Zerodha May End Zero Brokerage Service: SEBI’s New Circular Impact

Zerodha May End ‘Zero Brokerage Framework’ or Increase F&O Trading Fees

Brokerage firm Zerodha may end its ‘zero brokerage framework’ or increase fees for Futures and Options (F&O) trading. Zerodha’s co-founder and CEO, Nithin Kamath, has hinted at these changes. This potential shift is in response to a new circular from the market regulator, SEBI.

Nithin Kamath posted on social media that market infrastructure institutions (MIIs) like stock exchanges will begin charging ‘label-wise’ fees starting October 2, 2024.

Kamath noted that this circular will not only impact brokers but also traders and investors. He mentioned that they might have to abandon the zero brokerage model or increase brokerage fees for F&O trades. Other brokers across the industry may also need to adjust their pricing.

Why Did SEBI Issue New Guidelines?

SEBI issued new guidelines to ensure fairness and transparency in the fees charged by market infrastructure institutions (MIIs). These guidelines will take effect from October 1, 2024. MIIs include stock exchanges, clearing corporations, and depositories.

Currently, stock exchanges charge transaction fees based on the total turnover of stock brokers. Brokers collect fees from their clients on a daily basis but pay the stock exchange on a monthly basis. The existing system uses a volume-based slab structure, meaning brokers with higher turnover fall into a slab with lower charges, while those with lower turnover face higher charges.

SEBI stated that due to slab benefits, brokers might charge their clients more than what they actually pay to MIIs. This could lead to misleading information about the actual fees charged by MIIs reaching the end clients. The slab-based charging structure can impact transparency and create an uneven playing field for brokers of different sizes. SEBI wants brokers to charge their clients fees that are equal to what MIIs charge the brokers.

What Is in SEBI’s New Guidelines?

After discussions with its Secondary Market Advisory Committee, SEBI formulated guidelines for MIIs. According to these guidelines, the fees imposed on end clients should match the fees collected by MIIs. Additionally, MIIs should remove the slab system based on volume.

Revenue Stream Impacted by New Circular

Nitin Kamath explained that stock exchanges charge transaction fees based on the total turnover by brokers. The difference between the fees brokers charge their clients and what exchanges collect from brokers at the end of the month is retained by the brokers.

This practice is common worldwide. These rebates account for about 10% of Zerodha’s revenue and between 10-50% for other brokers in the industry. The new circular eliminates this revenue stream.

Zero Brokerage Framework Might End

Nitin Kamath mentioned that Zerodha is one of the last brokers offering free equity delivery trades. They have been able to do this because the revenue generated from F&O trading allowed them to offset these charges.