The Indian Stock Broking Industry

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It all began in 2nd  century BC in Rome, which was the first time any shares were bought or sold. The storm
came to India in 1875 with the setting up of Bombay Stock Exchange. Since then, the profession has
come a long way and to have become more than a $1 billion industry in this country. It was during this
time when broker members were considered elite group due to limited entrants, thanks to highly capital
and infrastructure intensive sector.

It all changed in the 1990s, with the setting up of NSE in 1992, trade volumes increased exponentially,
broker members came by storm, and the overall industry expanded like a mammoth, due to relaxation of
entry barriers and the increasing market size. At the last count, the BSE had about 4,700 listed firms,
whereas the rival NSE had about 1,200. In BSE, only about 500 stocks contribute to more than 90% of its
market capitalization; the rest consists of highly illiquid stocks.

However, in the past few years, this industry has gone through major consolidation phase. Number of
brokers have gone down drastically, all this can be attributed to some major reasons. Some of them are:
major entry barriers, tightening of rules and regulations, technology advancements, highly volatile market,
increasing compliance by governing bodies and availability of sophisticated trading tools. Increasing
compliance by SEBI can be considered as a major reason for such consolidation.

The government is making every effort to ensure investor safety. These regulations are inevitable to
control such volatile market and to avoid speculation or gambling. There is a dire need to ensure that this
platform is used as an investment opportunity rather than a speculation ground.

Another major factor playing its role in today’s market is the introduction of discount broking and
technology, putting a major dent on the profitability of conventional stock brokers. Discount broking
players have started a major price war in the industry and hence is a reason for eradicating the mid and
small size brokers in the market. The industry today has become transparent, highly technology intensive
and a lot tougher for new entrants.

With all these changes, investors today want a swift and a highly customized trading platform, something
which is being taken as an advantage by the big players. This industry today has completely moved
towards automation, be it risk assessment, order placing, portfolio management, market research or
investment advisory.

Baseline is, all these factors are not only being barrier to new entrants but have also decreased trading
costs and have increased transparency, hence, making it more accessible to retail investors.

The future:

Like any industry goes through consolidation phase, stock broking is no different. The big players today
are taking a great advantage of present market scenario, but, there still is a vast potential in the niche
market where only small players can serve. To get more idea about the potential: today, out of 1.3 billion
people in India, not more than 0.8% people are investing in the stock market whereas, in USA this figure
is around 12%.

A 5-year yearly return on equity has been more than 12% as compared to mutual fund at 8%, fixed
deposit at 6%, gold at 1.98% and real estate with a negative return and investors today have started to
understand this. Additionally, the liquidity offered by the stock markets is not available with most of the
other investment avenues.

In India, a very little part of the household saving is being invested in primary or secondary markets, but
with GDP growing at 7-8% annually and a stable financial market, we might see more money joining the
race. All that this country needs is investor education.

In today’s race, conventional brokers need to focus more on technology, cutting on their overhead costs,
focusing more on sales and post-sale support and adopting new methods like E-KYC, AADHAR based
systems among others.

All said and done, there is a vast ocean of opportunities in this “to-be 3 rd largest” consumer market by
2025.