Proprietary traders to be worst hit by securities transaction tax hike: Report
MUMBAI: On the heels of a slew of regulatory changes introduced since the last fiscal, the doubling of the securities transaction tax (STT) on derivatives trades will have serious revenue implications for proprietary traders.
The other two segments of brokers -- traditional players including discount brokers and diversified other players -- will bear the least of the revenue impact, Crisil Ratings said in a note Tuesday, which also called upon them to diversify to remain viable.
Going ahead, the proposed hike in STT could have a higher impact on proprietary traders, including high-frequency traders and arbitrageurs, who account for 60% of the market volume, the report said.
The proposed STT hike comes on the heels of substantial regulatory changes introduced by the Securities and Exchange Board (Sebi) over the past few quarters, aimed at curbing speculative activities especially on the F&S segment, protecting retail investors and enhancing market transparency.
But these regulatory measures have led to lower average daily turnover (ADTO) volume across capital market segments. The ADTO had dropped 25% in the second half the past fiscal. And though it recovered to some extent, the volume remains below previous highs and has resulted in a 6% on-year drop in the revenue of the broking industry in the first half of fiscal 2026, Crisil Ratings said in a report based on the business performance of 25 players during fiscal 2025 and the first half of fiscal 2026.
These brokerages are tagged into three segments: traditional brokerages, including discount firms, earning more than half of their revenue from transaction broking and trading business; diversified players earning less than half of their revenue from this stream; and entities engaged primarily in proprietary trading.
Non-broking and non-trading revenues for this categorisation include fee income from distribution, wealth management and investment banking and interest income from margin trading facility.
According to Malvika Bhotika, a director with Crisil, the analysis of 25 players shows that entities with diversified revenue streams have typically navigated market fluctuations adeptly, while entities where transaction broking fees or proprietary trading business constitutes the predominant share of revenues, have faced decline in revenue during such periods.
Diversified capital markets players, on their part, have shown higher resilience in performance. Around two-thirds of their revenue come from non-broking and non-trading activities putting them in a better position to absorb market volatilities and hence, their revenue has seen the least impact.
On the other hand, traditional brokers are impacted more in periods of volatility, with revenue falling 15% in the second half of fiscal 2025 compared to the first half, led by lower market activity as well as streamlining of charges levied on customers.
Many players have made changes to brokerage rates and are levying charges for certain services that were offered at nil cost earlier. Additionally, the focus on enhancing the MTF book led to the revenue share of this segment rising 4 percentage points on-year in fiscal 2025. However, these measures have not been entirely sufficient to offset the dent in revenue, with revenues in the first half of fiscal 2026 remaining below the year-ago period despite some increase vis-Ă -vis the previous six-month period.
The third category of proprietary players bore the maximum brunt of the impact. According to Prashant Mane, an associate director with Crisil, with the regulatory measure of reducing weekly expiry products resulting in fewer arbitrage opportunities, proprietary players saw revenue drop by 25% during the second half of fiscal 2025 over the first half, with a slight improvement in the first half of fiscal 2026.
The findings underscore the importance of diversification. Additionally, the proposed STT hike on derivatives trading could also potentially affect market liquidity and trading volumes. While increasing interest income from MTF has provided some cushion, increasing revenue from other sources has become crucial.