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.

compare2

 

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.

compare3

 

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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Comments

  1. Never knew there are so many ways for brokers to make money ! Scam alert ! Thank you though for giving out this piece of information.

    Reply
    • Manish, there was no regulation for this until now. Don’t think you can do anything much about the past, but yep if you are still being charged the same, you can definitely demand for a refund (from August 1st onwards).

      Reply
  2. Hi all,

    Actually exchange charges are not fixed, based on the turnover of the member they will charge 190 to 170 Rs/crore. usually big broking houses get benefit form the incremental charges, but they don’t extend it to retailers.

    Cheers.

    Reply
    • I don’t think it would be fair to expect that benefit, the reason being this reduction will always be in hindsight. So for example, more turnover for the last month won’t guarantee higher turnover for this month, and hence the brokerage can’t really charge lesser for this month and end up paying more.

      Reply
  3. Pingback: The mystery behind Transaction/Turnover/Other charges by Indian Brokerages - indiTraders - Forum for the Active Indian Trader

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  6. åh gud lige lige og læser på bloggen og ser en der hedder det samme blive skældt ud troede lige det var mig der havde skrevet noget slemt. for det kunne jeg ikke finde på ELSKER at læse på Maschas blog og synes hun er skøn og gør det super sorry det kunne jeg ikke finde på

    Reply
  7. I think jose and Anh Tu are related by mutual scum spit. They have same rhetoric without any truths in their comments. Should file for the marriage license before Nov. 4th election.Wait, Janet’s recount lawyers might come to rescue gay’s marriage ceremonies!

    Reply
  8. ” I cannot claim to believe that it was ‘planned’”Dept of Education models were formed & designed for students to fit in an industrial/assembly line world. planned to a degree, maybe not sinister.but in any case, it was designed to give people one trait/task.you take them away from that one trait/task… they bumble.. can’t think, and give you the deer in the head lights look.I might not be to clear with my typing, enjoying a glass of wine right now:)SAS

    Reply

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