Mint Primer: Why brokerages are looking at a dip in their earnings

livemint.com:

Subscribe to enjoy similar stories. A flurry of regulatory changes is about hit the stock market following a circular issued by Sebi, the market regulator. While these might be in the investor’s best interest, they might be bad news for brokerages.

Mint explains these changes and how they may impact market players. The Securities and Exchange Board of India has issued a circular mandating market infrastructure institutions (MII), including stock exchanges, clearing corporations and depositories to levy uniform and equal charges on transactions effective 1 October. Stocks have a slab-wise structure where they charge brokerages lower fees for higher volumes of transactions.

But brokerages pass this monthly operational expense to investors at the highest slab rate, pocketing the difference as their gains. The new rules aim to promote transparency and are likely to be more investor-friendly by cutting the transaction charges paid by customers. The National Stock Exchange has clamped down on referral programmes used by brokerages for expanding their customer base.

It has banned brokerages from using referral incentives unless the individual is registered as an authorized person with exchanges. This move aims to reduce induced trading where investors might be coaxed into participating in risky referral activities or unauthorized investment plans. This new rule is expected to hit online brokerages disproportionately because, unlike traditional brokers, they do not have sub-brokers or franchises who are authorized entities already.

The government hiked the securities transaction tax on futures and options (F&O) trades to 0.02% from 0.01% in the Budget. This, too, comes into effect on 1 October. This doubling of the tax on trades