In a significant regulatory overhaul, both the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE) have revised their transaction charges, effective October 1, 2024. This change, alongside the increased Securities Transaction Tax (STT) rates, marks a substantial shift in the cost structure for traders across equity, futures, and options markets. This blog explores the impact of these revisions on various market participants, from retail traders to institutional investors.
Securities Transaction Tax (STT) Changes:
• STT on Futures: Increased to 0.02% (from 0.0125%).
• STT on Options: Increased to 0.1% (from 0.0625%).
Background on the Revisions
The changes in transaction charges and STT were prompted by a circular from the Securities and Exchange Board of India (SEBI), which mandates a flat-rate fee structure for all market participants. This regulation aims to streamline the costs associated with trading and ensure uniformity across Market Infrastructure Institutions (MIIs). Prior to this, brokers and traders had the ability to negotiate fees based on their trading volumes, allowing some to benefit from lower charges.
Additionally, the increased STT rates, which are levied on the sell side of futures and options trades, will further impact the trading community by adding a tax burden to these transactions. These changes, while primarily designed to enhance market fairness and transparency, come with varying consequences for different market participants.
Impact on Retail Traders
Retail traders, who typically trade in smaller volumes, will experience the impact of these changes most noticeably in the futures and options segments. The increase in STT rates for both futures and options will directly affect their sell-side trades, reducing net profits. Retail traders who engage in active trading or speculative short-term trades will see their transaction costs rise, which may discourage frequent trading.
However, the reduction in transaction charges for options across exchanges offers a silver lining. For traders who prefer options trading, the decrease in costs per crore of premium turnover will slightly offset the higher STT, making it more affordable to enter and exit positions. This may encourage a shift in focus from futures trading, where the cost burden is higher, to options trading, which could become relatively more economical.
Key Takeaway for Retail Traders:
• Negative Impact: Higher STT rates will reduce the profitability of frequent trades, particularly in the futures segment.
• Positive Impact: Lower transaction charges in the options segment provide some relief, encouraging more cost-efficient options trading.
Impact on Institutional Traders
For institutional traders, the impact of these changes will vary depending on their trading strategies. Institutional investors typically trade in larger volumes, making them more sensitive to even small increases in trading costs.
The increase in STT will directly impact institutional investors who engage in high-frequency trading (HFT), algorithmic strategies, or arbitrage, where margins are already slim. The increased tax on sell-side futures and options trades will reduce profitability, and firms may need to adjust their models to accommodate the new cost structure.
However, for institutional traders who hold positions for longer periods, the increase in STT may be less significant. These participants may benefit from the reduction in transaction fees for options, as they tend to execute large block trades where even marginal reductions in fees can result in significant savings.
Key Takeaway for Institutional Traders:
• Negative Impact: High-frequency and algorithmic traders will face increased costs due to higher STT, potentially impacting profitability.
• Positive Impact: Long-term institutional investors may benefit from lower options trading costs, leading to cost savings on large block trades.
Impact on Discount Brokers
Discount brokers such as Zerodha, Angel One, Upstox and 5Paisa have built their business models on providing low-cost trading platforms, often benefiting from large volumes of trades. These brokers were able to offer lower transaction charges to their clients by negotiating better rates with exchanges based on high trading volumes.
The new uniform flat-rate fee structure eliminates this margin play, reducing the profitability of discount brokers. Under the new regime, brokers can no longer exploit lower negotiated rates with exchanges and will be forced to pass on the flat charges to clients. This could erode their competitive edge in a market that thrives on cost efficiency.
Moreover, with the increase in STT rates, brokers will likely see a decline in overall trading volumes as clients—particularly retail traders—adjust to the higher costs of trading. This could further reduce the revenues of discount brokers, especially those who rely heavily on transaction-based fee models.