Volume traders like Zerodha take fancy to online discount broking

MUMBAI: A stock broking model, popular in developed markets, is being successfully replicated by Bangalore-based firm Zerodha. The concept, known as online discount broking, has helped Zerodha clock an average daily turnover of Rs 1,000 crore within a year of its launch, when most stock brokers are struggling to stay afloat, because of declining volumes in both cash and derivatives market.

So, what makes this business model work? Lower broking costs compared with what usual stock brokers charge. Zerodha charges a flat fee of only Rs 20 for every trade done through its platform. For example, if a trader buys one lot or even Rs 10 lots of Nifty futures in a single trade, he pays Rs 20. In comparison, a stock broker would charge anywhere between Rs 50 and Rs 100 per lot, depending on the client's ability to negotiate, which is again based on his trading volumes.

This striking cost advantage has caught the eye of some high-volume traders, who operate on wafer-thin profit margins. In choppy market conditions, when trading opportunities are hard to come by, the cost makes the difference.

"We are focusing on traders comfortable taking large positions in the derivative segment," says Nithin Kamath, founder of Zerodha, who was launched the platform in August 2010.

Zerodha is able to keep costs minimal because of lower employee costs and marketing expenses. The firm does not advertise, but tries to get more clients through the referral system, where the person who gives the reference gets 2 (or 10%) for every trade made by the person referred. To avoid the risk of client default, the platform lets a trader punch in trades only if he has money in his trading account.

But stock brokers are doubtful whether this business model can attain scale as margin funding is not available to clients and the nation's banking system is still not advanced enough.

"In India, the banking system has still not become fully online and real time. Most of the transactions happen through physical cheques, which necessitates a physical presence of the broker to service their clients," says Vinay Agrawal, executive director-equity broking, Angel Broking.

Some brokers say this model will work in taxing market conditions such as the existing one, where trading costs play a big role. But in a bull market, seasoned traders will rely on margin funding to multiply bets.

In the past, some leading retail brokers had launched versions of online discount broking, but had to wind up as the business was not viable because of higher overhead costs, including real estate, research and staff.


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