SEBI’s curbs and fees squeeze discount brokers’ transaction model

Securities and Exchange Board of India (SEBI) derivatives curbs and uniform transaction fees are set to squeeze discount brokers’ transaction-led model by restricting high-frequency retail futures and options activity and removing volume-based fee advantages. The most direct change cut weekly index expiries from 18 to six contracts per month from November 20, 2024.

How do SEBI derivatives curbs affect discount brokers’ transaction model?

SEBI derivatives curbs affect discount brokers’ transaction model by reducing trading occasions, leverage mechanisms and eligible retail activity that generate transaction-linked revenue. Non-assisted brokers, meaning digital and discount platforms with minimal human interaction, are particularly exposed because they generally charge zero or minimal brokerage for equity delivery and depend substantially on futures and options, or F&O, transactions for broking revenue.

The regulatory package targets risk and speculative activity in equity derivatives. From November 2024, an additional extreme loss margin, or ELM, of 2% applied to all open short positions on expiry day. ELM is collateral collected to cover severe price moves, and the added requirement can raise the funds needed to hold short options positions during high-volume sessions.

SEBI also set the minimum derivative contract value at Rs 15 lakh and stated an eventual range of Rs 15 lakh to Rs 20 lakh. A larger contract value means a trader must take exposure in bigger notional increments, while margin rules determine the collateral required for that exposure. The industry material says the revenue effect depends on retail clients being unable or unwilling to meet higher capital and margin requirements, resulting in lower F&O volumes.

Why do uniform transaction fees remove a discount-broker advantage?

Uniform transaction fees remove a discount-broker advantage because the October 1, 2024 rule standardised fees charged by market infrastructure institutions, including stock exchanges. The industry material says discount brokers historically used high trading volumes and lower fee structures to support low client charges, whereas a standardised structure prevents them from retaining significantly cheaper exchange-linked pricing.

The change matters most where revenue per client is tied to repeated execution rather than advice or distribution. The material identifies the removal of volume-based discounts as a source of margin compression, particularly for discount brokers. Non-assisted brokers may pass higher costs to users, but doing so could reduce their low-cost appeal for retail clients seeking accessibility and convenience.

The scale of the derivatives market explains why a fee or volume change can be material. National Stock Exchange, or NSE, equity-derivatives notional turnover reached Rs 78,359 lakh crore in FY25, while retail traders’ share of derivatives volumes rose from 2% in 2018 to 41% in 2023. Notional turnover is the face value of contracts traded, not broker revenue, but the figures show the volume base on which transaction-led models have operated.

The effect is not identical across brokers. Full-service brokers offer advisory and personal interaction alongside research, wealth management, distribution and lending solutions, according to the industry material. They can still face margin compression from uniform fees, but their revenue is not described as being as dependent on high-frequency retail F&O trades as that of non-assisted brokers.

How much did retail derivatives participation grow before the curbs?

Retail derivatives participation grew faster than cash-market participation before the latest curbs, increasing transaction-led brokers’ exposure to a decline in F&O activity. Individual investors in NSE’s F&O segment increased from 14 lakh in March 2020 to 106 lakh in March 2025, a 49.9% compound annual growth rate, or CAGR, compared with 32.9% for cash-segment participation over the same period.

The trend moderated after the restrictions began to take effect. F&O individual investors stood at 98 lakh in June 2025, down from 106 lakh in March 2025, while cash-segment investors were 369 lakh in June 2025 versus 377 lakh in March 2025. The source does not assign the entire movement to regulation, but it states that strict F&O guidelines affected participation within the segment.

Risk outcomes provide the policy context. A SEBI study released on July 7, 2025 found that 91% of individual traders incurred a net loss in the equity derivatives segment in FY25. The industry material says further strict guidelines for individuals are likely to affect participation, making future F&O volumes a condition for the persistence of discount brokers’ transaction-led revenue.

Which parts of the framework raise brokers’ operating costs?

The framework raises costs through stricter compliance, cybersecurity, reporting and client-verification requirements, with the precise burden differing between assisted and non-assisted brokers. As of September 3, 2025, nearly 4,900 brokers were registered with SEBI under the equity segment, making these requirements relevant across a large and fragmented market.

For non-assisted brokers, the industry material identifies stronger cybersecurity and data-protection measures as a necessary technology investment. It also says automated real-time know-your-customer, or KYC, verification will be important under stricter KYC and anti-money-laundering, or AML, updates. These requirements can reduce a digital broker’s cost advantage if systems investment rises faster than transaction revenue.

For assisted brokers, the stated prospective response includes investment in regulatory technology, compliance teams, quarterly audits and higher capital ratios. The Qualified Stock Broker framework assesses brokers using active clients, client assets, non-proprietary trading volumes and end-of-day client margin obligations, with scoring data taken on December 31 of the relevant financial year. The framework illustrates a regulatory focus on scale, client exposure and risk controls rather than transaction volume alone.

Can diversification offset lower transaction-linked F&O revenue?

Diversification can offset some transaction-linked F&O revenue pressure only where a broker develops services that do not depend mainly on frequent trade execution. The material identifies research subscriptions, asset distribution, margin funding, loans against shares, wealth management and advisory as ancillary or non-broking revenue sources, rather than as automatic replacements for F&O income.

The available asset pools show the scale of adjacent businesses. Portfolio management services, or PMS, assets under management reached Rs 39.3 lakh crore in June 2025, up from Rs 18.1 lakh crore in March 2020, representing a 15.8% CAGR. PMS requires a minimum investment of Rs 50 lakh, so this offering serves different clients and economics from mass-market retail execution.

Alternative investment funds, or AIFs, had commitments of Rs 13.5 lakh crore in March 2025, compared with Rs 3.7 lakh crore in March 2020, a 29.5% CAGR. Category II AIFs accounted for more than 76% of FY25 commitments, while Category III funds, which may use leverage and derivatives, represented 17%. These figures demonstrate potential distribution and advisory categories, but the source does not quantify how much such businesses can replace lost discount-broker F&O revenue.

Conclusion

SEBI’s rules change the economics of a model built on retail derivatives turnover: fewer weekly expiries, higher expiry-day collateral, reduced calendar-spread benefits, larger contract values and uniform transaction fees each affect the frequency, cost or pricing of trades. The exposure is greatest for non-assisted discount brokers because the source identifies F&O transactions as central to their broking revenue and equity-delivery brokerage as zero or minimal.

The next indicators are retail F&O participation after the June 2025 count of 98 lakh investors, the effect of intraday position-limit monitoring that began on April 1, 2025, and any further individual-investor guidelines flagged after SEBI’s July 7, 2025 loss study. Brokers’ ability to build distribution, lending, research and advisory income will determine whether these regulatory changes translate into a lasting shift away from transaction-led revenue.