True to Label, False to Scale: Why markets need pricing freedom

 

In October 2024, India flattened the transaction fee curve for equity markets, mandating that exchanges charge all brokers the same rate, regardless of scale or trade volume. The regulation, designed to ensure fairness and transparency for end investors, eliminated volume-linked discounts that previously allowed brokers to craft differentiated pricing strategies. While well-intentioned, the rule has triggered a chain reaction, slashing broker earnings, discouraging participation, and threatening the very liquidity that sustains India’s growing market ecosystem.

Quarterly earnings from India’s top brokers reveal the impact. Angel One reported a 22% year-on-year drop in operational revenue and a nearly 49% decline in profit. Its net brokerage income decreased by 28%, with profits plummeting to levels nearly half its four-quarter average. ICICI Securities experienced a 9% decrease in revenues and a 29% decline in net profit year-on-year. For both firms, margins compressed as costs remained steady while fee income diminished. Smaller brokers like 5paisa Capital and IIFL Securities also faced income pressures due to the collapse of volume-linked economics.

What’s changed is the underlying business model. Previously, high-volume brokers could negotiate lower exchange fees, either passing savings to clients or reinvesting in better tools, analytics, or services. Large clients effectively subsidized service improvements for smaller ones, creating a broad-based benefit. Flat fees erase this margin leeway. Brokers can no longer cross-subsidise, nor can they attract clients through aggressive volume incentives. Consequently, ultra-low or zero brokerage plans are becoming unviable. Firms must now reassess pricing and value delivery under tighter constraints.

The policy shift arrives at a delicate time. India’s capital markets have expanded dramatically over the past five years, adding millions of first-time retail investors. Intuitive platforms, low or zero-fee trades, and bundled analytics drew in many. These features were not charity — they were enabled by a pricing structure that rewarded scale and ingenuity. Now, with no incentive to chase volumes and no flexibility in cost management, brokers are starting to retrench. Value-added services previously bundled in, such as research dashboards, real-time analytics, or educational modules, are being reduced or monetized separately. The pressure on brokers diminishes profitability and stifles innovation, limiting their ability to engage investors. Previously, brokerages funded financial literacy and advanced tech through margin income from active clients. A uniform fee model constrains these efforts, promoting basic services over unique offerings. This trend could lead to decreased investor satisfaction and trust, especially for first-time investors seeking guidance.

Liquidity strain is evident as market activity decreases. Effective market liquidity hinges not only on technology but also on engaged participants across various instruments and strategies. Flattened fees reduce high-volume trading incentives, causing market makers and algorithmic traders to withdraw, diminishing market depth and widening bid-ask spreads. This leads to poorer execution and increased slippage for retail investors. The subtle yet significant cost of reduced liquidity is thinner order books and heightened price volatility, particularly in stressful conditions. In India’s evolving market, where institutional and retail flows are intertwined,

regulations intended to enhance fairness can paradoxically introduce inefficiencies that raise trading costs, especially affecting the small investors they aim to protect.

Losing pricing flexibility also reduces brokers’ ability to tailor services to different client segments. A high-frequency trader has very different needs from a passive SIP investor. The earlier fee system allowed brokers to adapt through discounts, tiered services, or bundled research. A flat fee model forces a one-size-fits-all approach, penalizing scale, disincentivizing product diversity, and encouraging commoditization, ultimately narrowing investor choice.

Globally, differentiated pricing is a competitive norm. U.S. brokers such as Robinhood, Schwab, and Fidelity offer zero-commission trading but monetize through scale-based models like order flow payments or premium subscriptions. Exchanges provide rebates or tiered access fees to large participants, who in turn inject liquidity. In Europe, MiFID II emphasizes transparency and client protection while allowing fee structures to reflect volume, service complexity, or platform costs. These markets feature deep liquidity, diverse offerings, and high investor satisfaction. Pricing freedom, when paired with disclosure, promotes participation and innovation.

Analogies from other industries reinforce the case. In telecom, heavy users access cheaper per-unit rates via bulk data plans. Airlines price cargo clients differently based on shipment size and frequency. These models improve access while maintaining service quality and infrastructure funding. A flat-rate telecom model would penalize data users and deter network expansion. Similarly, forcing uniformity in air freight would either price out small clients or starve the system of operating margins. Markets, like networks and airlines, thrive on tiered access, provided the rules are transparent and fairly enforced.

What’s needed is a regulatory posture that balances fairness with sustainability. Uniformity should not mean rigidity. If the concern is hidden markups or asymmetry, solutions lie in disclosure norms and investor education, not blanket flattening. As long as these are well communicated, brokers should be allowed to structure pricing tiers based on volume, service quality, or risk appetite. "True to label" can coexist with "tailored to need." Flexibility does not weaken fairness; it enhances it by providing investors with more choices and allowing firms to compete on value. Pricing freedom encourages brokers to effectively serve different segments, invest in long-term platform quality, and promote financial inclusion through innovation. A rigid, flat model may superficially level costs, but it risks diminishing the very diversity and depth that underpin a vibrant market.

As India aims to globalize its financial infrastructure, it must adopt regulatory principles that reward transparency, not just uniformity. Markets function best when large and small participants are empowered to choose, innovate, and compete under shared rules. While flat fees offer simplicity, they can diminish dynamism. A more nuanced approach would preserve the spirit of fairness while restoring the incentives that keep India’s markets liquid, inclusive,and future-ready.

Author is Partner, MCQube. Views are personal