Rajandran R Creator of OpenAlgo - OpenSource Algo Trading framework for Indian Traders. Telecom Engineer turned Full-time Derivative Trader. Mostly Trading Nifty, Banknifty, High Liquid Stock Derivatives. Trading the Markets Since 2006 onwards. Using Market Profile and Orderflow for more than a decade. Designed and published 100+ open source trading systems on various trading tools. Strongly believe that market understanding and robust trading frameworks are the key to the trading success. Building Algo Platforms, Writing about Markets, Trading System Design, Market Sentiment, Trading Softwares & Trading Nuances since 2007 onwards. Author of Marketcalls.in

How SEBI’s New Circular Will Impact Zero Brokerage Services: What Traders Need to Know

2 min read

In recent years, many brokers like Kotak, Shoonya (Finvasia), and mStock have attracted traders with their zero brokerage services. While this model has been enticing for day traders, options traders, and high-volume traders, a new SEBI circular (CIRCULAR SEBI/HO/MRD/TPD-1/P/CIR/2024/92) might bring significant changes. This circular, effective from October 01, 2024, aims to ensure transparency and fairness in the way Market Infrastructure Institutions (MIIs) levy charges. Let’s break down what this means for traders using zero brokerage services.

Understanding the SEBI Circular

Key Points of the Circular:

  1. True to Label Charges: Charges levied on clients by brokers must exactly match the charges received by MIIs.
  2. Uniform Charge Structure: MIIs must adopt a uniform charge structure, eliminating the current volume-based, slab-wise system.
  3. Transparency and Fairness: The new structure aims to make charges clear and fair for all market participants, ensuring end clients benefit from any charge reductions.

the below image shows a comparison between the existing and revised transaction charges rates for various levels of incremental billable monthly turnover (premium value) for brokers. This is relevant to the new SEBI circular, which mandates changes in the way Market Infrastructure Institutions (MIIs), like stock exchanges, levy charges. Here’s a detailed explanation:

Impact of the SEBI Circular

End of Revenue Sharing:

  • The provision where the exchange shares revenue with brokers based on their monthly turnover, especially for options trading, will no longer be relevant post October 1, 2024. This means brokers will not receive rebates or incentives based on the volume of trades they conduct.

Lower Exchange Transaction Charges:

  • SEBI has directed exchanges like NSE to lower the transaction charges. This is evident from the reduced rates across all slabs in the revised structure. The aim is to make the cost of trading more transparent and fair.

    Impact on Zero Brokerage Services

    1. Day Traders: Day traders make multiple trades daily, benefiting significantly from zero brokerage. However, with SEBI’s new directive for true-to-label charges and uniform pricing, brokers may no longer be able to subsidize the cost of trades in the same way. This could lead to the introduction of minimal transaction fees to cover operational costs, affecting the profitability of high-frequency trades.

    2. Options Traders: Options traders, who often engage in complex strategies involving multiple contracts, could see a change in how transaction fees are structured. Currently, zero brokerage services can reduce the cost burden of these multiple transactions. With the new SEBI rules, the transparency in fee structures might reveal hidden costs, and brokers might need to introduce small fees to align with the new regulations, impacting overall trading costs.

    3. High-Volume Traders: High-volume traders benefit the most from zero brokerage due to the sheer number of transactions. The SEBI circular’s mandate for a uniform charge structure means that these traders could lose out on the volume-based discounts they currently enjoy. Brokers might introduce a nominal fee per transaction to maintain compliance and cover operational costs, slightly increasing the cost per trade.

    How Brokers Might Adapt

    • Introduction of Minimal Fees: Brokers may introduce small transaction fees to comply with the SEBI directive while still remaining competitive.
    • Enhanced Transparency: Expect brokers to provide more detailed breakdowns of all fees and charges, helping traders understand the exact costs involved.
    • Bundled Services: Brokers might offer bundled packages with value-added services like premium research, faster execution, or advanced trading tools to justify any new charges.

    What Should Traders Do?

    1. Stay Informed: Keep an eye on communications from your broker regarding changes in fee structures and how they will be implemented.
    2. Compare Brokers: As brokers adjust their models, compare the new fee structures to find the one that offers the best value for your trading style.
    3. Optimize Strategies: Review and adjust your trading strategies to account for any new costs, ensuring that your approach remains profitable.

    The SEBI circular introduces significant changes aimed at improving transparency and fairness in the market. While this might bring an end to the zero brokerage era as we know it, the impact can be managed with informed decisions and strategic adjustments.

    Read the SEBI’s latest circular here

    Stay tuned for more updates and insights on regulatory changes and their impacts on the financial markets!

    Rajandran R Creator of OpenAlgo - OpenSource Algo Trading framework for Indian Traders. Telecom Engineer turned Full-time Derivative Trader. Mostly Trading Nifty, Banknifty, High Liquid Stock Derivatives. Trading the Markets Since 2006 onwards. Using Market Profile and Orderflow for more than a decade. Designed and published 100+ open source trading systems on various trading tools. Strongly believe that market understanding and robust trading frameworks are the key to the trading success. Building Algo Platforms, Writing about Markets, Trading System Design, Market Sentiment, Trading Softwares & Trading Nuances since 2007 onwards. Author of Marketcalls.in

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