The Implications of SEBI’s New Pricing Circular on the Broking Industry
Recently, Zerodha founder and CEO Nithin Kamath shed light on the potential impact of SEBI’s new transparent pricing circular on the broking industry. The Securities and Exchange Board of India (SEBI) released a circular mandating all market infrastructure institutions, including stock exchanges, to adhere to a “true to the label” fee charging system.
This new regulation has significant implications for brokers, traders, and investors, according to Nithin Kamath. Currently, stock exchanges determine transaction fees based on the turnover generated by brokers, who receive rebates at the end of each month. These rebates account for a substantial portion of brokers’ revenues globally, as highlighted by Kamath on social media platform X (formerly X).
Kamath stated that Zerodha may need to adjust its zero brokerage model or increase brokerage fees for Futures and Options (F&O) trades due to the new circular. Similarly, brokers across the industry will have to reevaluate their pricing strategies in response to this regulatory change.
For Zerodha, these rebates constitute around 10% of their revenue, whereas other brokers in the industry rely on them for 10-50% of their earnings. With the introduction of the new circular, this revenue stream is at risk of being eliminated.
Kamath noted, “We were one of the last brokers offering free equity delivery trades, thanks to the revenue generated from F&O trading. However, the new circular poses challenges to this business model.”
SEBI’s circular directs market infrastructure institutions to implement a uniform fee structure for all members starting from October 1, abolishing any discounts based on trading volumes. Currently, some institutions utilize a volume-based slab charge system, where charges are collected daily from clients by members such as stockbrokers, depository participants, and clearing members.
SEBI emphasized that as public utility institutions, market infrastructure bodies are first-level regulators responsible for providing equitable, transparent, and fair access to all market participants.
Overall, the new pricing circular from SEBI is set to reshape the broking industry and compel market participants to adapt their business models to comply with the revised fee structure.