BSE's small brokers are folding up as technology, regulations outpace them

More than three decades after starting as a broker on the Bombay Stock Exchange, Asia’s oldest bourse, Yogesh Choksey shut up shop last year, missing out on a record-breaking equity rally that would usually boost profits for brokerages.

“The business was no longer viable for a smaller setup like mine,” said Choksey, who opened his namesake firm in 1986 in the iconic Jeejeebhoy Towers, home to the BSE in the old business district of Mumbai.

Choksey, 65, is part of a dying breed of traditional stockbrokers in India, whose numbers have shrunk by about three quarters in less than six years. Smaller brokerages have been rapidly closing their doors as they fail to keep up with cheaper online competitors.

“The stockbroking business, as we knew it, is dead,” said Premal Sanghvi, a remisier—a broker paid on commission—at Sharekhan by BNP Paribas in Mumbai. Sanghvi began his career in the early 1990s at his family’s brokerage firm, which is no longer doing business.

India had slightly more than 2,400 brokerages as of December 24, down from more than 9,000 in March 2014, data from the regulator show. The decline has been intensified by the shuttering of 13 regional bourses, which forced about 3,000 brokers out of business between 2014 and 2017.

The emergence of discount online brokers has turned the industry into a business of high volumes and wafer-thin margins, prompting several large publicly traded broking firms to expand into lending, wealth management and even insurance.

They’re epitomized by market leader Zerodha, a discount broker which boasts more than 1.5 million clients. It offers free trades if customers hold shares longer than a day and collects less than 30 cents on intraday and derivatives orders.

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Zerodha handled about 10% of the nation’s stock trades in the year ended March, a period when the S&P BSE Sensex rose 17% and many Indians shifted into stocks from cash after the government’s ban on high-value currency bills in 2016 altered saving habits.

But the rise of online brokers isn’t the only thing hurting their traditional counterparts. Also at issue are the costs and efforts needed to meet stricter compliance and reporting obligations, which apply regardless of a brokerage’s size.

“The double-whammy of high regulatory expectations and rapidly changing market dynamics have made it unviable for traditional brokers,” said Uttam Bagri, chairman of the BSE Brokers’ Forum, which represents 900 members. “There’s a cost to compliance, which isn’t linked to the size of the firm. It adds up for small brokers.”

The Securities & Exchanges Board of India has tightened compliance and reporting rules in recent years as it seeks to address the risk of brokers not acting in their customers’ interests.

Tightening compliance

Just last month, Sebi barred Karvy Stock Broking Ltd. from taking on new customers after the firm was found to have allegedly misused clients’ shares. The company broke rules that mandate segregation of broker and client accounts, Sebi Chairman Ajay Tyagi said in Mumbai on November 27. Karvy’s trading license was suspended earlier this month.

While people will always find ways to subvert the system, the potential for widespread fraud is low given the copious reporting rules, BSE Brokers’ Bagri said.

“Older brokers have run the business for decades and have the highest level of ethics but the regulator has no way of capturing those traits,” he said.

The demise of traditional brokerages may be no bad thing for the new breed of Indian investors, according to Suresh Sadagopan, founder of Mumbai-based Ladder7 Financial Advisories in Mumbai.

“Millennials are tech-savvy, do-it-yourself types,” he said. “They have sources of information they trust and don’t need the tips older brokers would give.”

For Choksey, who surrendered his BSE membership in autumn of 2018, exiting the business has been a relief. He could no longer compete with full-service brokers charging as little as 0.1 rupee per trade, he said. His clients, about 25 wealthy families, moved to larger firms. And he turned to investing his own funds instead.

“My son helps me research stocks and we invest our money in shares,” he said. “But our trades are executed by another broker.”

(With assistance from Paresh Jatakia.)