SEBI’s New Regulations Halt Free Trades: Discount Brokers to Pass All Fees to Exchanges

Once celebrated for democratizing stock market access by offering free or low-cost trades, the discount brokerage industry is now facing a turning point. Major players like Zerodha, Groww, and AngelOne are struggling with regulatory changes and shifting market dynamics that challenge their core business models. 

Under the new “true-to-label” rules, brokers must pass all exchange transaction fees directly to the exchanges. This regulation removes any discounts brokers previously kept for themselves. The timing of this change aligns with an increase in securities transaction tax (STT) on futures and options trades, potentially raising overall costs for traders.

Since the Securities and Exchange Board of India (SEBI) introduced the true-to-label regime on July 1, shares of BSE Ltd, the only listed exchange, have surged nearly 65%. This rise is attributed to the upcoming initial public offering of the rival NSE and the anticipated benefits from the new SEBI regulations.

Source: Mint

The “true-to-label” rules require brokers to adhere strictly to their offerings. This means they must be transparent about the services they provide and cannot rely on hidden charges or unclear pricing structures. This affects discount brokers, as they will have to revise their business models to ensure they do not mislead customers about the costs or risks associated with investing on their platforms.

Let’s explore how this landscape changes and what it means for brokers and investors.

Key Changes in the Brokerage Industry

End of Exchange Fee Discounts	-Brokers used to retain exchange transaction fee discounts from exchanges.-New rules from 1 October mandate brokers to pass all fees to exchanges, raising their costs.
Rising Brokerage Fees	-Angel One ends its zero-brokerage policy on equity delivery trades, charging ₹20 per order or 0.1% of the transaction value, whichever is lower for cash delivery trades. -Zerodha hasn’t changed its fees yet.
Customer Retention Challenges	-Brokers may see churn as customers leave for lower-cost options. -Firms must rethink value propositions to retain clients.
Shrinking Profit Margins	-Flat charges reduce profit margins.-Brokers may introduce new fees and improve services to stay competitive.
Market Share Redistribution	Brokers offering better experiences and transparent pricing may gain market share.

The market regulator has introduced several measures to regulate India’s derivatives market. These include limiting the number of weekly expiries per exchange to one instead of the current five and raising the contract size for index F&O contracts from ₹5-10 lakh to ₹15-20 lakh. Additionally, the lot sizes and margin requirements will be increased proportionally, with traders facing extra margin requirements on expiry day. These changes are set to take effect from November 20, 2024. Source: Mint

Impact of the True-to-Label Rule on Brokerages

According to industry experts, the true-to-label rule will ensure uniformity across brokerages. With exchanges discontinuing transaction fee discounts for brokers, the rule will impact broker revenues, signaling the end of discount-driven benefits in trading.

Experts believe these changes and new regulations in the derivatives market will curb speculative trading. They also express uncertainty about potential pricing changes and how these reforms affect F&O volumes. 

The Rise of Discount Brokers

In the past decade, discount brokers revolutionized retail investing by removing traditional barriers to entry. They attracted millions of new investors by eliminating high commissions, simplifying the trading experience with user-friendly apps, and offering educational resources to help beginners navigate the stock market.

Unlike traditional full-service brokers, these platforms operate with a low-cost model, making money through other means such as margin lending, subscriptions, or small fees for premium services.

Popular platforms like Zerodha, Groww, and AngelOne quickly became household names in India. Their no-brokerage or minimal fee structure allowed retail investors to make frequent trades without the burden of high transaction costs, fostering a new generation of market participants.

Changing Regulatory Environment

However, the honeymoon phase for discount brokers is coming to an end. The Securities and Exchange Board of India (SEBI) is introducing stricter regulations to ensure transparency and protect investors. These new rules, especially regarding margin requirements, trading mechanisms, and the “true-to-label” framework, are causing significant ripples in the brokerage world.

Impact on Free Trading

One of the most significant impacts of these changes is the potential end of free trades. Free or zero-brokerage trades were a major draw for discount brokers, but now, brokers may need to start charging for certain services to comply with SEBI’s regulations. As a result, the zero-fee model, which has been a cornerstone of platforms like Zerodha and Groww, could become unsustainable.

Brokers must adapt by diversifying revenue streams and offering value-added services such as advisory, premium research reports, or advanced trading tools. For investors, this could mean additional costs, enhanced services, and a more transparent investment experience.

Shifts in Business Models

With the regulatory landscape evolving, discount brokers are rethinking their business strategies. They must balance compliance with profitability while maintaining their appeal to cost-sensitive investors. This may lead to tiered pricing models, where basic services remain free or inexpensive, but more advanced features come at a premium.

Additionally, brokers will likely increase their focus on ancillary services such as mutual fund distribution, insurance products, and robo-advisory. These services can help diversify their income streams while providing investors with more comprehensive financial planning tools.

Increased Competition

As the industry shifts, competition among discount brokers is intensifying. New entrants are vying for market share while existing players are upping their game to retain clients. Companies will likely invest more in technology, improving app functionality, enhancing user experiences, and providing seamless integration across financial products.

Furthermore, brokers may emphasize investor education and financial literacy to attract and retain customers. By offering better educational tools, tutorials, and market insights, brokers can build trust and loyalty among retail investors navigating an increasingly complex financial landscape.

The Role of Technology

Technology will play a pivotal role in shaping the future of discount brokers. As costs rise and margins shrink, automation and artificial intelligence (AI) will be crucial for maintaining efficiency. AI-powered trading tools, personalized investment advice, and advanced data analytics are becoming more prevalent, helping brokers cater to the needs of both novice and experienced investors.

Moreover, as customer expectations evolve, brokers must ensure their platforms are fast, secure, and user-friendly. Mobile app enhancements, intuitive interfaces, and features like voice-assisted trading could soon become industry standards.

What This Means for Investors

For retail investors, the end of free trade may seem like a setback, but it could lead to a more transparent and service-oriented investment environment. While some costs may increase, investors will likely benefit from better educational resources, improved trading tools, and more personalized advice. Additionally, the new regulations will ensure that brokers are more accountable, reducing the risk of hidden fees or misleading information.

Investors should also be prepared for more diversification in the services offered by discount brokers. Platforms may start promoting more financial products beyond stock trading, such as mutual funds, insurance, and tax-saving instruments, giving investors a broader range of options within a single platform.

Conclusion: A New Era for Discount Brokers

The discount brokerage industry is at a crossroads. Regulatory changes, competitive pressures, and investors’ evolving needs are forcing brokers to adapt their business models. While the era of free trades may be ending, these changes also present an opportunity for brokers to innovate and provide more value to their customers.

As we move forward, it’s clear that life will never be the same for discount brokers. However, those who can adapt to the new regulations, embrace technology, and focus on delivering superior services will thrive in this new era. Investors, too, must be ready to navigate this changing landscape, weighing the benefits of new tools and services against any potential costs.

*Disclaimer Note: The securities quoted, if any, are for illustration only and are not recommendatory. This article is for education purposes only and shall not be considered as recommendation or investment advice by Research & Ranking. We will not be liable for any losses that may occur. Investment in securities market are subject to market risks. Read all the related documents carefully before investing. Registration granted by SEBI, membership of BASL, and certification from NISM in no way guarantee the performance of the intermediary or provide any assurance of returns to investors.

FAQs