Can brokerage rates in India drop to zero? Zerodha's Nithin Kamath answers
Premium- The Zerodha CEO said the brokerage charges might go up in the future. ‘…if anything, brokerage rates will go up in the future,’ he said
While trading in the stock market, it becomes imperative for you to pay various fees and charges, including the brokerage charges. Nithin Kamath, CEO and co-founder of Zerodha, took to Twitter on Wednesday to answer all queries related to brokerage rates.
In a series of tweets, Kamath said, “Many people ask me if brokerage rates can go to zero like in the US, and why not flat monthly brokerage plans with unlimited trades."
The Zerodha CEO said the brokerage charges might go up in the future. “…if anything, brokerage rates will go up in the future," he said.
Here are the reasons listed by him:
- 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.
- Float income: Unutilized funds are transferred back to the customers. In the US, funds remain with the brokers—they not only earn interest but use it for working capital as well.
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Kamath said India is by far the best-regulated market in the world in terms of investor protection.
“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," he tweeted.
“A flat monthly fee model doesn't make any business sense. Many have tried and reverted. 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," he wrote.
A brokerage is like an insurance business, collecting small premiums (brokerage) but incrementally taking risks with every trade, the Zerodha CEO said.
“Stock purchases don't have a risk since 100% of the money is collected upfront, but all speculative leveraged trades do," he said.
He added, “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."
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