Broking Business – Quo Vadis

Dr V.R. Narasimhan

The double-whammy of high regulatory expectations and rapidly changing market dynamics have made it unviable for traditional brokers,”  said Uttam Bagri, chairman of the BSE Brokers’ Forum in the recent past.   

This is a concern that has to be examined in detail to visualise future of broking business. This is the right time to examine this question in view of disruptive trading practices being followed by some of the new generation brokers, increasing use of technology by brokers as well as Market Infrastructure Institutions, millennial generation turning into potential clients, runaway growth of mutual funds, recent trends in regulatory demands as a response to mischief of some brokers, etc.  

While concern is well-placed, it is necessary to answer certain questions to be able understand the trajectory of broking industry.

Is the market growing?

  1. Fortunes of broking industry is closely linked to the growth of investments in general and growth of trading volumes and trading values on the stock exchanges.  The following data suggests that market is growing.

Table – 1

Trends in growth of business

(source: SEBI Hand book of Statistics)

CashMarketcash marketEquity derivatives
PeriodBSE daily trades in lksNSE daily trades in lksBSE daily turnover Rs CrsNSE daily turnover Rs in Crsdaily number of contracts on NSE
2010-11             20.7260.81         4,333.4414029.06        40,55,734
2011-12             15.8456.38         2,680.7111023.11        47,25,668
2012-13             12.8253.35         2,195.1010620.70        44,37,127
2013-14             14.4756.60         2,078.3411013.68        50,36,958
2014-15             29.2671.87         3,517.8816979.04        72,04,083
2015-16             16.6772.62         2,996.3116615.62        82,29,845
2016-17             15.8077.49         4,025.2419827.11        54,89,201
2017-18             14.5897.70         4,402.3128371.87        75,05,406
2018-19             12.68111.89         3,127.3831172.57    1,24,10,990
2019-20             12.1186.42         2,553.9225060.58    1,44,07,954
  • The turnover and number of trades may increase  even if the existing clients, proprietary traders and institutional traders intensify their trades.  To clarify this doubt, one may examine if number of investors are increasing.  This can be assessed from growth in number of demat accounts as can be seen from the following table.

Table -2

Growth in number of Demat Accounts

(source: SEBI Hand book of Statistics)

yearNSDL (number in crores)CDSL (number of in crores)Total number of accounts in croresIncremental number of accounts- crores
  • The growth in number of demat accounts clearly indicates that investors are getting added to the market size. At the same time another question comes up is if number of accounts in depository system may grow without actually having any balance in the account. To check that one may examine the average value of assets held in a demat account over a period of time from the following table.

Table – 3

Average value in Demat Account

yearNSDL val in CRNSDL Average value per account (Rupees in Lks)CDSL val in crCDSL Average value per account (Rs in lks)

The distortion in the average value held in a demat account may be attributed to skewed holding of institutional holdings with NSDL. 

One would observe that as the number of accounts opened in CDSL are increasing exponentially, the average value held per demat account is not reducing.

The growth of the industry may also be examined from the point of view of number of brokers getting added or leaving the industry. The following table gives a view on the trends in number of brokers in equity segments.

Table – 4

Trends in total number of brokers

PeriodNumber of brokers on BSENumber of Brokers on NSE
2010-11             1,3011,389
2011-12             1,3751,421
2012-13             1,3611,416
2013-14             1,3961,316
2014-15             1,3611,418
2015-16             1,3641,324
2016-17             1,3541,328
2017-18             1,3141,318
2018-19             1,3481,314

As can be seen from the above table, number of brokers have been reducing over a period of time. It may be noted that during the period after 2018-19, there were a quite a few defaults by brokers (not to the Exchange but to the clients due to which they were expelled).  The trends indicate that number of brokers leaving the industry are more than the number of brokers joining the industry.  This only suggests that broking business is not attracting new entities.

  • Interest in investment activity as such is also on the growth as witnessed by growth in the mutual fund industry.  The growth in mutual fund industry can be seen from the following table.

Table – 4

Net inflows in Mutual Fund industry

(Amount Rs in crores)

Net Inflows during 2014-15Net Inflows during 2015-16Net Inflows during 2016-17Net Inflows during 2017-18Net Inflows during FY 2018 – 2019Net Inflows during FY 2019-20 (till Dec. 2019)
  • Readers may refer to the statistics relating to geographical spread of deposit accounts displayed on depository systems and Hand Book of Statistics published by SEBI.  As these statistics are too dense, in the interest of space, they are not reproduced.

From the Handbook of statistics it is seen that while cities and towns where trading activity has settled traditionally has sustained or slightly reduced as a percentage to total turnover, “others” (other than the four metroes and other tier II cities) have increased their market share.  This gives an impression that the trading culture has spread over to other than traditionally well-known cities and towns.

  • What are the trends in Revenue Accruals
  1. There is a marked change in the quality of clients which has lead to changes in business practices.  Today’s client looks at customised service, technology based operations and service delivery, research based information delivery, timely and appropriate communication relating to transactions on hand and so on; all this at competitive price.

New generation brokers, old brokerage houses being managed by new generation managers are introducing newer practices, facilities and services to clients and turning client expectations away from traditional client experiences to newer client experiences.

Traditional broking which established personal equation with the clients and rendered personalised service on friendly terms requires a thorough change.

A mere decade back, client used to pay for opening account (stamp duty charges at least) and spend own time, money and effort to complete KYC formalities. Today, it is all broker’s cost.

Initial capital earlier was towards setting up a swanky office, modern facilities for staff and technological infrastructure. Today, while  a decent office and office facilities are being created, the same investment in technology is brining in much more sophisticated technology which helps cutting down cost of operations and communications. For illustration, brokers who are able to deploy E-KYC effectively are able to on board clients with ease with negligible cost.

New generation brokers and old brokerages whose technology has outlived their operational life are able to renew their technological infrastructure with multiplied capability. The brokerages which are about 8 to 15 years vintage are sandwiched between the new brokerages and old (strong) brokerages. Such brokerages need to review their business models and approach to business.

Revenue models are based on “Zero brokerage for delivery based trades” “Rs 20 or 0.05% which ever is lower” “free margin funding for 30 days” are all frequently seen or heard service charges. 

The following table (Table-5)  shows  the  trends in revenues for brokerages estimated on the following assumptions:

  • Brokerage in cash market at 10 bps of value of trade.
  • Rs 8 per contract – both options and futures based on trades. Estimates are based on trading data of only NSE.
  • The estimates are done only equity cash markets and equity derivative markets without considering currency futures and commodity derivative trading.
  • Most of the Brokers are also Depository Participants. As DPs they earn custody fee, annual account maintenance fee and transaction fee.  However, it is not considered here in this table.
  • Most brokers sell mutual funds as well.  That revenue is not considered in these estimates.

As the Exchange level turnover is increasing, total revenue generated at industry level is also growing over a period of time.

Table – 5

Estimated total brokerage revenue at Exchange level

(source of stats:  SEBI hand book of statistics)

eriodNSE Torun overBSE TurnoverNSE estimated brokerageBSE estimated BrokerageEstimated derivative brokerage
RS CrsRs croresRs CroreRs Crore
2010-11      35,77,409.78    11,05,026.86         2,575.53849.37827.37
2011-12      28,10,893.20      6,67,497.58         1,978.11485.45964.04
2012-13      27,08,279.12      5,48,774.44         1,912.63403.21905.17
2013-14      28,08,488.40      5,21,664.20         2,134.11373.681027.54
2014-15      43,29,654.99      8,54,845.05         3,053.35628.101469.63
2015-16      42,36,982.86      7,40,089.20         3,200.14542.591678.89
2016-17      50,55,913.29      9,98,260.58         3,807.16737.271119.80
2017-18      72,34,825.69    10,82,968.24         5,489.25824.181531.10
2018-19      79,49,004.31      7,75,590.08         6,049.47575.362531.84
2019-20      63,90,447.32      4,67,368.20         4,957.68348.002939.22

Table – 6 given below gives an estimate of average revenue  per broker in the  top 100 brokers and other brokers based on the following :

  1. The number of brokers on NSE and BSE is taken from SEBI hand book of statistics.

Table -6

Estimate of average revenue per broker

(for those in top 100 brokers and other than top 100 brokers)

(source of stats:  SEBI hand book of statistics) (All amounts are in Rs Crore)

PeriodShare of top 100 brokers in NSEAverage for top 100 NSEShare of top 100 brokers in BSEAverage of top 100 in BSEAverage for other than top 100 NSEAverage for other than top 100 in BSE
2010-11261.302.6153.350.53             0.070.05
2011-12216.382.1648.3470.48             0.050.01
2012-13209.032.0939.2370.39             0.050.01
2013-14221.172.2138.4530.38             0.050.01
2014-15344.033.4466.5750.67             0.070.01
2015-16345.423.4558.5480.59             0.060.01
2016-17413.144.1383.6740.84             0.080.01
2017-18593.305.9389.6260.90             0.110.02
2018-19681.166.8165.5300.66             0.090.01
2019-20560.145.6039.7680.40             0.070.01

Observations from Table 5 and Table -6 above clearly indicate that revenue for broking industry as such is increasing over a period of time; earnings of top 100 brokerages is increasing but earnings of small brokers (other than top 100) is not very encouraging. It is necessary for brokerage firms to invest in appropriate financial (for suitable technology), human capital and brining in a thorough revamp in the business processes.

  • Is broking business as an intermediary relevant at all?

This is an inescapable question.

  1. The traditional functions of extending operational assistance in posting trade and settlement of trade is under doubt.

a.1. The following table relating to BSE will show the trends in posting of trends:

Table – 7

BSE mode of Trading trends (Cash Markets)

ALGONon-ALGODirect Market AccessFOW-NOWCo-locationInternet Based TradingMobileSmart Order Routing

a.2. The following table shows mode of trading (cash markets) in NSE.

Table – 8

Mode of Trading in cash Market NSE

ALGONon-ALGODirect Market AccessCo-locationInternet Based TradingMobileSmart Order Routing
2010-11         13.94         70.86          0.39          4.50         10.29          0.01          0.01
2011-12         16.90         59.71          0.94         11.48         10.36          0.06          0.55
2012-13         17.60         55.29          0.72         13.55         10.78          0.35          1.71
2013-14         18.11         49.71          0.82         17.20         11.01          0.65          2.51
2014-15         16.13         46.73          0.97         21.79         11.49          1.09          2.27
2015-16         17.72         41.62          0.59         24.01         11.32          2.16          2.59
2016-17         17.08         40.96          1.01         23.16         12.42          3.48          1.90
2017-18         15.34         37.64          1.15         24.67         14.61          5.06          1.52
2018-19         16.26         28.62          1.01         28.16         16.24          8.60          1.11
2019-20$         15.43         23.97          0.99         31.15         14.15         13.01          1.29

Both at BSE and NSE, clearly there is an increasing trend in Co-location trades, Algo trades, DMA trades, Internet based trades and Mobile trades where client places orders by itself. The ratio of non-algo trades (taken as a proxy for broker punched orders) is reducing.

b. It is a well known fact that all settlements are done electronically. The funds side technology has improved by leaps and bounds and on securities side also clients, brokers and MIIs are reaping benefits of stable technology platforms.

c. Though clearing corporations have technological capabilities and regulatory frame work was created for direct credit of funds and securities to clients (investors), it has not caught the imagination of clients as yet.  

Therefore, broking firms extend a very limited service with respect to posting of orders on trading platforms and settlement of trades.

  • The following services extended by brokers are a very strong reason for their relevance:
  1. KYC function: With increased governmental focus on Anti money laundering measures, KYC function is very critical in on-boarding a client into the securities markets system. Brokers extend this function; in this the critical part is ‘in person verification’ and brokers may take enough care in doing this ‘in person verification’.
  1. Product suitability test: This is an important function that brokers perform. Whether the savings product opted by the investor is suitable to its risk profile and risk appetite needs to be examined by an informed intermediary and this function is expected to be discharged by brokers.  Already, some investment advisors and sales staff of brokers have started using sophisticated tools to make this assessment. A broker who wants to stay put in the industry and wants to be a part of top 100 brokers, may have to adapt processes that help investor decide product suitability. If the tool or process is fool proof, investors’ faith in the broking firm will improve and client loyalty will be the outcome.
  1. Product knowledge and financial education: Brokers discharge the function of extending product knowledge and financial education. What ever be the information available on the internet, investor has enormous ‘pre-investment’ anxiety and ‘post-investment’ anxiety which only brokers can attend to.  It is also a common knowledge that investors enter an investment without understanding the process/steps/issues involved in exiting the investment. Brokers have an important role to play here.  As the markets are expanding beyond the top few cities, brokers who can  give product knowledge in vernacular language may have an upper hand. Even the technology used for this purpose may also use vernacular or regional language as a medium of communication.
  1. First layer of risk absorption:  Clearing Corporations, Mutual Funds and investors expect this function – though broker is not remunerated for this. If and when shortage emerge in settlement, if and when custodian rejects a trade and investors commit errors of omission and commission, they look at broker to absorb the consequential risk. This function perhaps no one else in the whole secondary market cycle can absorb.
  • Transactional support:  As the securities market is expanding to towns outside of top few cities, broking firms may have to handhold the client for trading and settlement.

Because of the above factors, clearly broking business will stay relevant for some more time.

  • Can Technology substitute intermediation services offered by brokers?

Technology is the cornerstone today for any ‘service’.  Any service has certain critical elements like communication, authentication, delivery of funds, delivery of service. Pre and post consummation of a trade/transaction, periodic and even based communication, etc which is virtually now relegated to technology – be it email, phone call or messaging.  Authentication is again technology based in terms of OTP, sending links for services/downloads, etc to registered email address and so on. Financial transactions is increasing digital; even street side vendor is using payment technology. Unless service involves some physical item and so long as service involves authorised communication/confirmation, etc, it is all technology today. Regulatory and legal systems are also geared up to all this. Therefore technology is corner stone for service industry.

Though technology can subsume transactional aspects and communication aspects of broking business, legal obligations and accountability will stay with the entity.  As  the legal accountability  towards client and regulator is linked to the entity, broking entity cannot be wished away. 

  • What can be done to make my broking entity relevant and earn client expansion and retention.

Client engagement is, perhaps, one of the most powerful ways of achieving client expansion and retention. Thankfully easy access to digital technology and mobile devices in the hands of the customer as receivers are very helpful in creating and delivering content for meaningful and constructive client engagement content. 

Creativity and honest appreciation of clients’ information requirements will give that competitive edge to a willing broking entity.  Size of the firm or investment requirements are not too intimidating for implementing the client engagement activity.

Assessment of  client informational requirements

All broking firms extend broking services and depository participant services. In addition, services like mutual fund transactional support service or advisory services are also offered.  With this gamut of services, a firm will be in a position to understand informational requirements of a client by closely monitoring transactional behaviour of the client. Broking firms may observe whether:

  • Client regularly invests in IPOs or NFOs. 
  • Client holdings by industry/sector/company.
  • Client sells equity holding but does not invest in another scrip.
  • Client sells equity holdings in one industry/sector and moves into another industry/sector.

Several other ‘big data anayltics’ can be performed without ‘big financial investments’ and outcome of all that analytics will be directly relevant to the business.

Understand  What Content client may need

The client engagement content that we send should stand out distinctly and must make receive the Attention of the recipient to open it, when opened it should be Interesting to the receiver and finally provoke action on it. Action could be in the form of queries to elicit further information or straight away take transactional decision. Therefore, our content should be relevant, cogent, concise and constructive from the client perspective.  Emphasis should be to avoid temptation to inform on what we have but should be on give information that the client may need.

Clients who have booked profits (which can be easily assessed by the broker) search for alternative investment opportunities. Extend informational help if possible. It is quite possible that the alternatives may not be served by the broking firm (may not result in transactional value to the broking firm) but from a client perspective useful information is given – a constructive engagement strategy

Sources of relevant information

Both clients and service providers face the challenge of how to gather actionable and relevant information; thankfully broking firms need not invest in content creation but may have to invest only in collating information from publicly available authentic information and package them in a way that client can effectively use it

Value added engagement

Engagement with clients can be simple, intuitive and ride on high-tech and with a high touch approach.  The content delivery should be in multiple formats – use simple text message, show an animated power point presentation with or without voice over, give links to the specific product originator or use videos recorded with experts on a given topic.

 Based on the investor queries received and imaginativeness of content creators, a question and answer series can be recorded in different formats suggested above and served to the appropriate client group.

Video recordings of some of the clients who have views on services rendered by the broking firm can as well be offered on a one on one basis instead of bulk email that land in spam folder.

Create a financial content engagement strategy.

A firm which has a created a comprehensive client engagement strategy has higher probability to win. The components of this strategy are (i) categorise clients (ii) understanding client financial content requirement per category (iii) gather financial information (iv) create content as required in the most appropriate format (v) filter the content and presentations through compliance framework (vi) to the extent possible deliver the content to specific mail addresses/mobile numbers in a manner that it becomes customised information and (vii) recalibrate available technology resources within the firm or invest and (viii) review the effectiveness of the process and content  at frequent intervals by analysing client behaviour as captured in the systems.  Assessing effectiveness should be very objective – for illustration, if a client who has been given content on new IPOs, check has that client invested in the next IPO, and so on. 

A methodical approach to Client engagement through digital technology will definitely be a profound differentiator.


Broking business is clearly at cross roads.  Firms with ‘fire in the belly’ , ‘imaginative use of technology’ and ‘effective client engagement’ will sustain and remain in the business. Tonnes of capital may not be required but tonnes of focus and creativity are required.

End of document.

Dean, NISM.  Views expressed are personal opinions

Leave a Reply