Is it true that a lot of brokers on the BSE have wound up business? I was recently reading that nearly half the brokers have given up membership. Why is that happening when markets are booming?
Answer
Answer
That is an interesting question. The fall in the number of brokers as per SEBI data is a lot sharper. Consider these numbers! Between September 2013 when the Modi rally in the stock markets started and mid-2019, the Nifty successfully scaled the 12,000 mark and the Sensex crossed 38,000. Generally, bull markets are considered to be a great time for brokers in terms of business. But if you look at the SEBI data put out, the sharp reduction in the number of brokers is quite shocking. The number of brokers in India fell from 9606 in 2013 to a low of just 2773 brokers in 2018. That is a sharp fall of nearly 72% in a span of just 4 years in the midst of one of the sharpest bull rallies in the market. Let us look at why it happened and broadly there are 3 key reasons for the same.
Markets are getting increasingly institutionalized
One can say that the average retail investor has become a lot savvier in the last five years. The inflows into equity mutual funds; especially through SIPs has been phenomenal. The AUM of mutual funds has grown 3-fold from Rs.8 trillion to nearly Rs.25 trillion in 5 years with the equity AUM at nearly 1/3rd of the total AUM. In addition, the mutual fund SIPs (largely equity funds) has grown to nearly $1.2 billion per month. The old retail habit of trying their luck at equity trading has come down drastically in the last few years as retail investors are finding it simpler and also more profitable to adopt the mutual fund SIP route to wealth creation. This has largely reduced the retail share of broking revenues. This puts more pressure on the smaller sized brokers that have traditionally relied on retail flows.
Shift towards no-frills broking model is catching on
The institutional and HNI broking segment is still well served by a niche group of brokers with the ability to offer high quality research and advisory services. Apart from the international names, domestic names like India Infoline, Edelweiss, Motilal Oswal, Kotak Securities and ICICI Securities have a strong presence in the institutional segment. The retail volumes are now being split across two distinct categories of brokers. On the one hand, there are discount brokers (no frills brokers) like Zerodha, SAMCO and RSKV, who offer a tech driven platform at ridiculously low levels of brokerage. Smaller brokers are unable to match these rates. This shift is more pronounced among the more aggressive traders.
Remaining retail investors are gravitating to the bank model
On the other hand, there are bank driven brokers like ICICI, HDFC, Axis, SBI and Kotak which are creaming away a large part of the retail clients with their combination of banking, demat and trading under one roof. For the bank, it is an extension for their existing banking clients and ensures higher revenue per customer. For the customer also it is convenient because it reduces the touch points for retail investors and makes it a lot more convenient. The remaining retail brokers are having a tough time trying to survive in this challenging market.
The sharp fall in broking volumes for smaller brokers is real. You can just visit NSE and see how the broking volumes are getting concentrated and you will understand how smaller brokers are finding it hard to sustain in these markets. That looks like a trend to stay.