The mystery behind Transaction/Turnover/Other charges by Indian Brokerages

Fellow Traders & Investors,

If you visit comparebrokerages and check out “Turnover charges” under the heading “Transparency and other costs”, you will realize that these charges vary between brokerages. Have you ever wondered why the difference? Or have you never ever seen this charge on your contract note? Have you looked at your contract note in the first place, most traders don’t, have you?

Are you paying extra as transaction charges that you are not aware of? 

Find below a comparison table, and see how the turnover charges seem to be different. Turnover charge is something a brokerage charges over and above the brokerage charges.

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Some things you need to know: To become a brokerage on the exchanges, you have 4 kinds of memberships: Trading membership,Trading cum self-clearing membership, Trading cum clearing membership, and Professional clearing membership.

Trading member: A Trading member is one who can trade on his own account (self) and can have his own clients trading through him on the Exchange.

Professional Clearing member:  This category of membership allows the member to clear and settle trades of such members of the Exchange who have chosen to clear and settle their trades through this member.

Clearing & Settlement is the process of identifying the payable/receivable by each trading member of the Exchange and then making an actual settlement of such payable/receivables.

Clearing fees: The trend over the last few years of obtaining membership at Exchanges has been that of becoming only a Trading member and then utilizing the clearing services of a Professional clearing member. This is quite logical in the sense that it reduces the risk and the operational costs of a trading member along with the necessity to maintain a higher amount of net worth as desired by the Exchanges for a clearing member. The Professional clearing member charges a certain amount of fee for offering this clearing and settlement service and this is labelled “clearing fee”.

Exchange Transaction charges: If you are wondering how the Exchanges (NSE, BSE, etc.) earn revenues, it is by way of levying ‘Transaction Charges’. Transaction charges are collected by the Exchange from the Trading member, who in turn collects it from his clients for the trades executed by such clients. Exchange transaction charges are the same for every brokerage.

Here’s some interesting trivia for you. Did you know that NSE is the most profitable Indian company in terms of number of people employed to profits made? NSE’s profit for the year 2013-14 was a whopping 1000 crores!

Brokerage: This charge is charged by your broker and it is very likely that you would have been informed of such a charge at the time of your account opening.

Most traditional brokerage firms don’t share details of any of the charges on their website, but there is breath of fresh air with the new age ones being completely transparent about their trading costs by displaying them prominently on their website.

To summarize,

Transaction/Turnover/Other Charges = Exchange Transaction Charges + Clearing Fees

Brokerages which clear their own trades (Trading cum self-clearing members) are not allowed to have any clearing fees. For example, most banks who are brokerages clear their own trades, and hence you will find that their transaction charges are basically just what the exchanges charge. Check the image above for HDFC Securities. You will also see that Unicon securities charged quite a bit more, practices like these lead to Unicon having to shut shop.

Brokerages have gotten away by charging you excessively in the name of clearing fee. In reality, the clearing fee that the brokerage firm would be paying to the clearing member would be way lower than what he is collecting from you in the name of clearing fee. You may be under the assumption that you have gotten yourself a very good deal with the broker charging you low brokerage but they might be charging  higher ‘Transaction charges’.

Here is what we think should be the ideal range for charging clearing fee. This range has been arrived at after having worked with a professional clearing member. Ideally, you would want your broker to be in the lower half of this range.

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Light at the end of the tunnel? 

SEBI, the regulator for the Indian financial markets identified this practice followed by brokers and has taken corrective measures by way of a regulation which stipulates that all brokerage firms are now required to charge only as much clearing fee that they are paying to the clearing member and not charge any random arbitrary inflated number. This along with the new Common contract note regulation is applicable from August 1, 2014. You can find details of the circular issued by NSE  here.

So, if you now find the total transaction charges you are paying to your broker to be more than the sum of Exchange charges and Clearing charges as mentioned in the table above, you can complain to the Exchanges giving details of the same and you can rest assured that these charges will be reduced. This regulation, thanks to the Exchanges and SEBI gives more power to the retail investor and trader on the Indian capital markets.

Empowering Indian retail investors/traders,
Comparebrokerages

 

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Hello traders & investors on Indian exchanges

Hello Friends,

I have traded, worked, and consulted for a few of the biggest brokerage firms in India and have also spent some time researching to put up our website Comparebrokerages. I intend to bust many myths that you as a retail trader/investor might have on the entire broking system in India. 

The idea is to also make sure that you are aware at all times on what is happening at your brokerage.

  • Know if there is an option where you can switch for lower costs.
  • Track the financials of your brokerage to ensure that if they are in trouble as a business, you can take necessary action.
  • Know about all the hidden charges.
  • and a lot more…

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