Zerodha set to stop zero brokerage model after SEBI’s new circular

By Entrackr

In an attempt to slow down speed of derivative trading, the Security Exchange Board of India (SEBI) is abolishing the volume-based transaction fee model on free equity delivery trades for all brokers including Groww, Zerodha, AngelOne, and Upstox, among others. 

While we will come at how the new transparent pricing circular impacts the topline of large brokers, Zerodha’s co-founder and chief executive Nitin Kamath stresses that the company in all likelihood would put a halt on zero commission zero brokerage structure.

According to Kamath’s post on X,  Zerodha is likely to increase brokerage for future and option or F&O trades as well. The company is one of the handful of trading platforms which charges no fee on equity delivery.

Experts tracking the space outline that almost all brokers will increase their existing pricing on equity trades and option (future) trading. For the uninitiated, equity delivery fee is a fee for physical delivery of shares in retail investors’ demat account. 

So, why is Zerodha anticipating a complete move from the zero commission model? SEBI mandates that a broker’s stock exchange fee is based on the turnover processed through the platform in a month. If the platform has more volume, its transaction fee would be lesser.

Zerodha’s dominance (large volume) in the e-trading space allows it to charge nada on delivery of equity trades as of now but it may change in coming months as the new circular will come into effect from October 2.

“We earn about 10% of our revenue from these rebates. This could range between 10% and 50% of the revenue for other brokers,” wrote Kamath in a blog post posted on Zerodha’s platform.

Kamath claims that the company generates 90% of its revenue from rebates on F&O trading so the new circular isn’t going to cost it much. However, he points out, “SEBI has recently set up a working group to study and address the concerns about the steep increase in retail participation in options trading. As I have said several times in the past, including recently, this regulatory risk is one of the biggest risks for a regulated business like a stock broker,” added Kamath.

The F&O trading space may face crackdown from SEBI in the future as regulator’s chairperson Madhabi Puri Buch emphasized that it won’t hesitate to ban future trades from retail investors in case the working committee favors it. Recently, SEBI set up a committee to study and address the concerns about the steep increase in F&O trades. For context, between FY18 and FY23; option trading on NSE spiked over 10X: rising from 9.3 lakh in FY18 to 95.7 lakh in FY23.

Source: Entrackr