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

In an attempt to slow down the 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 explain how the new pricing circular impacts the topline of large brokers, Zerodha co-founder and chief executive Nitin Kamath stresses that the company in all likelihood would halt its zero brokerage structure and/or increase brokerage for future and option (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 charged on physical delivery of shares in retail investors’ demat account.

So, what makes Zerodha anticipate a shift from its zero commission model?

SEBI in its circular 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, this arrangement may change as the new circular comes into effect from October 2, 2024.

“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.

Kamath explains that his 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,” he further said.

The F&O trading space may face crackdown from SEBI in the future as regulator’s chairperson Madhabi Puri Buch has emphasized that the regulator 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.