Zerodha’s co-founder Nithin Kamath, in a post on social media platform X on Tuesday, said that the brokerage may need to reconsider its zero brokerage model or potentially raise brokerage fees for F&O (futures and options) trades after SEBI issued a circular mandating that all market infrastructure institutions, including stock exchanges, adhere strictly to their fee charging practices.
“Since 2015, when we went 0 brokerage on equity delivery, we have subsidized equity investments with the revenue from the F&O trading activity. This structure could now potentially change. As a business, we may have to introduce a brokerage fee for equity delivery investments, which is currently free, or/and increase F&O brokerage,” Kamath said in a note.
SEBI stated that fees imposed by market infrastructure institutions like stock exchanges, clearing corporations, and depositories should be standardized and not tied to trading volumes.
According to Kamath, this new regulation has a profound impact on brokers, traders, and investors alike.
Kamath further said, “This becomes all the more important given the big uncertainty around the future of F&O trading volumes. We are still trying to ascertain the second-order effects of the circular. In all likelihood, we will probably have to let go of the zero brokerage structure for equity delivery trades which we have been able to offer for the past 9 years. We are one of the few remaining brokers offering free delivery trades. Many newer brokers who started out with free delivery trades have started charging a brokerage in the last couple of years.”
Exchanges frequently offer reduced fees to brokers who generate substantial trading volumes, which fuels increased trading activity in segments such as derivatives.
Requesting exchanges to discontinue this practice is part of a broader range of measures under consideration by SEBI to mitigate the fervor in India’s derivative markets.
“All brokers may be forced to tweak their pricing models to adjust to the new reality in a few months. The hope with this circular is that the exchanges will pass the benefit to customers by charging the lowest slab. So, an increase in F&O brokerage shouldn’t be of any impact,” he added.
Stock exchanges determine transaction fees based on the total turnover generated by brokers. At the end of each month, brokers receive a rebate, which is the difference between what they charge customers and what the exchange charges them, he added.
Kamath explained that for Zerodha, these rebates make up about 10% of their revenue, whereas for other brokers in the industry, it varies from 10% to 50%. He noted that the new circular effectively removes this source of revenue.
“We earn about 10% of our revenue from these rebates. This could range between 10% and 50% of the revenue for other brokers. For us, this has increased from ~3% to ~10% in the last four years because of the increase in options turnover. Today, 90% of our revenue from these rebates comes from options trading alone. With the new circular brokers will no longer earn these rebates,” he said in the note.