How Technology is Transforming the Brokerage Industry


In the old-age, brokers used to dominate the exchange. Gradual formalization in the capital market led to the entry of traditional brokerage firms whose main value propositions were in-house research team and personalized customer service. During 2000-2005 trading was limited to a few set of informed and institutional investors. However, technology has transformed the way we used to access information. Growing internet and smartphone penetration has made information easily accessible by everyone. Hence the USP claimed by traditional brokerage houses to have an in-house research team has faded over the last couple of years. The introduction of derivative instruments and the development of trading infrastructure has improved the participation of retail investors.

Earlier brokerage on equity trading was fixed. Hence brokers competed on customer service and relationship. After most of the countries implemented negotiated contracts by 80s, brokers started competing on commissions which accelerated over the last ten years. Electronic trading has dramatically increased the trading volume and liquidity, which has reduced the dominance of brokers.

Gradual reduction of commission due to ongoing competition has finally given birth to discount brokers like Robinhood, TradeStation Global and Firstrade. Being a complete tech-driven platform, they can operate with substantially less overheads seeing a significant reduction in fees. As discount brokers facilitate trading anytime and anywhere through their smartphone apps, they have been able to grab a substantial market share quickly. Even a situation like COVID has worked in their favor as investors can open the trading account and start trading all through their smartphones. Most of the discount brokers have seen a surge in new account openings from March 2020 onwards.

There is a race to zero everywhere and even traditional brokers are also coming up with ‘Lite’ plans to stop their customers switching to discount brokers.

Some of these platforms had been charging average commission as high as up to $7 per trade. Switching to zero club had an immediate impact on their market cap, which dropped around 10-30% in one day due to an anticipated reduction in future revenues.

How does a discount broker survive by providing zero commission trading?

Discount brokers are able to survive because there are different other sources contributing to their top line. First is Float Income, where brokers earn interest income on the idle balance lying on investors account. Second is Payment for order flow, exchanges’ main source of income is from selling data feed. So, to generate more transactions and better quality data, they offer rebates to brokerage firms to attract order flow. Third is Securities Lending, in the US stocks are held by the brokers which gives them a right to lend them to people looking to short stocks or borrow for various trading strategies.

A. Monetizing the surge in derivatives volume
Discount brokers have kept equity trading free but charge a fixed fee on derivative trading. The reason is simple; derivatives form a significant share of trading volume, which is growing at a faster pace. Even a nominal fixed fee will have a considerable impact on overall revenue. In 2019, global derivatives volume rose by 13.7% to reach a record of 34.47 billion contracts.


Source: HDFC Securities

Derivatives (Future and options) constitute 97% of overall trade volume in India, and it is growing. Low cost and technological upgradation of trading infra are the key drivers of growth. Algorithmic trading has also played a significant role in market growth which accounts for one-third of total derivative trading.

B. Unbundling the gap between discount and full-service brokerage

Full service (traditional) brokers provide a range of services; hence their cost structure is much higher than discount brokers. Since these brokers serve both kinds of customer segments – retail and institutional, both the segments may not have similar demand for all these services. For instance, research reports and stock recommendations might be relevant for institutional investors but not for retail investors. Thus it is logical to unbundle the offering and charge for only what is required by the end-users. Hence a new model has emerged called Hybrid Brokerage where brokers offer a basic plan at zero or low cost and charge for value-added services provided.

In India, Zerodha the leader with the most number of accounts does not charge any commission for investing in equities and mutual fund. There is just a flat fee of INR 20 ($0.27) or 0.03% (whichever is lower) per executed order on intraday trades across equity, currency, and commodity trades. But to maintain the top line, it is consistently adding new features on a subscription basis. It is also filling the gap between offerings of discount and full-service brokerage, with the only difference that the offerings are technologically advanced because modern problems require a modern solution.

When the price is similar, technology is where everyone is competing to differentiate

Almost every discount brokers have a similar pricing structure hence to differentiate everyone is focusing on technology. Leading players have been seen to advancing both their backend and frontend with the latest technologies such as EKYC, biometric authentication, order management systems, advanced charting, algo-trading & analytical solutions for technical and fundamental analysis etc.

Discount brokers are investing heavily in technology to offer innovative solutions to investors. AI and ML has become the most frequently used technology structure in wealth management solutions.

Modern problems require modern solution: Appeal to a new generation

A. Robo Advisory

100% technology-based platform to avoid human bias, more efficient, and at a fraction of cost. Dynamic risk profiling to determine ideal asset allocation & create personalized portfolios. One single view for all future financial goals. Few additional features are tax-loss harvesting to minimize investors’ tax bills.


B. Algo Trading For Everyone

Algo trading is not just limited to institutional investors. There is a strong interest shown by the retail investors for technical investment platforms. Advancement of technology has made it possible to deploy solutions that do not require users to write even a single code and can be used on just a few clicks.


C. Predictive Stock Rating

Technology has made it possible for retail investors to trade like an expert. Companies are coming up with intelligence platforms that use big data to run predictive models to come with stock rating based on technical and fundamental analysis. The daily investment strategy is automated using AI-based pattern recognition and price forecasting engine.


The Future Outlook 

As new technologies are in demand because they make investment process simple and enhance investors’ return. We believe there is a perfect case for the birth of a new brokerage model – ‘Hybrid Brokerage’. Apart from providing a tech-driven low-cost investment platform, Hybrid brokers are also adding new features to provide all the investment lifecycle solutions under one umbrella. We believe in future Hybrid Model will surpass discount brokers in terms of market share.


Blog written by Rahul Gupta, Pirimid Fintech

Drop a comment or write us an email with any feedback about this article, queries info@pirimidtech.com. View our portfolio in building Robo advisory, Large Scale Trading Systems, Algo Trading, Stock Sentiments, Price Trends forecasting, Back testing frameworks, etc. and services offered on our website. to see our Fintech expertise can help you build cutting-edge solutions powered by AI/ML.

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