The online guide to e-broking

Aparajita Saha

Though the spread of the Internet has been slow in India, players are catching on fast, at least in the online stock trading business. Internet trading or e-broking seems to have passed through its teething troubles and more players are now entering the fray.

While volumes are still low at the Rs 100 million a day mark compared to the combined turnover of Rs 90 billion a day on the Bombay Stock Exchange and the National Stock Exchange, e-brokers have already announced price cuts that have been unheard of for the Indian trader.

Investors and traders have never had it so good as trading commissions and brokerage rates are declining steeply. E-broking has triggered off a price war with each player valiantly trying to outdo the other. Every broker has offered a service or a price to differentiate itself from the rest of the fray.

The discount brokers

ICICI Direct (www.icicidirect.com) was the first broker to introduce a brokerage of 0.85 per cent per trade. ICICI's differentiators are an integrated service encompassing broking, banking and depository services from ICICI Bank. ICICI Direct's pricing structure depends on how much the investor trades and ranges between 0.85 per cent and 0.4 per cent as trade volumes increase.

In July, Probity's 5paisa (www.5paisa.com) was the next one introducing a brokerage rate, probably the lowest in India, of 0.05 per cent a trade. Last week, stockbroker S S Kantilal Ishwarlal's Sharekhan (www.sharekhan.com) turned the fee structure of the broking industry upside down in July by introducing a trade-as-much-as-you-want scheme of Rs 1,000 a month. Sharekhan is the first broker in the country to introduce flat-fee broking. On August 9, Kotak Securities introduced e-broking with the option of trading against securities. Other players will inevitably introduce further innovations in the near future.

Apparently, Sharekhan is targeting the high volume trader with its fee structure that is not a percentage of transaction value. If a trader crosses monthly volumes of Rs 2 million, Sharekhan is the cheapest broker. (At a volume of Rs 2 million, the 5paisa.com brokerage works out to Rs 1,000.) Reacting to the cut-rate discounts, ICICI Direct has reduced its minimum brokerage per trade from Rs 100 to Rs 25 and the minimum trade size from Rs 6,000 to Rs 1,000.

Unrealistic? Unsustainable? Impractical? The players beg to differ. Each is supremely confident of the success of his respective pricing strategy and revenue model though only time will tell whether the confidence is misplaced or not.

All the online brokers are targeting large volumes of trade to make money. While some of them admit they will make losses in the short-term, they remain optimistic about overcoming them with sufficient volumes.

Are low rates everything?

The US model of full service brokerage and discount brokerage is not applicable in India. Most full service brokerages (transaction, research and recommendations) take only institutional investors and high net worth individuals as clients

A point to note here is that in spite of the apparent price wars, no price-cutting has occurred in the physical broking world. The reason probably is that trading brokerages range between 0.1 and 0.2 per cent anyway. Admitting to this, Manish Shah, senior vice president, e-broking, Motilal Oswal Securities, says, "The broking rates are quite reasonable. For an individual who is investing Rs 100,000, a rate of 0.05 per cent will imply a brokerage of Rs 50 while a real-world broker will charge Rs 150 (at 0.15 per cent). On an investment of Rs 100,000, very few traders will consider a marginal difference of Rs 100. Individuals who don't trade frequently will opt for the most economical rates but a high net individual will opt for his broker even if he has to pay a premium."

Emphasising on the fact that brokerage rates are not the only factor influencing investors, Anup Bagchi, chief operating officer, ICICI Direct, says, "Investors are no doubt attracted to low rates. However, other vital factors, such as quality of value-added services, trust and security, backing and funding of the broking institution, distribution and reach, customer confidence and comfort, cannot be overlooked. And these factors are enhanced by the physical presence of the firm. It is here where the real world institutions have an edge."

Most online brokers have an established service network and also offer value-added service because of their parentage. There is also a shift in the positioning of players like Sharekhan and ICICI who have hitherto targeted the institutional investor and high net worth investors.

With the backing of quality research, the online brokers come with a competitive advantage compared to the traditional brokers who have recommended stocks more on hearsay and gossip than on financial analysis. There has not been any precedence of the retail investor having access to research in India and is difficult to predict his reaction. But it could turn out to be a strong edge.

What happens to brick-and-mortar broking?

So what does e-broking spell for the brick-and-mortar models of equity trading? Is it the beginning of the end of an era? Will the Darwinian rule of the survival of the fittest come into play? Or will the e-broking hype bubble burst like the dot-com one? Interestingly, Bagchi comments, "As confidence levels of investors rise, more trades will shift online. However, percentage of online broking vis-à-vis total trades will be low."

Echoing similar sentiments is Dhiraj Agarwal, CEO, Sharekhan.com, who says, "The rules of doing business on the net are different from those that prevail in the real physical world. About 15 to 20 per cent of the trades enjoyed by real world brokers may shift online. What I feel will happen is that the trading base itself will widen. More than investors switching media, there will be an incremental surge in the total number."

Motilal Oswal's Shah is confident that e-broking will not pose a threat to existing brokers. "The very requirement of a net connection eliminates so many potential and actual investors. What is also needed is efficient infrastructure with special reference to the telecom sector. Unless this is reliable and speedy, e-broking cannot take off as even a nanosecond delay can put you out of the race for that particular stock at that particular price. A physical presence is a necessity in this industry," he feels.

Shah's complacency doesn't appear to be misplaced as Mrugank Paranjape, director, e-broking, 5paisa.com, says, "At present, the percentage of e-broking that is being carried out is negligible (significantly less than 1 per cent). E-broking will only manage to carve a niche for itself when it can boast of having a share of 10 per cent of total traded volumes. Real volumes will be realised only in 2001."

Online or offline?

The question of mutual exclusivity between e-broking and real world brokers does not arise as there appears to be ample room for both parties. Says Paranjape, "Cautious investors will adopt a wait-and-watch attitude and will only trade online once they have established the speed, security and convenience factors. In another six months, the number of players in e-broking will reduce to between eight and ten, as the more serious contenders will dominate while the rest will wind up."

Speaking about broking in the real world, he says, "There will be a substantial class of investors who will be loyal to the traditional way of broking. Also, conventional broking houses will, in all probability, adopt the me-too approach and offer online trading as one of their services." That is happening anyway. Except for 5paisa.com and India Bulls, most other online brokerages are an extension of brick-and-mortar broking.

"The two kinds of players will coexist. Their combined presence will lead to the overall improvement of services and increased transparency in dealings," enthuses Bagchi. He further adds, "The long term existence of e-broking firms will depend on the scalability of their systems, reach and penetration, customer service and winning the investors' trust as well as competitive rates."

"There will be a segmented market with each player trying to be as competitive as possible in his particular segment," feels Shah.

Any bets on future trends?

Agarwal prefers to exercise caution and says, "It is too early to point out any specific trends. Only time will tell which revenue models of the e-broking enterprises will be successful. One thing that is certain is the increase in the number of investors. We anticipate an increase of over 50 to 60 per cent."

"Brokerage rates will bottom out. Traditional broking was previously a personalised industry with individual brokers operating through firms. Then the business went through a process of corporatisation. The next logical step will be the coming together of big established trading houses. One can't say when exactly these mergers will happen but they will occur in the times to come," predicts Shah.

Paranjape emphasises the availability of a complete financial product. "Consolidation is the key word. Most brokers will offer the complete range of financial transactions that combine content and facilities. Meanwhile, the cost of intermediation will decrease," he says. As far as the value of trading volumes are concerned, he adds, "BSE, NSE and, to some extent, the Calcutta Stock Exchange, clock combined volumes of Rs 80 billion plus. By the end of the current financial year, trade values will double to over Rs 160 billion."

Investors have never had it so good. They can buy any of the dematerialised share traded on the NSE as of now. Trading will also be allowed shortly on the BSE. Bagchi sums it up succinctly, "Whatever the nature of the trends, the bottom line is that the investor will be the ultimate beneficiary."

Part II: The A-List

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