It’s been another tough year for domestic brokerages. Profit margins of top listed brokers continued to remain under pressure as retail investors failed to return to the market, cash volumes on exchanges remained low for much of the year and action in the low-yield options segment saw a spurt. The top brokers could have been in greater trouble had it not been for a rise in interest income from their lending business. Though there were no massive layoffs, most brokerages continued to find new ways to cut costs throughout the year.

?Overall, the year has been just a shade better than the previous year because the market has shown some strength post September. So, there has been some volume pick-up, but retail investors haven’t come back,? said Girish Dev, director, Future Capital Securities.

According to Prasanth Prabhakaran, president of IIFL’s retail broking division, brokers continued to woo retail investors with products such as equity SIPs, but investors stayed away because of the persistent volatility in the market. ?The mood has improved over the last three months, but not to the extent we would have liked it to, as investors still remain cautious,? said Prabhakaran.

Combined average cash turnover on the BSE and the NSE in 2012 declined 4% to R13,463 crore from R14,036 crore in CY11. The cash turnover is down nearly 30% compared with the turnover of R19,231 crore logged in 2010.

According to market observers, the improvement in cash volumes in the past few months was due to the increased participation of prop traders and institutional investors, and not retail investors. FIIs purchased shares worth nearly $10 billion since September.

The rise in low-yield options volumes continued for the third consecutive year. Share of options as a percentage of the total market turnover rose from sub-70% levels in the first quarter of the year to 72% and 76% in the subsequent two quarters.

According to market observers, the options turnover during the last quarter is likely to remain as high as 76-77%. The options turnover during CY10 was at sub-50% levels.

?The share of options turnover has been rising over the last 2-3 years. Despite low yields, every broker is now trying to gain market share in this segment and, particularly, targetting traders who are active in the options segment,? said a senior broker, who did not want to be named.

With margins under pressure, brokerages have focussed on cutting costs. According to market sources, there has not been much hiring this year, except at the entry level and replacement hiring on the sales side. Brokers have also refrained from large-scale layoffs as most of the retrenchment had happened in 2011. However, salaries have been reduced by 5-20% and the salaries of several employees have been realigned to bring in the component of performance-linked pay, said sources. So, say, if an employee’s salary is R1 lakh, he would be entitled to the full pay only if he meets certain targets set by the company.

Brokers have also reduced branches. ?Most top brokers have closed down at least 15-20 branches this year. Some have moved from a larger office premise to a smaller one or have brought different verticals working in different locations under the same roof,? said a broker, who didn’t want to be named.

Brokers are also focussing on driving their online business to cut costs. For instance, rather than sending physical contract notes to their clients, brokers are now opting to send just the soft copy of the same through email. ?Instead of setting up new branches, brokers are now opting for the franchisee model. They are also tying up with banks to cut down costs in sourcing new clients,? said Prabhakaran.

The diversification strategy, and more specifically the thrust on the lending business, has helped shore up margins of some top brokers. For instance, for the quarter ended September, Edelweiss’ interest and treasury income rose 50% to R417 crore from R277 crore in the same period. The company’s total credit book stood at R5,773 crore at the end of Q2FY13 compared with R5,219 crore at the end of Q1FY13.

According to estimates by rating agency Crisil, segments such as retail lending, wealth advisory and asset management could contribute 50% of the broking houses’ profits in 2012-13, compared with 25% in 2010-11. The retail lending book of these players is also likely to triple to R300 billion by March 2013, from the March 2010 level.

Shares prices of broking majors such as Edelweiss Financial Services, Motilal Oswal Financial Services, IIFL and Geojit BNP Paribas, are up anywhere between 36% and 97% in the year to date. Market observers believe the broking scrips were beaten down way below their fair value in 2011 and the bounceback in the benchmark indices in 2012 has brought them back in the limelight. The Sensex has risen more than 25% this year.

Market participants are hopeful that 2013 will be a better year for brokers. ?Broking is a cyclical business and if the market remains at elevated levels, it might end up as a better year than the previous two,? said Prabhakaran. According to Dev, a lot will depend on the market movement before next year’s Union budget: ?A consistent upmove in the market and some good initial public offerings might just bring back genuine retail participation in the market.?

Research analyst Kajal Gandhi from ICICI Securities believes the only way forward is consolidation. ?With the capital market regulator raising the minimum capital requirements for brokers, the smaller players might find it difficult to survive,? she said.