Broking Business Will Only Get Stronger in the Future: Here's Why

Introduction  

The stock broking industry in India has seen remarkable growth over the past few decades, transforming from a largely traditional market into a tech-driven powerhouse. The history of stock broking in India dates back to the early 19th century, but modern broking has evolved rapidly with advancements in digital platforms and online trading. 

Today, stock brokers in India offer various services, from basic trading to advanced investment solutions. Understanding what stock broking is crucial, as it involves buying and selling securities on behalf of clients. With the rise of online trading platforms, there are now several types of stock brokers, ranging from full-service to discount brokers. As we look ahead, the future of the stock broking industry in India seems promising, with a tech-savvy population and growing interest in the equity markets.

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Table of Contents

1. Introduction  
2. Impact of Discount Brokers and Zero Brokerage Models
3. Changing Investor Behavior in India and Globally
4. Regulatory Support and Market Expansion
5. Future Outlook – Why Broking Will Only Get Stronger?
6. Now they are shouting the “ASBA Wolf”
7. Separating execution and advice
8. Broad-basing their offerings
9. Do not forget the Indian macro sweet spot

Factors Driving Broking Business Growth

Technological Advancements: The rise of online trading platforms, mobile apps, and real-time data access has made investing more accessible and convenient for retail investors.

Increased Market Awareness: With financial literacy initiatives and a growing interest in wealth management, more individuals are actively participating in the stock market.

Regulatory Support: Government policies and regulatory reforms by SEBI (Securities and Exchange Board of India) have made the market more transparent and investor-friendly.

Democratization of Investments: Discount brokers and low-cost trading options have made it easier for individuals with smaller budgets to enter the market.

Rising Disposable Income: As India's middle class grows, more people have disposable income to invest, contributing to a surge in stock market participation.

Impact of Discount Brokers and Zero Brokerage Models

Lower Costs for Investors: Discount brokers and zero brokerage models eliminate or drastically reduce trading fees, making investing more affordable for retail investors.

Increased Market Participation: The reduced cost barrier has encouraged more people, especially young and first-time investors, to enter the stock market.

Shift in Broker-Client Relationships: Traditional full-service brokers, who offer personalized advice, are facing competition as discount brokers focus on self-directed, cost-efficient trading.

Focus on Technology and User Experience: Discount brokers invest heavily in user-friendly platforms and mobile apps, attracting tech-savvy investors looking for convenience and speed.

Impact on Broker Profitability: While discount brokers thrive on high-volume trading, traditional brokers may see a squeeze in margins and need to adapt by offering additional services or competitive pricing.

Changing Investor Behavior in India and Globally

Increased Digital Adoption: Both in India and globally, investors are increasingly turning to digital platforms and mobile apps for trading, making investing more accessible and convenient.

Rise of Retail Investors: The pandemic-driven shift to online trading has led to a surge in retail investors, especially younger generations, entering the stock markets.

Focus on Long-Term Wealth Creation: Investors are now more focused on building long-term wealth rather than short-term speculative trading, driven by financial literacy and awareness.

Interest in ESG Investments: Globally, there’s a growing trend toward investing in companies that prioritize environmental, social, and governance (ESG) criteria, with Indian investors also catching on.

Shift Toward Passive Investing: With the rise of index funds and ETFs, both Indian and global investors are increasingly choosing passive investment strategies over actively managed funds.

Regulatory Support and Market Expansion

Investor Protection Measures: Regulators like SEBI have introduced stricter norms and transparency requirements to protect investors and build trust in the market.

Ease of Account Opening: Digitization of KYC and simplified processes have made opening demat and trading accounts faster and more user-friendly.

Introduction of New Products: Regulatory approvals for instruments like REITs, InvITs, and derivatives have expanded investment choices and market depth.

Support for Fintech Innovation: Regulators have encouraged the growth of fintech in broking through sandbox programs and flexible licensing, fostering innovation.

Increased Market Accessibility: Reforms such as extended trading hours and onboarding through UPI have helped expand retail participation across India, including in Tier 2 and Tier 3 cities.

Future Outlook – Why Broking Will Only Get Stronger?

Technological Advancements: With continued improvements in AI, machine learning, and blockchain, trading platforms will become faster, smarter, and more secure, making broking even more efficient.

Rising Financial Literacy: As more people learn about investing, the number of retail investors is expected to grow, expanding the market for broking services.

Democratization of Investment: The shift to discount brokers and zero-commission models will make investing more accessible to a larger, diverse set of investors.

Government Support: Ongoing regulatory reforms and initiatives like financial inclusion programs will continue to foster growth in the broking industry, ensuring a stable and growing market environment.

Global Integration: As Indian markets become more connected with global exchanges, there will be greater opportunities for investors, boosting the demand for broking services both locally and internationally.

Now they are shouting the “ASBA Wolf”

With SEBI announcing the extension of the ASBA (Applications Supported by Blocked Amount) facility to secondary markets, sceptics are back once again. There are already those who feel that there is trouble for brokers. In an interesting conversation, Rashesh Shah of Edelweiss, one of the most respected names in the Indian financial services industry, has predicted good times for brokers. According to Shah, the broking business will get bigger over the years due to volumes rising as well as the consolidation of niche advantages. What does the future hold for stockbrokers?

Separating execution and advice

One big change that has happened in the broking industry is the clear demarcation of execution and advice. At one end, there are discount brokers with automated order execution systems. The focus is on speed, technology, and reliability. There is no advice or hand-holding, and traders and investors are largely on their own. Like, elsewhere in the world, even in India, there is a huge market for pure execution at low cost. 

The full-service brokerages must not only offer a value proposition, but also quantify it and communicate it to the clients. These could include much beyond calls and recommendations. It must cover offerings like wealth management, tailor-made financial solutions, hedging strategies, etc. As the markets get more complex, an alpha will get tougher. That is where the full-service brokers will have an opportunity to distinguish themselves. In the US, just as you have Robinhood and Charles Schwab at the entry level, there are also private banks like Citi and Bank of America at the upper end.

Broad-basing their offerings

As Rashesh Shah says, to survive and thrive in the broking industry for the next 10 years will need conviction, adaptability, and staying power. In a way, they are all related. Brokers will see a lot of front-ending of investments in areas like technology, platforms, artificial intelligence, quality advisory, high-end conten,t etc. 

The payback would be longer, and that is where staying power and conviction will come in handy. Brokers must also diversify and de-risk their business models by offering the full gamut. That includes equities, mutual funds, bonds, derivatives, private equity, wealth management, advisory services, digital services, bankruptcy-related services, etc. 

Do not forget the Indian macro sweet spot

With the recent pause on hawkish interest rate policies by the RBI, the consensus is that India would be closer to the upper end of the interest rate cycle. That would mean the challenge of cost of funds should now plateau, if not reduce immediately. Now comes the opportunity matrix. If India were to become a $5 trillion economy by 2028 (as is very likely), then the financial services segment has to play a pivotal role. Brokers have to play a catalytic role, although the broking industry of the future may not be as simple and as innocent as the broking industry of the past.