Dear Readers,

Any sustainable long term business is only built when your clients make money, while Brokerages have been trying to invert the universal truth. However as they say, you can’t have the best of both worlds. Brokerage businesses are seeing a rapid slowdown with some of them being clammed up for sale while most of them have cut down headcounts to save on cost.

First let’s go through what Mr. Rashesh Shah of Edelweiss, the leading brokerage house of India, had to say in one of his recent interviews:

The volumes are down by almost half which has taken a toll on brokerage business, he said. Since commissions too have halved, a lot of brokerages are trying to adjust to reality. Along with volumes, yields, particularly in the cash market are also down. “Option trading and intraday trading are to take the blame for decline in yields,” Shah said.

The yields are down largely because there is a lot more option trading than cash trading, usually yields on cash are much higher than options when in the last year option volumes have been almost up by 100%. So, if you look at the overall volumes in the market is almost as down. However, option volumes have registered relatively smaller fall while cash volumes have seen a big slump.

Therefore, aggregate yield across options futures and cash has tumbled. On cash, yields have been almost steady for the last year. They have not fallen but there is a lot more at the retail level as people are doing intra-day trading and square up trades. So, aggregate yields across this were about 7 basis points a year ago. Yields have overall come down as a result of options and intra-day trading and all that.

Retail investors are almost absent. The retail trading is very short-term oriented because people are not seeing a secular trend in the market. We are seeing some HNI investing who are buying with two-three year view. The FIIs, insurance companies and institutional investors are still there, though their volumes are down. Institutional investors, some HNI investors and very few retail investors are there. A large amount of retail has gone towards very short-term trading.

——

Well for the above situation Brokerage houses are themselves responsible with Retail investors party to the same.

I believe it’s the brokerage houses who educate Retail investors only partially (A little knowledge is a dangerous thing) about the hedging instruments like Futures and Options. They overemphasize on the leverage while leaving investors un-educated about the real thing i.e. hedging.

The gullible retail investors unaware of the intricacies (the fatal leverage component) of the instruments start playing with them. They start believing that they have got a weapon through which they can win over the world and can turn their fortunes around overnight. Well if fortunes could be turned around so easily just by trading, all the entrepreneurs are dumb putting in all the hard work.

Though the good thing about Retail investors going for excessive trading is the fact that it’s a kind of Negative feedback loop (Negative feedback loop tends to reduce the input signal that caused it, is also known as a self-correcting or balancing loop). Had making money been so easy through trading, the entire nation would have flocked towards the same with no other activity (Many of you reading this must be realizing the fact that your profession is getting affected because of daily focus on the market), so the negative feedback of losses helps keep the same under control.

Coming back to Brokerages, the relationship managers at brokerage houses are asked to focus on generation of brokerage by any means. They end up targeting the naive retail investors who had after much thought decided to invest in stocks from a longer term perspective but the lure of quick money by RMs finds them treading on the wrong path.

So as I said, Brokerages shouldn’t cry foul for the pathetic situation they are currently in.

ekansh@katalystwealth.com