Introduction to Brokerage Industry
Content
Introduction to Brokerage Industry:Post major reforms initiative in early 2000s brokerage industry in India is experiencing rapid growth and diversity. At present apart of brokerage business industry is also offering wide range of financial services. These developments have resulted in huge spurt in business and also growing market share of the large sized brokerage houses has led to surge in enterprise value. In the year 2007 IPOs of large firms (Motilal Oswal, Religare, and Edelweiss) received huge response (Indian catalog, 2001). At the same time global and private equity firms have taken stake in brokerage firms. In India there are about 45 equity brokerage houses that are at present listed in the stock exchanges. Industry Insight:• Majority of the broking firms entered the business post 1990. A majority of members have memberships in more than one stock exchange and across equities, equity derivatives and commodities futures in domestic and International stock exchange. • On the back of growing equity culture broking activity is spreading in Tier II and Tier III cities in India. • Deepening financial system and economic growth has provided growth and expansion opportunities to broking firms. Access to public equity markets and growing international investor’s interest has enabled them to raise resources. • Although there are more than 9000 brokers registered with SEBI 80% of the turnover in NSE and BSE is accounted by about 100 brokers. One of the oldest trading industries that have been around even before the establishment of BSE is the Indian Broking Industry. Post liberalization there have been number of changes, despite this the stock broking industry was at its pace and retained its sustainable growth. To study the trend in the stock broking industry, if we take the database of over 394 broking firms. All the data for the study was collected through responses received directly from the broking firms.
The insights have been arrived at through an analysis on various parameters, pertinent to the equity broking industry, such as region, terminal, market, branches, sub brokers, products and growth areas.
•
Some key characteristics of the sample 394 firms are:
• On the basis of geographical concentration, the West region has the maximum representation of 52%. Around 24% firms are located in the North, 13% in the South and 10% in the East • 3% firms started broking operations before 1950, 65% between 1950-1995 and 32% post 1995.
• On the basis of terminals, 40% are located at Mumbai, 12% in Delhi, 8% in Ahmadabad, 7% in Kolkata, 4% in Chennai and 29% are from other cities • In the cash market, around 34% firm’s trade at NSE, 14% at BSE and 52% trade at both exchanges. In the derivative segment, 48% trade at NSE, 7% at BSE and 45% at both, whereas in the debt market, 31% trade at NSE, 26% at BSE and 43% at both Exchanges. Majority of branches are located in the North, i.e. around 40%. West has 31%, 24% are located in South and 5% in East. • In terms of sub-brokers, around 55% are located in the South, 29% in West, 11% in North and 4% in East • In terms of various areas of growth, 84% firms have expressed interest in expanding their institutional clients, 66% firms intend to increase FII clients and 43% are interested in setting up JV in India and abroad • In terms of IT penetration, 62% firms have provided their website and around 94% firms have email facility.
(Graph 2) Branches & Sub-Brokers:The maximum concentration of branches is in the North, with as many as 40% of all branches located there, followed by the Western region, with 31% branches. Around 24% branches are located in the South and East constitutes for 5% of the total branches of the total sample.
In case of sub-brokers, almost 55% of them are based in the South. West and North follow, with 30% and 11% sub-brokers respectively, whereas East has around 4% of total sub-brokers.
(Graph 3)
Where one firm looses out to other:• Lack of well established branches put smaller brokers at a disadvantage when compared to larger Brick and Mortar players who have presence in every corner of the country. • Bulk of client base is made up of retail investors. Institutional and other high value high volume investors prefer to trade with so called blue chip brokers. Retail investors are “easy come easy go” accompanied with inconsistent trading habits. In Bull Run they gain confidence to invest but in correction phase they lose confidence easily.
• High competition among Stock brokers has put significant pressure on the prices. • Market consolidation and merger are expected to keep the broking industry viable in the long run. • Demanding customers asks for 24/7/365 access to information and transaction capability. Providing it with minimum overheads is very challenging especially for newer firms who are yet to realize margin of scale.
Foreign banks for a slice of equity business pie In the recent period, global and domestic private equity firms have taken stake in brokerage firms such as Anand Rathi (Citigroup), Edelweiss (Lehman Brothers), Geojit (BNP Paribas), SMC (Millennium India), Motilal Oswal (New Vernon), Network Broking (Amas Bank of Hindu as) and India Info line (Orient Global) etc. Stock Exchange - Business Trends:• Indian Stock Markets And Exchanges:There are 23 recognized stock exchanges in India, including the Over the Counter Exchange of India (OTCEI) for small and new companies and the National Stock Exchange (NSE) which was set up as a model exchange to provide nation-wide services to investors.
• Bombay Stock Exchange (Bse):Bombay stock exchange is the oldest stock exchange of India For the premier Stock Exchange that pioneered the stock broking activity in India, 128 years of experience seems to be a proud milestone. A lot has changed since 1875 when 318 persons became members of what today is called "The Stock Exchange, Mumbai" by paying a princely amount of Re1.
Since then, the country's capital markets have passed through both good and bad periods. The journey in the 20th century has not been an easy one. Till the decade of eighties, there was no scale to measure the ups and downs in the Indian stock market. The Stock Exchange, Mumbai (BSE) in 1986 came out with a stock index that subsequently became the barometer of the Indian stock market. • SENSEX SENSEX is not only scientifically designed but also based on globally accepted construction and review methodology. First compiled in 1986, SENSEX is a basket of 30 constituent stocks representing a sample of large, liquid and representative companies. The base year of SENSEX is 1978-79 and the base value is 100. The index is widely reported in both domestic and international markets through print as well as electronic media The index is calculated on the “Free-float Market Capitalization” methodology. The "Free-float Market Capitalization" methodology of index construction is regarded as an industry best practice globally. All major index providers like NIKKEI, NASDAQ and DOW JONES use the free float methodology. The growth of equity markets in India has been phenomenal in the decade gone by. Right from early nineties the stock market witnessed heightened activity in terms of various bull and bear runs. The SENSEX captured all these events in the most judicial manner. • National Stock Exchange (Nse):-
The National Stock Exchange of India Limited has genesis in the report of the High Powered Study Group on Establishment of New Stock Exchanges, which recommended promotion of a National Stock Exchange by financial institutions (FI’s) to provide access to investors from all across the country on an equal footing. Based on the recommendations, NSE was promoted by leading Financial Institutions at the behest of the Government of India and was incorporated in November 1992 as a tax-paying company unlike other stock exchanges in the country. On its recognition as a stock exchange under the Securities Contracts (Regulation) Act, 1956 The Capital Market (Equities) segment commenced operations in November 1994 and operations in Derivatives segment commenced in June 2000. When India’s National Stock Exchange (NSE) was started in 1994, few believed it would survive. How could a stock exchange run
by a team of untested professionals headed by a former development banker succeed against existing stock exchanges run by third generation, savvy stockbrokers? Critics even went to the extent of warning that NSE’s sophisticated systems would be a misfit in an Indian capital market dominated by physical deliveries, arbitrary speculative trade, and lengthy trade settlements. Today, with number of trades touching 2.5 million a day and turnover touching turnover touching Rs 100 billion in value terms, NSE towers over all the other stock exchanges in the country. In a ten-year period (NSE completed a decade on June 30, 2004) the National Stock Exchange has tilted the market system in favour of investors and away from a significant bias in favour of intermediaries. For a mass of investors across the country, the NSE is now the focal point for trading in stocks, and futures and options. The Stock Exchange, (NSE) came out with a stock index that subsequently became another barometer of the Indian stock market known as NIFTY.
Nifty been the focal point of investors, as it provides trading the shares as well as index in futures and options. Before Nifty came into existence trading of index concept was not present it was introduced by Nifty and is present in it only, till date. Cash Market And Derivatives:National stock exchange gives the investors different option where an investor can deal the equities into different market situations like cash market and derivatives. Cash market is simply the equity market where investors have to pay the security amount which is done in BSE also but in NSE investors has the choice of dealing in derivatives. Derivatives are the future market where investors have the option of dealing in the price list of futures for which there a separate index is present known as NIFTY FUTURE. In Derivatives there are two choices available for an investor FUTURES AND OPTIONS.
•
FUTURE – In future market shares are deal in lots these lots could be of different numbers like 100, 200, 500 etc. Investors while taking over these lots and coming under the contract takes the position of the shares by paying the 1/3rd amount of the total holdings. (Could be understood by a formula).
Holdings of investors = (shares lot * price of the lot) / 3. This formula explains that as investor is interested in taking 2 lots of reliance of 100 shares of Rs. 900 , the investor has to pay:- (2*100*900) / 3 = 60000/ Which shows the investor is taking the position of Rs. 180000/- in just Rs. 60000/- in future market which the area of attraction of this particular market. These holdings are taken for 1 month, 2 months and three months according to the investor’s preference. The beauty of this contract is that the remaining 2/3rd money of the holdings is paid by the broking house the investors dealing with. Investor coming into this contract should know that by the time of contract he is in like of 1 or 2 months
investor should clear its position before the last Thursday of the expiry month.
•
OPTIONS – Option is a contract where the investor has two options to deal with CALL and PUT. The concept of call and put is opposite to each other call is the contract where the investors believe that the market is going to be BULLISH in near future and put option is taken when he thinks that the market is going to be BEARISH in the future.
In the call option investors is benefited if market drives up in future and in put will be benefited if it slips down. • Funds mobilized in primary market rose to Rs 1, 74,143 cr through 558 issues in 2007-08 against Rs 55,654 cr through 451 issues in 2006-07. Out of this Rs 87,029 cr were raised through 124 public and right issues against Rs 33,508 cr through 124 issues in 2006-07. Total of Rs 42,595cr Was raised through 85 IPOs in 2007- 08 against Rs 28,504 cr raised through 77 IPOs in 2006-07. • Net resource mobilization by mutual funds grew to Rs 1,53,801 cr in 2007-08 with a 63% rise from Rs 93,984 cr in 2006-07. Cumulative Assets under management rose to Rs 5,05,152 in March 2008 from Rs 3,26,292 in March2007.
Institutional Structure of the Indian Stock Market Market Intermediaries Stock exchanges Market) Number of Intermediaries as on March 31,2008
(cash 19
Stock Exchanges 2 (Derivative Market) Brokers (Cash Segment) 9487
Corporate Brokers (Cash 4183 Segment) Sub Brokers Segment) Brokers (Derivatives) FII Custodians Depositories Merchant Bankers Bankers to an Issue Underwriters Mutual Funds (Cash 44073 1442 1319 15 2 155 50 35 40
Stock Trading:Traditionally stock trading is done through stock brokers, personally or through telephones. As number of people trading in stock market increase enormously in last few years, some issues like location constrains, busy phone lines, miss communication etc start growing in stock broker offices. Information technology (Stock Market Software) helps stock brokers in solving these problems with Online Stock Trading. Online Stock Market Trading is an internet based stock trading facility. Investor can trade shares through a website without any manual intervention from Stock Broker. In this case these Online Stock Trading companies are stock broker for the investor. They are registered with one or more Stock Exchanges. Mostly Online Trading Websites in India trades in BSE and NSE. Installable software based Stock Trading Terminals. • This trading environment requires software to be installed on investor’s computer. • This software is provided by the stock broker. This software’s require high speed internet connection. These kind of trading terminals are use by high volume intraday equity traders.
Advantages:• Orders directly send to stock exchanges rather than stock broker. This makes order execution very fast. • It provide almost each and every information which is required to a trader on a single screen including stock market charts, live data, alerts, stock market news etc. Disadvantages:-
• Location constrains - You cannot trade if you are not on the computer where you have installed trading terminal software. • It requires high speed internet connection. • These trading terminals are not easily available for low volume share traders.
•
Web (INTERNET) based trading application These kind of trading environment doesn't require any additional software installation. They are like other internet websites which investor can access from around the world through normal internet connection.Below are few advantages and disadvantages of Online Stock Market Trading:
•
Advantages of Online Stock Trading (Website based):• Real time stock trading without calling or visiting broker's office. • Display real time market watch, historical data’s, graphs etc. • Investment in IPOs, Mutual Funds and Bonds. • Check the trading history; demat account balance and bank account balance at any time. • Provide online tool like market watch, graphs and recommendations to do analysis of stocks. • Place offline orders for buying or selling stocks. • Set alert to inform you certain activity on the stock through email or sms. • Customer service through Email or Chat.
•
Disadvantages based):-
of
Online
Stock
Trading
(Website
• Website performance - sometime the website is too slow or not enough user friendly.
• Little long learning curve especially for people who don’t know much about computer and internet.
The insights have been arrived at through an analysis on various parameters, pertinent to the equity broking industry, such as region, terminal, market, branches, sub brokers, products and growth areas.
•
Some key characteristics of the sample 394 firms are:
• On the basis of geographical concentration, the West region has the maximum representation of 52%. Around 24% firms are located in the North, 13% in the South and 10% in the East • 3% firms started broking operations before 1950, 65% between 1950-1995 and 32% post 1995.
• On the basis of terminals, 40% are located at Mumbai, 12% in Delhi, 8% in Ahmadabad, 7% in Kolkata, 4% in Chennai and 29% are from other cities • In the cash market, around 34% firm’s trade at NSE, 14% at BSE and 52% trade at both exchanges. In the derivative segment, 48% trade at NSE, 7% at BSE and 45% at both, whereas in the debt market, 31% trade at NSE, 26% at BSE and 43% at both Exchanges. Majority of branches are located in the North, i.e. around 40%. West has 31%, 24% are located in South and 5% in East. • In terms of sub-brokers, around 55% are located in the South, 29% in West, 11% in North and 4% in East • In terms of various areas of growth, 84% firms have expressed interest in expanding their institutional clients, 66% firms intend to increase FII clients and 43% are interested in setting up JV in India and abroad • In terms of IT penetration, 62% firms have provided their website and around 94% firms have email facility.
(Graph 2) Branches & Sub-Brokers:The maximum concentration of branches is in the North, with as many as 40% of all branches located there, followed by the Western region, with 31% branches. Around 24% branches are located in the South and East constitutes for 5% of the total branches of the total sample.
In case of sub-brokers, almost 55% of them are based in the South. West and North follow, with 30% and 11% sub-brokers respectively, whereas East has around 4% of total sub-brokers.
(Graph 3)
Where one firm looses out to other:• Lack of well established branches put smaller brokers at a disadvantage when compared to larger Brick and Mortar players who have presence in every corner of the country. • Bulk of client base is made up of retail investors. Institutional and other high value high volume investors prefer to trade with so called blue chip brokers. Retail investors are “easy come easy go” accompanied with inconsistent trading habits. In Bull Run they gain confidence to invest but in correction phase they lose confidence easily.
• High competition among Stock brokers has put significant pressure on the prices. • Market consolidation and merger are expected to keep the broking industry viable in the long run. • Demanding customers asks for 24/7/365 access to information and transaction capability. Providing it with minimum overheads is very challenging especially for newer firms who are yet to realize margin of scale.
Foreign banks for a slice of equity business pie In the recent period, global and domestic private equity firms have taken stake in brokerage firms such as Anand Rathi (Citigroup), Edelweiss (Lehman Brothers), Geojit (BNP Paribas), SMC (Millennium India), Motilal Oswal (New Vernon), Network Broking (Amas Bank of Hindu as) and India Info line (Orient Global) etc. Stock Exchange - Business Trends:• Indian Stock Markets And Exchanges:There are 23 recognized stock exchanges in India, including the Over the Counter Exchange of India (OTCEI) for small and new companies and the National Stock Exchange (NSE) which was set up as a model exchange to provide nation-wide services to investors.
• Bombay Stock Exchange (Bse):Bombay stock exchange is the oldest stock exchange of India For the premier Stock Exchange that pioneered the stock broking activity in India, 128 years of experience seems to be a proud milestone. A lot has changed since 1875 when 318 persons became members of what today is called "The Stock Exchange, Mumbai" by paying a princely amount of Re1.
Since then, the country's capital markets have passed through both good and bad periods. The journey in the 20th century has not been an easy one. Till the decade of eighties, there was no scale to measure the ups and downs in the Indian stock market. The Stock Exchange, Mumbai (BSE) in 1986 came out with a stock index that subsequently became the barometer of the Indian stock market. • SENSEX SENSEX is not only scientifically designed but also based on globally accepted construction and review methodology. First compiled in 1986, SENSEX is a basket of 30 constituent stocks representing a sample of large, liquid and representative companies. The base year of SENSEX is 1978-79 and the base value is 100. The index is widely reported in both domestic and international markets through print as well as electronic media The index is calculated on the “Free-float Market Capitalization” methodology. The "Free-float Market Capitalization" methodology of index construction is regarded as an industry best practice globally. All major index providers like NIKKEI, NASDAQ and DOW JONES use the free float methodology. The growth of equity markets in India has been phenomenal in the decade gone by. Right from early nineties the stock market witnessed heightened activity in terms of various bull and bear runs. The SENSEX captured all these events in the most judicial manner. • National Stock Exchange (Nse):-
The National Stock Exchange of India Limited has genesis in the report of the High Powered Study Group on Establishment of New Stock Exchanges, which recommended promotion of a National Stock Exchange by financial institutions (FI’s) to provide access to investors from all across the country on an equal footing. Based on the recommendations, NSE was promoted by leading Financial Institutions at the behest of the Government of India and was incorporated in November 1992 as a tax-paying company unlike other stock exchanges in the country. On its recognition as a stock exchange under the Securities Contracts (Regulation) Act, 1956 The Capital Market (Equities) segment commenced operations in November 1994 and operations in Derivatives segment commenced in June 2000. When India’s National Stock Exchange (NSE) was started in 1994, few believed it would survive. How could a stock exchange run
by a team of untested professionals headed by a former development banker succeed against existing stock exchanges run by third generation, savvy stockbrokers? Critics even went to the extent of warning that NSE’s sophisticated systems would be a misfit in an Indian capital market dominated by physical deliveries, arbitrary speculative trade, and lengthy trade settlements. Today, with number of trades touching 2.5 million a day and turnover touching turnover touching Rs 100 billion in value terms, NSE towers over all the other stock exchanges in the country. In a ten-year period (NSE completed a decade on June 30, 2004) the National Stock Exchange has tilted the market system in favour of investors and away from a significant bias in favour of intermediaries. For a mass of investors across the country, the NSE is now the focal point for trading in stocks, and futures and options. The Stock Exchange, (NSE) came out with a stock index that subsequently became another barometer of the Indian stock market known as NIFTY.
Nifty been the focal point of investors, as it provides trading the shares as well as index in futures and options. Before Nifty came into existence trading of index concept was not present it was introduced by Nifty and is present in it only, till date. Cash Market And Derivatives:National stock exchange gives the investors different option where an investor can deal the equities into different market situations like cash market and derivatives. Cash market is simply the equity market where investors have to pay the security amount which is done in BSE also but in NSE investors has the choice of dealing in derivatives. Derivatives are the future market where investors have the option of dealing in the price list of futures for which there a separate index is present known as NIFTY FUTURE. In Derivatives there are two choices available for an investor FUTURES AND OPTIONS.
•
FUTURE – In future market shares are deal in lots these lots could be of different numbers like 100, 200, 500 etc. Investors while taking over these lots and coming under the contract takes the position of the shares by paying the 1/3rd amount of the total holdings. (Could be understood by a formula).
Holdings of investors = (shares lot * price of the lot) / 3. This formula explains that as investor is interested in taking 2 lots of reliance of 100 shares of Rs. 900 , the investor has to pay:- (2*100*900) / 3 = 60000/ Which shows the investor is taking the position of Rs. 180000/- in just Rs. 60000/- in future market which the area of attraction of this particular market. These holdings are taken for 1 month, 2 months and three months according to the investor’s preference. The beauty of this contract is that the remaining 2/3rd money of the holdings is paid by the broking house the investors dealing with. Investor coming into this contract should know that by the time of contract he is in like of 1 or 2 months
investor should clear its position before the last Thursday of the expiry month.
•
OPTIONS – Option is a contract where the investor has two options to deal with CALL and PUT. The concept of call and put is opposite to each other call is the contract where the investors believe that the market is going to be BULLISH in near future and put option is taken when he thinks that the market is going to be BEARISH in the future.
In the call option investors is benefited if market drives up in future and in put will be benefited if it slips down. • Funds mobilized in primary market rose to Rs 1, 74,143 cr through 558 issues in 2007-08 against Rs 55,654 cr through 451 issues in 2006-07. Out of this Rs 87,029 cr were raised through 124 public and right issues against Rs 33,508 cr through 124 issues in 2006-07. Total of Rs 42,595cr Was raised through 85 IPOs in 2007- 08 against Rs 28,504 cr raised through 77 IPOs in 2006-07. • Net resource mobilization by mutual funds grew to Rs 1,53,801 cr in 2007-08 with a 63% rise from Rs 93,984 cr in 2006-07. Cumulative Assets under management rose to Rs 5,05,152 in March 2008 from Rs 3,26,292 in March2007.
Institutional Structure of the Indian Stock Market Market Intermediaries Stock exchanges Market) Number of Intermediaries as on March 31,2008
(cash 19
Stock Exchanges 2 (Derivative Market) Brokers (Cash Segment) 9487
Corporate Brokers (Cash 4183 Segment) Sub Brokers Segment) Brokers (Derivatives) FII Custodians Depositories Merchant Bankers Bankers to an Issue Underwriters Mutual Funds (Cash 44073 1442 1319 15 2 155 50 35 40
Stock Trading:Traditionally stock trading is done through stock brokers, personally or through telephones. As number of people trading in stock market increase enormously in last few years, some issues like location constrains, busy phone lines, miss communication etc start growing in stock broker offices. Information technology (Stock Market Software) helps stock brokers in solving these problems with Online Stock Trading. Online Stock Market Trading is an internet based stock trading facility. Investor can trade shares through a website without any manual intervention from Stock Broker. In this case these Online Stock Trading companies are stock broker for the investor. They are registered with one or more Stock Exchanges. Mostly Online Trading Websites in India trades in BSE and NSE. Installable software based Stock Trading Terminals. • This trading environment requires software to be installed on investor’s computer. • This software is provided by the stock broker. This software’s require high speed internet connection. These kind of trading terminals are use by high volume intraday equity traders.
Advantages:• Orders directly send to stock exchanges rather than stock broker. This makes order execution very fast. • It provide almost each and every information which is required to a trader on a single screen including stock market charts, live data, alerts, stock market news etc. Disadvantages:-
• Location constrains - You cannot trade if you are not on the computer where you have installed trading terminal software. • It requires high speed internet connection. • These trading terminals are not easily available for low volume share traders.
•
Web (INTERNET) based trading application These kind of trading environment doesn't require any additional software installation. They are like other internet websites which investor can access from around the world through normal internet connection.Below are few advantages and disadvantages of Online Stock Market Trading:
•
Advantages of Online Stock Trading (Website based):• Real time stock trading without calling or visiting broker's office. • Display real time market watch, historical data’s, graphs etc. • Investment in IPOs, Mutual Funds and Bonds. • Check the trading history; demat account balance and bank account balance at any time. • Provide online tool like market watch, graphs and recommendations to do analysis of stocks. • Place offline orders for buying or selling stocks. • Set alert to inform you certain activity on the stock through email or sms. • Customer service through Email or Chat.
•
Disadvantages based):-
of
Online
Stock
Trading
(Website
• Website performance - sometime the website is too slow or not enough user friendly.
• Little long learning curve especially for people who don’t know much about computer and internet.
