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If you are consistently winning the pounds and desire to save the pennies too, it is time you turned to being a ‘do-it-yourself’ investor. Discount brokers eliminate the clutter of support services, bring down your trading costs and increase your earnings per trade on the bourses.
 
So, who’s a discount broker? A broker who facilitates online trade execution at low cost. These are “no-frill” brokers; they do not help investors with research or analyst calls. The investor, therefore, has to do his own research and strategise before parking money in a stock.
 
According to analysts at Comparebrokerages.in, a site that compares services of broking houses, discount brokers are cheaper than traditional brokerages by a wide margin. The concept of discount broking assumes greater importance when we consider the fact that a lion’s share of retail trading (about 80 per cent, according to market sources) gets logged in the options segment. Such trades, according to Comparebrokerages.in, are charged around Rs 50 a lot.
 
“If a regular trader buys and sells 10 lots, it would mean Rs 1,000 per trade. This reduces his chances of making money from the market. The same trade with a discount broker would cost just about Rs 40,” says an analyst representing the site.
 
For a simple equity delivery trade, full-fledged broking houses charge around 0.5 per cent on the amount traded. So if an investor buys Rs 1 lakh worth of shares, he will have to shell out Rs 500 as brokerage. A discount broker, on the other hand, would charge around Rs 20 to Rs 40 for the same trade. A similar cost differential works in the case of commodity trades too. 
 
While the savings-per-trade is neat, analysts at Comparebrokerages.in are not comfortable with the credentials and antecedents of some of the discount brokers in the market. “There has been a sudden rush of discount brokers in the market. Some of them really don’t have a clean background. There are discount brokers out there who haven’t even filed returns for three years. Trading with someone like that is risky,” warns the analyst at Comparebrokerages.in, which sources details of brokers from Ministry of Corporate Affairs scrolls.
 
Zerodha, RKSV, Wisdom Capital, Achiievers Equities, Alice Blue and Trade Smart Online offer discount broking services in the country.  Zerodha — the largest of them all in terms of clientele — claims to have on-boarded more than 20,000 customers. The firm claims to log over Rs 6,000 crore worth of trades every day.
 
“Our turnover may have gone up, but that doesn’t mean we charge our clients on the basis of trade volumes,” says Nithin Kamath of Zerodha.
 
“We charge a flat fee of Rs 20 for every executed trade.This pricing model reduces transaction costs significantly,” he adds.
 
Who’s The Better One? 
Discount broking is a recent development in the Indian market. Its origin can be traced to the final laps of ‘brokerage pricing wars’ between traditional broking outfits, in the heady days of the last bull-run. Intense competition amongst traditional broking houses (between 2005 and 2008) had reduced broking commissions to as low as 0.4 per cent, beyond which there was no room to cut rates. Traditional brokers, because of their legacy, could not cut down on support services (research, offline orders, etc). And being in a cost-neutral environment, they were further forced to up their qualitative offerings to attract customers.
 
Discount brokers had no such baggage when they started. They unabashedly rolled out ‘only trade execution/no support’ models at much lower costs than traditional brokers.
 
Discount brokers adopt a combination of two basic pricing models: fixed price per trade and fixed monthly fees for unlimited trade. While Zerodha largely follows the first pricing model, RKSV is a strong proponent of unlimited trades for a fixed term. The brokering house also has a Rs 20 per trade plan with five free trades every month.
 
“The reality is that discount brokers offer better service at a fraction of the cost levied by full-service brokers. We have an edge over them as we leverage technology better, employ a centralised support and eliminate all other overhead costs,” says Raghu Kumar, a founding-member of RKSV. 
 
Discount brokers quote rates that are 80-90 per cent cheaper than full-service brokers, supporters of discount broking opine. Apart from pricing, discount brokers are also sharpening their trade execution capabilities. Prominent discount brokers offer high-speed trading gateways, direct market access, shared servers for co-location, call-and-trade facilities and email support to their clients. Discount brokers charge Rs 20-25 on add-on facilities such as call-and-trade. Some of them also charge a higher annual maintenance fees on demat accounts. 
 
One thing you should remember about discount brokers is that they are inherently online brokers; this means you are going to be dealing with a broker who doesn’t have any physical presence. 
 
“Discount brokers can’t give you the wide swathe of services and products that a full-fledged broker can,” says Prasanth Prabhakaran, president, Retail Broking, IIFL.
 
According to traditional brokers, discount broking may continue to grow, but will not threaten traditional brokers as their technological platforms are almost the same. Besides, traditional brokers are heading in the opposite direction by offering more support services to clients. Apart from regular research support, traditional brokers also provide algorithm platform, live charting, accessibility across trading platforms and exclusive relationship manager support to their account holders.
 
Retail brokers like Angel Broking are trying to take the battle to discount brokers by reducing their trading costs and marking up their services.
 
Is Discount Broker For You?
Here are a few points that you should remember when opting for a discount broker
  • Background Check: Ascertain the financial background of the broker. If business is not profitable, the broker may cut spending on technology and platform advancement. This may weaken the broker’s trade execution capabilities.
  • In Debt: It is also important to see if the discount broker has a lot of debt in his books. Debt-laden brokers often misuse clients’ securities or delay payouts to customers.
  • Negotiate At The Start: Discount: brokers often mark up higher charges on services hired from external sources (like depository participant services). These charges can be renegotiated at the time of opening an account.
  • Extra Charges: Discount brokers charge a fee on every add-on service they provide. Facilities such call-and-trade and (courier) delivery of account opening forms are billed separately.
  • For Experienced Investors Only: Discount broking is for experienced investors with high trading volumes. New investors would be better off starting with a full-service broker
Brokerage charges for equity delivery trades have come down from 0.75-0.5 per cent to 0.30-0.25 over the past two years. Equity intra-day trading charges have come down from 0.05 per cent levels to about 0.03. While trading commission in futures segment has fallen from 0.05 per cent to 0.03, the average spread a broker gets writing option contracts has fallen from Rs 50–75 a year ago to about Rs 20–30 per contract, traditional brokers say.
 
“Discount brokers may be cheaper than full-service brokers in terms of execution cost, but the value of our services will even out that difference,” says Vinay Agrawal, executive director (equity broking), Angel Broking.
 
The brokers’ fight is helping investors. There is a serious push on the part of brokers to penetrate into the hinterlands and sell more trading accounts. There are currently 2.3 crore demat account-holders in India.
 
Despite low-brokerage commissions, India is considered an expensive market to trade. This is because of additional statutory levies like STT and stamp duty, brokers say. It is almost certain that the government will not roll back statutory levies on equities trading. Therefore, the onus to cut trading costs falls on brokers. Discount brokers, on their part, are helping the cause quite well.   
 
(This story was published in BW | Businessworld Issue Dated 29-12-2014)