Zerodha's Nithin Kamath thinks brokerage rates will go up in future; here's why

Zerodha founder and CEO Nithin Kamath on Wednesday said that the brokerage fee charged by stock brokers can go up in the future in India.
 
Kamath said that a lot of people ask him if brokerage rates can go to zero in India like in the US, or why don't brokers offer unlimited trades while charging a monthly fee. Saying that this is unlikely to happen in India, Kamath went on explain his reasoning for it in a Twitter thread.
 
"I think, if anything, brokerage rates will go up in the future," he said. In US, brokers can earn in ways that the Securities and Exchange Commission of India (SEBI) doesn't allow, and rightly so," Kamath said.
 
US brokers are allowed to sell customer orders to high-frequency trading firms. Besides, unlike India, stocks are held in the name of the brokers in the US, which they can lend to earn.
 

Firstly, in the US, brokers can earn in ways that SEBI rightly doesn't allow here:

Payment for order flow: selling customer orders to HFT firms.

Securities lending: Unlike India, stocks are held in the street name or in the name of brokers—they can lend them to earn. 2/7

— Nithin Kamath (@Nithin0dha) February 9, 2022

 
Moreover, unutilised funds are transferred back to the customers in India, unlike in US, where funds remain with the brokers. "...they not only earn interest but use it for working capital as well," Kamath wrote.
 

I had written this post a couple of years back on why brokerage rates in India can probably never to zero because there won't be other sources of generating revenue like in the US. 4/7https://t.co/f42Krg4prb

— Nithin Kamath (@Nithin0dha) February 9, 2022
 
Saying that India is the best-regulated market in the world in terms of investor protection, Kamath said brokerage rates in the country can never go to zero because there won't be other sources of generating revenue, like in the US.

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On the flat monthly fee model, he said it doesn't make any business sense for the brokers. "We started with a flat fee per order because effort involved doesn't go up with the size of the order in an online world. But effort involved does go up when a person trades once vs many," Kamath said.
 

Also, a brokerage is like an insurance business, collecting small premiums (brokerage) but incrementally taking risks with every trade. Stock purchases don't have a risk since 100% of the money is collected upfront, but all speculative leveraged trades do. 6/7

— Nithin Kamath (@Nithin0dha) February 9, 2022

 
Brokers also need "risk compensation" to cover black swan events like crude prices going negative in 2020. "One event like crude going negative (Apr 2020) can wipe out years of premiums or brokerage collected," he said.
 

Apart from, of course, the business having to earn a profit to be sustainable, there also has to be a risk compensation to cover black swan events. One event like crude going negative (Apr 2020) can wipe out years of premiums or brokerage collected. 7/7https://t.co/JTXxHt80MO

— Nithin Kamath (@Nithin0dha) February 9, 2022

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