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Increase in brokerage due to SEBI's new rule of uniform fees

ICICIdirect 8 Mins 10 Jul 2024

SEBI has a new rule regarding uniform transaction fees for market infrastructure institutions (MIIs) like stock exchanges, which may lead to an increase in brokerage fees for some retail investors. In this article, we cover the details and the new rule's impact on traders and stock brokers.

How does SEBI give an advantage of volume turnover?

Before we get into the details of the new rule, we need to understand a few concepts. First, we look at how SEBI gives the advantage of volume turnover and how brokerage makes money.

Market infrastructure institutions (MII) like stock exchanges charge slab-wise fees from stock brokers based on their turnover. The vital point to note is that the higher the trading volumes brokers generate, the lower the fees they pay. Why does the exchange have this mechanism? The discount is offered to increase trading across segments, including derivatives.

Brokers also have a similar volume-based structure through which they change traders. The difference between the fees charged by the investors and what brokers pay to exchanges is their additional revenue stream.

Here is how the volume turnover looks for equity options.

Equity Options

Rs per Lakh of Premium Value

Billable Monthly Turnover (Premium Value)

Flat Transaction Charges for the month

Up to Rs 3 Crores

Rs 2,500 per lakh

Incremental Billable Monthly Turnover (Premium Value)

Transaction Charges Rate (Rs)

More than Rs 3 Crores up to Rs 100 Crores

Rs 50 per lakh

More than Rs 100 Crores up to Rs 750 Crores

Rs 47.5 per lakh

More than Rs 750 Crores up to Rs 1500 Crores

Rs 42.5 per lakh

More than Rs 1,500 Crores up to Rs 2000 Crores

Rs 37.5 per lakh

Above Rs 2,000 Crores

Rs 30 per lakh

As you can see, the higher the turnover, the lower the fee the brokerage firm has to pay. Let us look at how much a firm has to pay for Rs 3,000 monthly turnover:

Turnover

Rate (Rs)

Amount (Rs)

First 3 Crore

2500

7,50,000

More than Rs 3 Crore up to Rs 100 Crore

50

4,85,000

More than Rs 100 Crore up to Rs 750 Crore

47.5

30,87,500

More than Rs 750 Crore up to Rs 1,500 Crore

42.5

31,87,500

More than Rs 1,500 Crore up to Rs 2,000 Crore

37.5

18,75,000

Above Rs 2,000 Crore

30

30,00,000

 

 

1,23,85,000

If there were no volume advantage, with a flat rate of Rs 50 per lakh of options, the cost would have been for Rs 3,000 crore turnover was Rs 1,50,00,000 (this is what broker charge their clients if they offer zero discounts).

Because of the volume advantage, the broker only needs to pay Rs 1,23,85,000 as exchange transaction charges. As stated above, the difference between the two is profit for the broker. In this case, it would be Rs 26.15 lakh.

What are the new rules for uniform fees on MIIs?

Starting 1 October 2024, SEBI wants MIIs to charge a uniform fee to all their members, regardless of trading volume. This eliminates the volume-based discounts brokers previously received.

SEBI further said, "While investors have to pay the charges daily, the brokers pay it monthly, and this has led to a situation where charges collected by stock brokers from the clients are higher than the month-end charges paid by the brokers to the stock exchanges".

Impact on stock brokers

The new rule will impact the stock brokers in the following ways:

  • Reduced Revenue: For brokers who rely heavily on volume-based discounts, this change can significantly reduce their revenue from transaction charges. As per experts, the impact on traditional brokers will be limited.
  • Increased Costs: To maintain their profitability, brokers may be forced to increase their brokerage fees to compensate for the lost revenue from SEBI's new rule.

Impact on traders

Here is how the new rule will impact the traders:

  • As discussed above, brokers with high trading volume enjoyed lower transaction fees. It allowed them to offer competitive rates to their clients. With the new rule, these brokers may need to increase their brokerage fees to compensate for the lost revenue from transaction fee reductions. It means higher trading costs for traders.
  • The extent of the impact will vary depending on the individual broker and their existing fee structure. Some brokers may absorb some of the increased costs to remain competitive, while others might pass it on fully to traders.
  • The impact might be minimal for investors with a buy-and-hold approach (who trade infrequently). However, they should still be aware of potential fee changes from their broker.

Positive Outcomes of the new rule

Here are the potential benefits of the new rule:

  • Increased Transparency: The new rule promotes transparency in transaction charges as all brokers pay the same fees. It allows you to make informed decisions when choosing a broker based on factors beyond fees.
  • Focus on Service: Brokers might shift their focus from simply offering the lowest fees to providing better customer service, research tools, and investment advice to attract clients. It will benefit traders seeking more comprehensive support.

Before you go

As we have seen above, the impact of SEBI's new rule will be mixed. The new rule aims to create a more transparent and potentially more service-oriented brokerage environment, which could benefit traders in the long run. However, there are some disadvantages. You should stay informed about potential fee changes from their brokers and compare options before making any decisions.

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