshuman Jaswal, senior analyst, Celent Securities and Investments.
He added that the market is moving towards a volumes game, and the firms that are unable to generate higher volumes will suffer as their margins decline.
The increase in options turnover as a percentage of the overall market volume in the past year has also impacted yields. For the three months ended March 31, 2011 the percentage of options turnover stood at 64.2%, a 28% increase over the first quarter of FY11 when the options turnover was 50%, according to data compiled by ICICIdirect.com.
?Blended yields are coming down as the proportion of turnover towards the low-yield segment continues to rise,? said ICICI Securities? research analyst Kajal Gandhi.
Gandhi believes it is the increased action in the options segment rather than cut throat competition among brokerages that is responsible for the declining yields. Margins are the lowest in the options segment, where rates can be as low as R20 per lot.
Therefore, buying a lot of Nifty index at this rate works out to about 0.6 paise, much lower than the average cash market delivery rates of around 25 paise.
Gandhi believes that yields have bottomed out to some extent as cash volumes are unlikely to fall further. ?It will be difficult for players to reduce rates any further,? pointed out Mishra.
Others such as Jaswal maintain that brokerage rates will continue to remain under pressure as players adopt better technology and concentrate on volumes: ?The higher use of direct market access (DMA) by clients will be a factor as rates for DMA are far lower than those for normal trading. Also, some of the firms that use algo trading will end up cannibalising their manual trading revenues, thereby reducing their profits.?