How discount brokers make money: brokerage, F&O, MTF and float

A discount broker is a stockbroker that offers trading and demat accounts at low, flat prices and without advice or branches. Zerodha, Groww and Upstox are well-known examples. They run on mobile apps, and they grew by making investing cheap and simple.

The older full-service brokers charged a percentage of every trade and sold research and advice. Discount brokers dropped those layers, so cost per customer fell, and the saving went into pricing.

Revenue from a broker comes from several places. The mix shifts with the market, and it matters for how stable the business is.

• Brokerage: a flat fee per order, or a small percentage, mostly on F&O and intraday trades, while delivery trades are often free.
• Margin trading facility (MTF): the broker lends money to clients to buy shares and earns interest on it.
• Interest on client money: margins and balances held with banks can earn interest, within SEBI limits on how client funds are used.
• Account and demat fees: account opening, annual charges and pledging charges.
• Distribution: commission on mutual funds, loans and insurance where the platform allows it, plus subscriptions to advanced tools.
• Exchange-linked income: rebates from exchanges on volume, now reduced by the 2024 changes.

Delivery trades, where the investor buys and holds shares, may carry no brokerage at some platforms. This works because the cost of serving a delivery customer is low, and because the same customer may later trade futures and options, where the fees are higher.

In effect, free investing is a way of acquiring customers. Zerodha has said publicly that it funded free delivery from the income on F&O trading. Other platforms charge a small flat fee on all orders. The flat fee model means a trade of ₹10,000 and one of ₹10 lakh carry the same brokerage.

Futures and options trades are frequent and small in fee terms, and a few very active traders place a large number of orders. A flat fee per order on that volume adds up. For many Indian brokers, F&O became the largest source of revenue.

That made the business sensitive to rules about F&O. When a regulator makes derivatives trading harder, volumes fall, and broker revenue falls with them. This dependence is a main reason analysts treat discount brokers as cyclical businesses.

In July 2024, SEBI issued a true-to-label circular for stock exchanges and other market infrastructure institutions. It asked them to charge brokers one flat fee for each kind of service, instead of slab-based pricing where discounts for high volume gave brokers rebates. It took effect from 1 October 2024. Brokers had earned a good share of income from those rebates, so removing them cut revenue.

In October 2024, SEBI also announced measures for the F&O segment to curb heavy retail losses. They included larger contract sizes, fewer weekly expiries, and upfront collection of option premiums, with different parts taking effect in stages. Listed and large brokers reported lower revenue and profit after these changes, and some have shifted focus to other lines such as wealth products.

A listed broker, such as Angel One, reports revenue by category in its filings, and the split gives a view into the whole industry. Typical lines are broking income, interest income, distribution income and other operating income. Reading two or three years side by side shows how much came from F&O and how fast it fell after the rule changes.

Private brokers share less, but their annual accounts filed with the Registrar of Companies and media reports based on those filings give outlines. Always check whether a headline revenue figure is operating revenue or total income. Total income can include returns on the broker's own cash, which are not a sign of customer activity.

Some app-based investing platforms started with mutual funds and moved into broking, while older discount brokers started with trading and moved into mutual funds, loans and subscriptions. The result is similar. Everyone wants active customers across many products, since a customer who uses several products costs less to serve than a new customer.

Platforms also compete on price, tools and features such as price alerts, charts and API access for algorithmic traders. Competition on price pushes brokerage towards flat low fees, so growth depends on volume of clients and on how many of them trade actively.

A margin trading facility lets a client buy shares by paying only part of the cost, while the broker funds the rest and holds the shares as security. The client pays interest on the funded amount, often charged daily. The broker may use its own money or borrow from a bank or non-bank lender, and earns the spread between the interest it charges and its own cost of money.

MTF can be profitable but carries credit risk. If the shares fall, the broker may sell them to recover the loan, and a sharp fall can leave a shortfall. SEBI sets rules on which shares are eligible and how much margin is needed.

Clients keep money with brokers as margin or idle balance. SEBI rules limit how brokers may use client funds, and a broker generally cannot lend them out freely. Some brokers earn interest by depositing margins as fixed deposits with banks, and the rules on how much of that interest may be kept have been tightened over time.

Float is more stable than F&O income but depends on interest rates and on SEBI's norms. Check how a company describes this line when reading its annual report.

A few questions help. What share of revenue comes from F&O? Is the figure operating revenue or total income, which includes treasury returns? Are profits growing because of volumes, which can reverse, or because of recurring fees? Has the broker disclosed active clients and orders, which show activity?

Listed brokers disclose revenue lines in their results, while private ones publish less. This page is a general explanation, not investment advice.

Also look at client growth versus activity. A broker can add many accounts and still earn less if most new clients trade rarely.