Foreign brokerages edge out locals

Foreign brokerages are swarming into India sending several local entities to the wall as the white heat of competition crimps margins that have already been mauled by the sharp fall in trading volumes. Many Indian outfits have shut down shop; others are scaling down their business or taking a hard look at their business model. Several big boys of global finance have beefed up their trading desks in India over the past few months, including Barclays and Jefferies, a US-based full-service securities and investment-banking firm. A slew of boutique brokerages from countries as diverse as Portugal and Korea have also waded into the Indian market. Market sources say the newbies who are keen to expand their role in the sub-continent include Portugal’s Esprito Santo and South Korea’s Samsung Securities and Mirae Securities. The upshot of this is that several local brokerages such as Mangal Keshav Securities and Alchemy Share and Stock Brokers have had to shut down their arms catering to the institutional business. Unconfirmed reports indicate that many other homegrown outfits that had sprouted in the past decade have started to trim their head count as they wilt in the heat of the competition. Faced with cutthroat competition and the slump in trading volumes, local entities are under pressure to raise compensation packages, including bonuses for the talent that operates their trading desks. The tough plight of the domestic brokerage houses was evident in the first quarter of this fiscal when most of the listed financial service entities reported lower income from the broking business. The slide has been triggered by the 14 per cent decline in the average daily market turnover on a sequential quarter basis. The turnover is down both in the cash market and the futures and options (F&) segment. Brokerages are worried because the turnover in the cash segment —, which has always been more profitable and remunerative — has fallen sharply.  Even as the share of the cash segment has declined, options now constitute a major share (over 65 per cent) of the market volumes. This segment gives very low yields to brokerage firms. The presence of a number of players in the segment has also affected brokerage rates, which are at abysmal levels. The margins in the brokerage business are as bad as the telecom sector where market leaders have to fend off an extremely aggressive bunch of new players. However, industry experts aver that brokerage houses are not in a position to raise rates like the telecom sector, where tariffs were increased recently.