The turnover in the cash market, the bulk of which is accounted for by intra-day trades, has dropped to a historic low of 10% for the quarter ended March 2011.

The trend is worrying particularly for small and mid-sized broking firms. The fall can be attributed primarily to subdued retail and HNI participation, whose confidence was dented after a steep fall in prices of mid-cap scrips in December last year. The shift towards low-yield options segment is also responsible for the drop in volumes in the cash segment. The average daily cash turnover on the NSE for 2011 is about R12,730 crore compared with an average daily turnover of R15,687 crore and R14,513 crore for 2009 and 2010, respectively. According to ICICI Securities, the contribution of the cash segment to the total average daily turnover is consistently declining. This segment contributed 20% in the fourth quarter of FY10 and 16% in the subsequent two quarters.

?The falling share of cash turnover and the rising share of low yielding options segment is pressuring broking yields. This along with falling market share is curtailing growth from brokerage income for tier I players,? said ICICI Securities research analyst Kajal Gandhi in a recent report. A continual fall in cash market volumes would imply that brokerages may have to increase their market shares to maintain the same profit margins, say market observers.

The hardest hit are the mid-sized and smaller brokerages. ?Their ability to generate newer revenues streams is limited and they cannot leverage their balance sheet,? points out Girish Dev, former CEO of Networth Stock Broking, a mid-sized brokerage firm. Added Nandip Vaidya, president, retail broking, IIFL, ?Those who don?t have the advantage of scale and are dependent on few clients will find it difficult to cover their overheads.?

Top brokerages, on the other hand, would be less impacted since they are diversified and earn from fee-based businesses such as portfolio management services and wealth management. They also have a diversified and large client base, which shields them to some extent, says Vaidya.

Options turnover as a percentage of the overall market turnover has risen steadily in the past three quarters from 53.4% to 64.2%, according to data compiled by ICICI Securities.

Indian equities have seen a significant upmove since March as foreign institutional investors have turned net investors. Large and mid-caps have rallied. The BSE Sensex has risen 10.5%, while the BSE MidCap has climbed 11.3%. But with no immediate triggers for a sustained mid-cap rally, market participants believe cash volumes are unlikely to go up in a hurry. ?A large-cap rally won?t do. Unless there?s a sustained mid-cap rally for 2-3 months and investors start leveraging, volumes are unlikely to pick up,? said Dev.