SEBI’s “true to label” circular

July 2, 2024

The impact of SEBI’s new transparent pricing circular on the broking industry.

SEBI recently issued a circular stating that market infrastructure institutions (MIIs) have to be “true to label” in the charges they levy from October 2nd, 2024. This circular has an impact not only on brokers but also on trading and investing customers. So in this post, I explain what it means and how it affects you, the customer.

Stock exchanges charge a transaction fee based on the overall turnover contributed by a broker in a month. The more turnover, the lesser the transaction fee. You can see the latest slab-wise transaction charge charged by NSE here. The difference between what the brokers charge the customer and what the exchange charges the broker at the end of the month is a rebate. Such rebates are common across the major markets in the world.

In the US, brokers earn by selling the order flow to one of the thirteen exchanges or a dark pool. The decision on where the order is sent is typically determined by the payment, and dark pools offered by High-Frequency Trading firms win that race.

We earn about 10% of our revenue from these rebates. This could range between 10% and 50% of the revenue for other brokers. For us, this has increased from ~3% to ~10% in the last four years because of the increase in options turnover. Today, 90% of our revenue from these rebates comes from options trading alone. With the new circular brokers will no longer earn these rebates

Increase in options trading turnover

As you can see, options trading turnover has increased significantly in recent years, and so have the regulatory concerns associated with it. 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.

By the way, I think the key reason for the drastic increase in options trading turnover is the restriction of leverages on intraday trading instituted in 2020. Unsurprisingly, traders seeking leverage ventured into options trading in no time.

Potential impact

Since 2015, when we went 0 brokerage on equity delivery, we have subsidised equity investments with the revenue from the F&O trading activity. This structure could now potentially change. As a business, we may have to introduce a brokerage fee for equity delivery investments, which is currently free, or/and increase F&O brokerage.

This becomes all the more important given the big uncertainty around the future of F&O trading volumes. We are still trying to ascertain the second-order effects of the circular. In all likelihood, we will probably have to let go of the zero brokerage structure for equity delivery trades which we have been able to offer for the past 9 years. We are one of the few remaining brokers offering free delivery trades. Many newer brokers who started out with free delivery trades have started charging a brokerage in the last couple of years.

As I indicated earlier, this is a substantial change that will have a significant impact on the financials of all brokers. All brokers may be forced to tweak their pricing models to adjust to the new reality in a few months. The hope with this circular is that the exchanges will pass the benefit to customers by charging the lowest slab. So, an increase in F&O brokerage shouldn’t be of any impact.

If you have any questions, post them on this thread on TradingQnA.

Founder & CEO @ Zerodha


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18 comments
  1. Amitabha says:

    In case the brokerage for delivery / cnc / positional trades are increased to maximum Rs 20/-, i.e. at per with current and existing Intraday and FNO brokerage charges (Rs 20/- for both Buy and Sale sides), I will opt for closing my Zerodha A/c and shift to any broker who would take lesser brokerage in delivery trades. As per my opinion, yes…. for your sake you may start levying brokerage in delivery / cnc trades; but max limit of that must not exceed Total Rs 20/- (Rs 10/- for both Buy and Sale sides) ….. That means even if you start charging brokerages for CNC / Delivery trades, the brokerage charges must remain half the charges currently applicable for intraday and fno trades.

  2. Raj says:

    Hi Nitin,
    I clearly don’t understand your point, maybe I need to have one on one conversation to understand this.

    But, What I understand from your long explanation is that you are willing to forego the 0 Brokerage on delivery trades.

    As far as Increasing taxes on f&o trade is concerned, I believe its a good thing.
    Reason being, let me give you a little stats as far as I remember, The trade in equity vs options ratio in India is much more then any developed country in the world. {I AM AVOIDING QUOTING THE NUMBERS AS THE ARTICLE IS NOT ACCESSIBLE TO ME AT THE MOMENT}.
    And this is really alarming, and that need to be checked. You pinpointed a great observation that after restriction on leverage, the volumes have increased. I agree with this.

    Now, for the earlier part of 0 brokerage, I would like to inform you that 0 brokerage on delivery is what we used to do as word of mouth for your promotion.
    If you stop this many traders like me will eventually move to some other alternative.

    So ponder over this idea. And try to find a balance. Lately, the number of outrages at kite has increased significantly in the recent past which is alrming too.

    Rest assured, you are smart, you established a profitable business and running it successfully for the last 9 years.
    I am one of the few who received an early email invitation of yours.

    Think.

  3. Harish Chandrakant Mayekar says:

    Dear Sir,
    What about us, I am full Time Option Trader & I have Lost My Job, my family depends on share market income to fulfill our daily Needs, from Last 2 Years I made huge losses & In between SEBI increase Taxes & Now Broker will increase Taxes from us, so how can we tackle in Our daily Needs?
    Please we don’t want to pay higher brokerage….

  4. Zerodha User says:

    Hi Nithin and Team

    I joined you guys in year 2017

    The time when full-time broker doesn’t provide live data feed for charting software and we have to take a subscription by paying them extra and above it sky high brokerage and charges for trade.

    Back then very few discount brokers were their and zero advertisement for discount broking.
    Searching on quora on how to pay less brokerage and saw your many post that you posted related to zerodha and services.

    Pi trading software, man you provided some heavy tools to use for retail trading back in time, many of the post covid market participants unaware of it.
    But you brought the breakthrough products in Indian market for retailers.

    Then Level 3 depth data, where a retail can see upto 20 bids and ask

    You increased the standards of trading in India and just because of Varisty courses, many youtuber/fin-fluencer running their shops till day.

    It was a great run till day with you and your team

    And its a hard time for both brokers and Traders as well

    So don’t hesitate to pull the string, eventually we all gonna take a hit either by paying for delivery or paying more in F&O segment.

    It was a great run Nithin with many market up and down.

  5. Gaurav kumar says:

    Once upon a time Late Mr Dhirubhai Ambani told , “ If you want to do buissness always look at the last Man. But post covid u discount brokers have changed the game,” u discount broker s always look at yourself, but it is not wrong in the “LAW OF NATURE “ but I think it will certainly make u rich with land and’s gold but may not give u mental peace. Which is going to impact your health. And also if u want to look at last man, always look at the price of last strike of the option chain of index option chain, and if the last strike is unable to become “IN THE MONEY CONTRACT “ u r making huge loss of ur health but certainly make wealth. I mean to say for example say nifty future is trading at 24000 and the last strike is 26500 and price is Rs 1 and if a trader buys it and before expiry if nifty does not surpass26500 than u r losing huge health. U people r doing just opposite to what Late shri Dhirubhai Ambani once said.

  6. Gaurav Kumar says:

    I am not very sure about this but I think what discount brokers are doing to earn money, in a post Covid scenario,using machines is equivalent to doing sucide , discount brokers can increase their span life, if sebi mandates exchange to charge brokers on per contract/lot basis for every index and stock options contract. For example say Rs 1 or 2 or so per lot.

  7. RAAK says:

    Hope good for investor.
    Sebi directed exchanges and other market infrastructure institutions (MIIs) to implement a uniform and equal fee structure for all members, instead of different fees based on their size or activity.

  8. kedar Sarang says:

    I think the era of free brokerage is progressing toward its End Phase. Start Brainstorming toward a better product that offer high quality platform such as Tick-By-Tick data, High End Reliable Trading Software etc. If you go with above approach as a business, you will lose your client based left and right. I think we are ready to opt for subscription-based plans. But if You think charging us for equity delivery is a way to sustain in broking industry then might as well change your business name. ZEROdha is meant for ZERO Brokerage

  9. Rahul says:

    As we know this measure is to reduce retail participation ask SEBI to make regulation like mandatory certification on derivative trading so that people are knowledgeable about what they are doing. SEBI should not do nanny sitting if I decide to trade. People lose money even in equity trading will they close stock exchanges
    Also why would you kill the options traders by charging them more….charge them what you pay to exchange…make you money by charging them a flat monthly fee. Same can be done for delivery based trading or create combo packs for delivery n options trading based on the transactions… something similar to talktime models of telecoms

  10. Saurabh says:

    Hi Nithin,
    Your profit (revenue – cost) for last FY was more than 1200 crores. I mean how greedy you and other brokers are. Look at other startups , they are barely break-even, and you want all of it. It’s a good initiative and I support SEBI to help retail investors like us. Don’t think that we don’t have a choice, soon new startups will emerge and provide better service than your platform at more competitive price .

  11. Kajal Das says:

    Under any circumstances zerodha sh not start charging brokerage on equity deliveries..or else its nomenclature will become contradictory and many customers including myself will be pulling out..instead balanced increase in F &O charges n if still needed,marginal increase of AMC fees can be considered

  12. Vamshi Kumar says:

    Hey kamath bro, don’t increase the delivery charges, please increase fno charges because derivatives are the one sebi want to regularise not equity delivery, if u do so like that u may loose equity clients like me 💯💯💯👍🏻👍🏻👍🏻

  13. Sujan barman says:

    I think you should give us a option of Yearly subscription. It could be 8k-15k or as you think.

  14. Akhilesh says:

    Will need to too how much your prices increase and then compare and go with brokers which provide best value.
    Especially with all the problems that Zerodha has been having in peak trading hours.

    Don’t want to pay higher brokerage and at the same time have a sub par performance.

  15. Manish K says:

    I would like to know what is the objective behind this amendment by SEBI. What is SEBI trying to achieve with this? Is SEBI giving the same salary to all employees or are we paying the same income tax if we earn more? It is not a hidden commission that the brokers get. It is their work and volume that earns them a bonus.

  16. Deeraj says:

    Zerodha known for zero brokerage. Don’t charge for equity and may increase for derivatives

  17. Subhadeep Gayen says:

    Yea sure , keep increasing, who cares, we have many other options

  18. Arvind Dureja says:

    I was very disappointed to read this article. My entire family will have to switch to a different broker (probably with Banks) if you start levying brokerage on delivery trades.