PORTER’S 5 FORCES FOR BROKING INDUSTRY

Bargaining Power of Buyers:

 When retail clients trade frequently, brokers earn more commission.
 Distribution of stocks of mediocore or small-cap companies to unknowing clients so
as to earn placement agent fees.
 Lack of Expertise in Clients can reduce their bargaining power. Retail investors often
lack the knowledge and expertise in the financial sector that calls them to approach
the broking houses.
 Lower product differentiation can increase the bargaining power of the clients. The
retail broking services provided by the various companies is homogeneous with very
low product differentiation. This allows customers to enjoy a greater bargaining
power.
 Institutional clients realize the deterioration of research quality, so they use brokers to
collect inside information and outsource the labour-intensive research and modelling
work.
 Institutional clients encourage competition among brokers to bring down the
commission costs.

Bargaining Power of Suppliers:

 Increase in dependence of IPO. There is a growing dependence of corporates on
broking houses with the rising number of IPO’s coming to the market.
 For small cap companies, many brokers try to lock in special relationships so that they
benefit from being exclusively associated with the company.

Threat of Substitute Products:

 Threat from Alternative Investment Options. Various alternative forms of investment
include fixed deposits with banks and post offices, etc. These act as substitutes to
retail broking products and services.
 More number of customers are shifting towards Discount Brokerage Model that offers
lowers brokerage. This will shrink the commissions and size of the industry.
 Even various banks provide similar type of services now. They also give the same
service of portfolio management and wealth management.
Rivalry among Existing Firms
 Large no. of competitors with different and lower commissions.
 Lot of brokerage companies are moving towards consolidation with the smaller ones
 becoming either franchisees for the larger brokers or closing operations.
 Online Trading Competes with Traditional Brokerage. There is an increasing demand
for online trading due to consumer’s growing preference for internet as compared to
approaching the brokers.

Threat of New Entrants

 Forms of trading including Dematerialization and increase in holding period in
margin financing business (generally T+180 or T+360) are strengthening the retail
brokerage market and attracting foreign companies to enter.
 Various foreign brokers like Interactive Brokers and others are planning to enter the
Indian retail Brokerage Industry.