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The host of measures proposed to curb retail frenzy in derivatives trading, the increase in securities transaction tax (STT) on F&O and making it mandatory for Market Infrastructure Institutions (MIIs) to implement ‘true to label’ charges to ensure fairness in fee structures may lead to a meaningful decline in F&O volumes, said a report by ICRA.
For broking firms, these changes present challenges as well as opportunities. “While broking income of the F&O segment is expected to face pressure, new opportunities could arise, particularly in margin financing. However, these developments would likely require a recalibration of the business models, including adjustments to brokerage fees and a possible shift from brokerage-free product,” said ICRA.
Mixed bag
ICRA said that reversion in trading volumes to FY2022 level cannot be ruled out, implying contraction in broking income with maximum impact on discount brokers. While share of F&O segment in broking income has increased, it accounts for less than half of broking revenues for most, barring discount brokers, it said.
Income from other revenue sources such as distribution, capital market lending and investment banking has increased considerably for many brokers in the past few years. “So, decline in net operating income for brokers would be relatively lower, assuming no second order impact on other offerings,” the report said.
Under the current volume-based slab-wise charge structure, brokers often collect more from clients than they pay to exchanges. Brokers earn the most when they charge clients the highest rates, even if they qualify for lower rates due to large volumes.
“The difference between the highest and lowest slabs is much more pronounced in the options segment compared to the cash segment; hence the potential net income earned by brokers is much more significant in options. Thus, discount brokers with a higher share of trading volumes from the options segment and with a business model of earning from the aforesaid spread will be impacted the most,” ICRA said.
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