The market slump has dealt a body blow to the stock broking industry. For one, brokers? income from retail clients is now near zero. To top it, they face an equally grave situation on the institutional clients front?business from banks, mutual funds (MFs) and foreign institutional investors (FIIs) have virtually dried up. This set of clients is increasingly choosy about distributing their funds among the brokers empanelled with them.
Many brokers are reportedly being left with hardly any business from their institutional clients, as most business is skewed towards bigger players, perceived as more dependable in a volatile market.
A typical criterion for a broker to be empanelled for an institutional client is the services offered in terms of taking a call on the market, the ability to execute bigger orders, higher net worth and the research coverage of stocks and sectors. However, one major problem faced by the brokers here is the differences in the views of the research teams of the institutional client and the broker. The differences become wider in an uncertain market.
According to the Securities & Exchange Board of India (Sebi) guidelines, an institutional client cannot allot more than 5% of its total volume to one broker. But the reality now is that many empanelled brokers hardly get any business from institutional investors, who themselves are not fully active in the market.
The institutional trading volumes have been dipping. The average trading volume from institutional clients has dipped by more than 50% since the first week of January 2008, when the markets began to correct from their peaks. The combined trading volume on both BSE and NSE stood at 148.51 crore shares on Jan 1, 2008 but has come down to 113.46 crore shares on August 1. This shows a decline of 25% from January 1. The turnover during the period has slipped by more than 13% from Rs 25, 550.77 crore on the first day of the year to Rs 22,468.37 crore on August 1.
Jignesh Desai, head-institutional business, SBICAPS Securities, said, ?The present situation spells real hard times for the broking industry. Actual income to the broker is realised on a day-to-day basis and with the drop in volumes coupled with the slowdown in churning by the institutional investors, which was so rampant during the bull-run, the topline of broking firms has got badly dented. Alongside, huge competition among the brokers is also impacting the bottomline, which is reflected by the results posted by the broking firms for the last two quarters. We might see a lot of consolidation in the sector, going ahead.?
The head of institutional business at a leading brokerage firm, who did not want to be named, said, ?The core issue between the broker and the institutional client is the services in terms of a call on the markets that the broker fetches to the client. Many small-time brokers had come up in the last few years, who do not have developed internal infrastructure for research. However, institutional clients are in a significantly stronger position in dealing with a broker. And with so much competition, they are rarely dependent on a single broker. They will use several brokers, who are constantly competing with each other for business. However, big brokers are very well established as providers of research and will not be easily dislodged.?