Emergence of e-broking

Krishnan Thiagarajan

THE democratised world of online trading (also called e-broking) is slowly attracting investor fancy in India.

Advertisements in the print and electronic media have raised curiosity of the investor, as slowly, the mechanics of online trading are also sinking in.

A small beginning

Compared to the Western countries, online trading is still in its infancy in India. With trading turnover at around Rs. 10 crores per day from online trading compared to a combined gross turnover of around Rs. 9000-10,000 crores handled by the BSE and NSE together, online trading has a long way to go. With some ten dotcom players, such as icicidirect.com, investsmart, 5paisa.com, indiabulls, and a host of brokers, such as kotakstreet, sharekhan, motilaloswal, Geojit Securities and duttstock, entering the online ring promises exciting times ahead.

The following issues are crucial in the selection of an e-broker:

Does brokerage matter: The starting point for individual investors examining the various online trading schemes is obviously the brokerage rate. In a competitive marketplace, can brokerage be a key differentiator among different schemes offered by e-brokers? Evidence on brokerage rates seems to suggest that this differentiator may be of limited value to most investors. For instance, icicidirect.com, as the first entrant into e-broking, charges the highest brokerage (for delivery transactions) at 0.85 per cent per trade. It is followed by InvestSmart which charges 0.75 per cent. However, late entrants such as 5Paisa.com, sharekhan and kotakstreet.com all charge 0.25 per cent of the transaction value for delivery-based trades.

Clearly, the pattern of entry into e-broking shows that ``brokerage and associated costs'' can be the differentiators only for a while. icicidirect.com as the first entrant, has touted itself as the first integrated e-broking service provider in the market. Though its brokerage charges are higher than its peers, it has positioned itself as the only player to have online broking, banking and depository interface in one module, to offer a fully integrated online trading experience.

Players such as SSKI's sharekhan, which launched their scheme in July, have tried to steal a march over icicidirect.com by introducing a flat fee product of Rs. 1,000 per month. This trade-as-much-as-you-want scheme was an innovation targeted mainly at frenzied day-traders.

But even this innovation gave sharekhan only a small headstart over its peers. kotakstreet.com, which launched its e-broking services in August, not only halved the flat fee from Rs. 1,000 to Rs. 500, but also allowed short sales and offered clients the option of trading against securities up to three times sales marked for delivery.

Clearly, innovation offers limited scope for it is a matter of time before almost all the schemes offer more or less identical features. Depending on the client's risk profile, preferences and requirements, each client may have to choose the different schemes.

Is click-and-mortar the best bet?: As online trading is still at a nascent stage, practically all the major players which have set up e-broking outfits, aim at achieving two objectives. One, to broadbase the overall trading of investors, while holding their existing clientele intact. Two, most established e-broking outfits, such as icicidirect.com, investsmart (an IL&FS initiative) and kotakstreet.com, are using their brick-and-mortar presence to encourage investors to go online. Given the poor connectivity and Internet infrastructure, most e-broking majors are trying to raise the comfort level of the investors by assuring them that even if the Internet order-routing system breaks down, or investor access is broken for any reason, online registered investors can always exercise the option of putting through their orders offline.

As this combination is still a new concept, most investors will be better off clarifying how the offline environment will operate, if the online environment fails for any reason. For the investor, the important thing is to ensure that this switch from online to offline is seamless and that there are no associated hidden costs.

Clearly, from an investor's viewpoint, ``click-and-mortar'' approach to investing may be the best bet till the online trading market matures in terms of technology, infrastructure and service to become a self-sustaining business proposition. At this point in time, for most e-broking majors, the brick-and-mortar brokerage outfit is likely to subsidise the investment in online trading technologies and further in the ongoing/recurring costs. Unless the online trading volumes increase dramatically to 10-15 per cent of the total trading volumes (or at least 20 per cent of the gross turnover of the BSE and the NSE), the brick-and-mortar outfits will continue to dominate.

Investor checklist for online trading: The investor checklist is mainly a trendspotter's guide to the selection of an e-broker. With most online trading outfits still forging agreements with payment gateways for online banking and with depository participants for online demat, it may be too early to differentiate the grain from the chaff among e-brokers. But the investors' checklist still looks at aspects that are expected to acquire prominence as online trading catches on.

The pedigree of the e-broker: The pedigree of the e-broker is important as that is likely to identify the serious players. Going forward, consolidation is inevitable even in this industry and when that happens, online trading sites such as icicidirect.com, investsmart and kotakstreet.com with a good pedigree have a much better chance of survival than the stand-alone sites such as 5paisa.com and Indiabulls.

Technology and back-.office infrastructure: In these early months, online trading is likely to attract a host of entrants as India has already seen so far. But the key differentiator will be the investment in technology and back-office infrastructure. Even if small-time e-broking outfits make the initial investments in technology, the recurring expenses, which would also be high, may prove to a burden in the long run. For investors looking at online trading from a medium-to-long-term perspective, sites with deep pockets and a pedigree will be a good choice.

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Quality of service and security: As the industry quickly consolidates and technology gets standardised, the quality of service will be the key differentiator. From an investor's perspective, in the initial stages holding at least two online trading accounts with two different outfits will be prudent in the long run. Basically, this will help the investor evaluate the quality of service and ``security-related issues'' (say, in terms of 128-bit encryption or privacy/confidentiality in access), between two outfits. In the long run, depending on the service levels, the investor can switch to the better player.

Integrated package: Currently, only icicidirect.com offers a seamless 3-in-1 package of broking, banking and demat accounts. This effectively means that through the click of a mouse, an investor can buy and sell shares, and forget about the paperwork involved in settlements and transfer of shares or money. The rest of the players are also putting such an integrated package in place, but icicidirect.com has a headstart as the others may be able to offer an seamless online trading experience only after an independent payment gateway (which provides connectivity between different banks for online banking) is firmly in place.

However, the existing online trading system suffers from a major lacunae. icicidirect.com currently offers online trading services only to investors who have a bank or a demat account with ICICI. Or, investors can open an online trading account with kotakstreet.com only if they open a demat account with Kotak Securities and have a bank account either with Citibank, HDFC Bank or Global Trust Bank. If investors do not have these accounts, they have to go through the entire rigmarole of opening up the bank and demat account again for easy operation. Apart from the hassles involved, there may also be certain extra charges involved in this exercise that may have to be built into the overall cost of online trading.