Can brokerage go to 0 in India?
Many people ask me if brokerage rates can go to zero like in the US, and why not flat monthly brokerage plans with unlimited trades. I don’t think so. I think, if anything, brokerage rates will go up in the future. Here’s why.
Firstly, in the US, brokers can earn in ways that SEBI rightly doesn’t allow here: Payment for order flow: selling customer orders to HFT firms. Securities lending: Unlike India, stocks are held in the street name or in the name of brokers—they can lend them to earn.
Float income: Unutilized funds are transferred back to the customers. In the US, funds remain with the brokers—they not only earn interest but use it for working capital as well. I think India is by far the best-regulated market in the world in terms of investor protection.
I had written this post a couple of years back on why brokerage rates in India can probably never to zero because there won’t be other sources of generating revenue like in the US.
A flat monthly fee model doesn’t make any business sense. Many have tried and reverted. We started with a flat fee per order because effort involved doesn’t go up with the size of the order in an online world. But effort involved does go up when a person trades once vs many.
Also, a brokerage is like an insurance business, collecting small premiums (brokerage) but incrementally taking risks with every trade. Stock purchases don’t have a risk since 100% of the money is collected upfront, but all speculative leveraged trades do.
Apart from, of course, the business having to earn a profit to be sustainable, there also has to be a risk compensation to cover black swan events. One event like crude going negative (Apr 2020) can wipe out years of premiums or brokerage collected.