HSBC InvestDirect Shuts Down Retail Broking in India

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HSBC InvestDirect Shuts Down Retail Broking Operations

As most of the retail trading community probably knows by now, London-based HSBC has decided to close down its retail operations in India. As shocking as the news might seem at first- after all, an emerging country like India should not be associated with a huge bank like HSBC closing down anything having to do with investing and trading- it should come to no surprise when one looks at the bottom line and the recent trends in the retail broking space in India.

According to a source involved in the process, "the bank decided to exit the business due to stiff competition in retail broking and low earnings potential."

And who, exactly, is this "stiff competition" in retail broking that caused HSBC to suffer low "earnings potential"? Upstox and other brokers that have drastically cut down costs to the end user.

HSBC InvestDirect Securities (India) Ltd, (HISL), commenced its Indian retail operations more than 5 years ago. 5 years ago, the retail trading landscape was much different than it is now. Here's a comparison in Equity (Cash) and  Futures and Options (F&O) total trading turnover figures from 2008 through 2012.

Year Equity (Cr.) F&O (Cr.)
2008 4,477,643 16,046,019
2009 5,086,096 20,651,859
2010 4,850,758 30,078,271
2011 3,456,596 35,658,694
2012 3,388,049 40,511,809

2013 is projected to generate 3,325,000 Cr. in Equity turnover and 44,595,000 Cr. in F&O turnover.

It is easy to spot the pattern here: Equity volumes have gone down by 30% while F&O volume has more than doubled in the past 5 years. So why would HSBC InvestDirect decide to shut down its retail offerings if the F&O segment has picked up so much steam in the past few years? The answer has to do with competition and costs.

Upstox, for example, allows its customers to do unlimited trading on Futures and Options at a monthly fee of Rs. 1947 (The Freedom Plan). HSBC InvestDirect, on the other hand, worked off a brokerage model. Here is a PDF, directly pulled from HSBC InvestDirect's website, which shows that the best deal a heavy Options trader could get was Rs. 40 per lot, provided he did at least 501 lots per month. Remember, this does not include Futures turnover and is calculated on a per lot basis. The average Options trade is easily between 3 to 4 lots; therefore, the customer is paying at least Rs. 10,000 per month on just Options trading. 

How is HSBC expected to compete with a low cost broker like Upstox which offers the same facilities (excellent software, prompt customer support, user friendly tools) while having significantly lower costs? The answer is simple: it cannot.

HSBC InvestDirect's decision to shut down its retail broking business can be summed up by the famous line "don't judge a book by its cover". Investors and traders might have flocked to brokerage houses like HSBC due to its popularity and its prevalence. But now, it seems that the page has turned and a new wave of brokers have not only entered the landscape, but are here to stay.

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