Capital market watchdog SEBI has decided to halt the zero-brokerage facility offered by discount brokers like Zerodha, Groww, Upstox and others, a move that will have a major impact on Futures & Options traders.
In a circular issued on July 1, the Securities and Exchange Board of India (SEBI) has asked brokerages to be “true to the label” in levying charges, which means that stock brokers will have to abandon the volume-based transaction fee model on free equity delivery trades. The order will come into effect from October 1 this year.
With this directive, Market Infrastructure Institutions (MIIs) which include stocks exchanges, depositories and clearing corporations will have to charge a uniform fee from members and cannot offer any discount to seek large volume of trades.
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How will this impact F&O traders and discount brokers?
After this SEBI order, all stock brokers are expected to increase their rates for derivative trading, including options trades. Zerodha CEO and co-founder Nithin Kamtah explains the impact of the SEBI order.
“This circular has a significant impact on brokers, traders, and investors,” he posted on social media platform ‘X’.
Kamath explained that stock exchanges charge transaction fees based on the overall turnover contributed by brokers. The difference between what the brokers charge the customer and what the exchange charges the broker at the end of the month is a rebate, which goes to brokers, he added. “Such rebates are common across the major markets in the world.”
“These rebates account for about 10% of our revenues and anywhere between 10-50% of other brokers across the industry. With the new circular, this revenue stream goes away. We were one of the last remaining brokers that offered free equity delivery trades. We could do this because F&O trading revenues were subsiding equity delivery investors,” Kamath rued.
With the new circular, Zerodha, in all likelihood, has to let go of the zero brokerage structure and/or increase brokerage for F&O trades, he said adding that brokers across the industry will also have to tweak their pricing.
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Here’s what SEBI said in its circular
The Market Infrastructure Institutions (MIIs) charges which are to be recovered from the end-client should be “True to Label i.e. if certain MII charge is levied on the end client by members (i.e. stock brokers, depository participants, clearing members), it should be ensured by MIIs that the same amount is received by them, the Sebi circular said.
It further said that the charge structure of the MII should be uniform and equal for all its members instead of slab-wise viz. dependent on volume/activity of members.
To begin with, the new charge structure designed by MIIs should give due consideration to the existing per unit charges realized by MIIs so that the end clients are benefitted with the reduction of charges.