The era of zero commissions has come in. Charles Schwab has made online stock trading free in the US. In India, while discount broking firms do offer zero fees in the cash segment, intraday and F&O trades attract a fixed rate of Rs 10-20. Most traditional brokerages still charge a percentage of the trading amount as fee.
Unlike in the US, brokerages in India earn a large chunk of revenues via commissions. US brokerages earn interest on idle cash in trading accounts and receive fee from exchanges for creating liquidity. They can sell order flow to high frequency traders and make money via securities lending also. Indian firms cannot do most of it. The recent regulation has put a limit on how much they can earn via margin funding as well. But they know the race to zero is inevitable.
They have been trying to expand other revenue streams such as offering value-added services. This includes same day cash in bank accounts, refund of advanced brokerage on special turnovers, distribution of financial products and wealth management services to HNIs and corporates. However, the real challenge is abysmal growth in number of active clients. Unless the number of active traders (8.9 million) grows four-five times, Indian brokerages would do well not to go aggressive on the fee war.