Discount Brokers See Drop In Activity As Volatility Spooks Retail Investors

As the number of demat accounts continued to rise in June, monthly active users fell to the lowest this year, spurring concerns for discount brokers targeting retail investors.

“Discount brokers have been luring traders. They have onboarded a lot of first-time traders who do not risk in turbulent markets," Deven Choksey, managing director of KR Choksey Holdings Pvt. told BQ Prime. "Unlike long-time investors, these retail players stay away from turbulent markets due to risk of higher losses leading to reduced activity in lean markets."

The resumption of work from office may be another reason for the decline in online trading activity as people dabbled in stocks as they worked form home, according to Choksey said. Since offices have resumed active trading is no longer possible, reducing the trading activity by around 20-25%, he said.

"Only a turnaround in the market sentiment could bring back better times for discount brokers."

Waning interest among retail investors coincides with market volatility stoked by the pandemic and the global energy crisis triggered by Russia's invasion of Ukraine. India's benchmark Nifty 50 has fallen nearly 9% year to date. That's reflected in slower addition of new demat accounts.

Total demat accounts were around 9.7 crore in June. But the pace of addition fell the slowest in the year in June.

The number of Indians participating in the capital markets has fallen below one crore on the national stock exchange, the Reserve Bank of India said in its financial stability report 2022. This come off the January peak.

This mismatch in demat account numbers and monthly active users could be attributed to multiple factors, according to Prakarsh Gagdani, chief executive officer at 5Paisa Capital Ltd.

A lot of people now keep two demat accounts since it is very easy to open such an account to hold securities in an electronic format, he told BQ Prime's Niraj shah. "If you can you take out those duplicate ones, the number may come down a bit."

Retail turnover is also down from over Rs 40,000 crore on NSE cash to around Rs 20,000 crores in June. "We are almost half in terms of turnover."

This, he said, could be due to initial public offerings like LIC, mid and small -caps going down and the overall market activity not offering returns that were seen in the last two years.

And millions of people who entered the market last two years were first-timers. "Now they are experiencing this entire thing--the last four months of bearish markets for the first time in their life," Gagdani said. "Their reaction would be very different from a seasoned player. When a person starts new, he would retract a bit more faster because he's used to good returns."

This fall in number of monthly active users maybe a temporary impact of the market gone sour, he said.

Total industry active user clients in June rose to 3.8 crore, a jump of 70% year-on-year and a marginal increase of 0.8% over the prior month, according to the National Stock Exchange's activation data. Sequentially, most of the discount brokers grew at faster pace than traditional brokers.

While the cash market turnover has gone down in the past couple of months, the reading for derivatives has risen consistently, Gagdani told BQ Prime.

With the peak margin circular getting implemented last year, the trading turnover shifted from cash to derivatives, he said, referring to rules that mandate collection of minimum margin from clients upfront. 50-60% of the cash segment turnover now is purely delivery driven, which goes up and down with market movements, he said.

Derivatives is non-seasonal and "you can trade in every type of market", Gagdani said. For the first time, he said, that there is no correlation between the turnover between these two cash and derivatives segments.

"We are also seeing a good amount of retail customers participating in derivatives," said Gagdani. Earlier, the derivative turnover was largely towards institutional and and large retail customers like the high net-worth individuals, he said.

Choksey attributed participation of retail investors in options to algorithm-based trading. In the past, he said, non-institutional investors did not have the resources to trade on a part with institutions or HNIs. But algorithm-based trading services providers have changed that.

“Traders have been deploying funds into algorithm-trading strategies which are operated by professional service providers who trade on their behalf, thereby leading to a growth in volumes in retail futures and options,” he said.

Gagdani said 5Paisa Capital has seen a 15-20% drop in the new client activation from the quarter ended March. "There's a demand drop, traffic drop on the website and the app, since it's very difficult to figure out what markets will do in the near term."

However, he said, this is a cyclical business. When the tide is good, they put money in but it's also important to control costs during volatile times, he said referring to its business. "We are a digital business, so we believe in keeping less of fixed cost." The focus, he said, will be on improving efficiency in terms of cost for the next one to two quarters.

"I'm really optimistic about this year. A lot of people are saying that it's going to be a bad year," Gagdani said. "[But] from an activity perspective, it is not going to be a bad year, it will be an average year. Why? Because if you consider 2021, it was very good so this year would be an average."