What is the reason that discount brokers (low-cost brokers) have taken off in a big way in India?
Answer
Answer
It must be said that in the last few years, discount brokers are changing the Indian scenario in a very big way. This is almost like the impact that budget airlines had on the aviation industry and change the model for ever. It is still too early to say if that is the road ahead but the signs are surely there. In 2004 when budget airlines were first introduced in India, most flyers scoffed at the idea. Today, budget airlines like Indigo, Spice Jet, Air Asia and Go Air comprise 70% of the domestic aviation market. I can think of a similar situation when index funds were launched in the world many years back. When John Bogle launched low cost index funds in the US, it was expected to be a marginal player. Today, 2 of the largest fund managers in the world are passive low-cost managers (Blackrock and Vanguard) managing nearly $11 trillion between them.
The top 5 discount brokers account for between 15-20% of NSE trading volumes on a daily basis. In the US, discount brokers account for nearly 70-75% of retail volumes. Discount broker is a no-frills broker who offers top-of the line execution via an online platform (internet and mobile app). Discount brokers do not maintain branch or franchisee networks reducing their fixed costs. Discount brokers also do not offer research, calls or advisory services. The money saved is passed on to the customer in the form of low brokerages.
Let me now come to the drivers that gave a big boost to discount broking in India.
Post the 2008 financial crisis, central banks across the world infused massive liquidity and hence most global markets started to move in tandem. As volatility increased, alpha (excess return) opportunities reduced. Specifically, traders needed a low cost option to reduce the break-even and over time investors have started seeing merit in this model.
Technology had a major role to play in the growth of discount broking in India. Reasonably priced smart-phones, better bandwidth, the risk of app usage all contributed to the rise of discount broking and now traders could execute at the click of a button.
Apart from demonetization that gave a boost to digital, other programs like Jan Dhan and Aadhar also helped discount brokers in a big way. Aadhar allowed discount brokers to do customer acquisition and verify KYC online and at a low cost. This was a major kicker for discount broking India.
Demand for F&O products like futures and options extremely sensitive to costs. Discount brokers offer fixed brokerage per lot, and that has been a major boost for the discount broking business. Aggressive traders found that they could keep costs under check even after aggressive churning.
While discount broking has grown in a big way, there is still a very big market left to penetrate. Low cost and efficient execution is a value proposition that is hard to match. Growth from here on will depend on how these brokers offer Do-it-yourself (DIY) insights to customers, provide online analytics, facilitate algo trading and back it all up with a solid call-n-trade facility. For aggressive traders, the young millennial investors and for the small retail investors; discount broking should have a lot of demand.