Brokers Have No Reason To Complain Against SEBI’s New F&O Curbs

The recommendations were an open secret for the markets. The proposals are targeted at specific investor class to reduce speculation and not against the whole derivatives market.

While the regulator is seeking public comments, it is understood that it is just a formality. The regulator has decided to implement measures based on proposals submitted by the Expert Working Group and subsequent deliberations held in Secondary Market Advisory Committee (SMAC) of SEBI.

The draft circular released says the measures shall be adopted by the Exchanges and Clearing Corporations. The board of SEBI will have to clear them, and these may be part of the next SEBI board meeting.

Few things are clear,

• Top five brokers will get severely impacted from decline in transactions. This is because they get paid per transaction and not on volumes. And number of transactions will decline.

• Brokers will be further impacted from the removal of float and payment of upfront margins calculated eventually on a real time basis will have to be paid directly to the stock exchange and clearing corporation.

• Exchanges will be impacted as their transaction turnover will get impacted due to decline in volumes. They also have a difficult decision to make on which weekly product to retain. One dominant exchange’s loss will be another’s gain.

• The depositories will be impacted due to decline in volumes and consolidation of demat accounts. The active demat account will drastically reduce and thereby impact their revenues and profitability. It is the active demat accounts that generate revenue for them.

Broker association and their office bearers and prominent market participants are in a huddle on how to respond to the SEBI consultation paper.

A lot of commentary is pouring in from brokers and some prominent market experts on the social media platform X. A select few are even part of the SEBI’s Secondary Market Advisory Committee.

There was no pushback either in the Expert Working Group or the SMAC, which had representatives from brokers, exchanges, depositories and clearing corporations. If there was one, it does not reflect in the committee recommendations shared with the public.

The Asset Management Cos were much more assertive in pushing back proposed regulations on fee and expenses that impact them the most. The brokers and exchange will have to take some lessons from them. MFs won that round because they responded to SEBI proposal backed by data.

The regulator’s move is backed by data and one such data point the over Rs 51,000 crore of trading loss incurred by retail investors in the derivatives segment in just one year i.e., FY24 alone. Brokers will have to prove that SEBI data interpretation is incorrect like MFs proved SEBI data interpretation was incorrect/incomplete.

The unique investors trading in the derivatives markets alone has risen dramatically to 92.50 lakhs and aside of trading losses they also face additional cost of 23% in transaction costs while the 15% that made trading profits saw their profits decline by 15% due to transaction costs.

This means the system is making huge money irrespective of whether retail investor is making profit or loss. And among those that will be hit the hardest will be online brokers, depositories and exchanges who earn from this F&O frenzy.

Can this loss be compensated; the answer is not completely. Brokers will have to diversify their operations; they will also have to increase transaction fees or link to transaction turnover because if the transactions are expected to fall by a third so will their revenues.

There is a good chance at least $10 billion of additional liquidity will flow into cash market, IPOs, and mutual funds to chase returns. Intraday trading volumes are likely to jump led by higher number of transactions thereby increasing volatility in the small and midcap stocks. Those who continue to trade will have to shell out five times more for trade and this will see the average trade size for retail jump from Rs 6000 odd to over Rs 30,000.

Between new STT rates and SEBI’s F&O curbs trading in F&O will become expensive and brokers with better technology platforms will have to pass on the tech advantage to investors without increasing the transaction costs further.

India’s top brokers have been spending on technology for the last few years on scale and speed. This will now come to test and may the best tech platform with the lowest transaction cost win.

Its Darwin’s theory at play.