Identifying myths of the zero brokerage model

Blog | OUTLOOK

Discount-broking model or no-frills broking model was first launched in the US with the likes of E*Trade and TD Ameritrade. In the last few years, this model has picked up rather well and the growth has coincided with markets become more volatile and technology becoming more accessible. Zero-brokerage—a subset of this offering—added to the attraction. Though its popularity continues to grow, inhibitions still exist about the same. Here are 5 popular myths about the zero-brokerage model that we are debuking for you, here.

Zero-brokerage models are not trustworthy

You can totally trust them! Zero-brokerage models are also run by SEBI registered brokers. They also go through the same stringent tests of capital requirements, risk management, qualifications of employees, etc.

The broker cannot sustain without charging the customer

Zero brokerage does not mean zero always! It’s a myth that discount brokers don’t charge anything to any customer. In the case of most brokers, the brokerage on cash market transactions is zero but trades in stock futures, index futures, and commodity futures are subjected to brokerage. These brokers even charge for intraday transactions. For example, Upstox only charges brokerage on intraday transactions for equities but not for equity deliveries. Also, despite zero brokerage, statutory costs like STT, stamp duty, and exchange fees—based on the value of turnover—will be levied. Considering the cost management and the revenues, the discount broker is able to sustain rather well.

Lower brokerage does not make a big difference in cash markets

For anybody who trades regularly in the market, the cost savings from discount brokers can make a very big difference. That explains why there has been such a big shift of clients from full-service brokers to discount brokers. For example, even if you save 20 basis points (0.20%) on cash market transactions, then on a monthly turnover of Rs.2 crore, you save Rs.40,000. That is good enough to help you pay for your office expenses just out of the savings.

Hidden charges could be there

As we mentioned earlier, the lower brokerage that the discount broker is able to offer is due to the lower expenses that they incur. Typically, discount brokers like Upstox only offer pure and efficient execution of transactions. They do not offer research or advisory of any kind. Also, the discount brokers do not invest money in branches and franchisee expansion. The model is typically an online-platform based model and delivered through the internet and the mobile. These lower costs are passed on as discounts to the customers.

Discount brokers do not have too many customers

In fact, you would be surprised to know that the largest brokers in India today—in terms of number of active customers—is a discount broker! The interest first came from the aggressive proprietary traders who needed to save on costs. Gradually, this has been spreading to retail customers who prefer to pay lower brokerage and trade on their own. Discount brokers are already generating a chunk of the volumes on the exchanges and the number of customers are growing fast. We expect this trend to sharpen in the years to come.