Brokerages conflicted about trading volumes post STT hikes in F&O trades declared in Budget

Amid ballooning trading volumes in the Futures and Options market, Finance Minister Nirmala Sitharaman announced an increase in the Securities Transaction Tax (STT) in her Budget 2024 speech.

Starting October 1, the STT on options will rise from 0.062% to 0.1%, and on futures from 0.0125% to 0.02%.

STT is a type of financial transaction tax similar to tax deducted at source. It is a direct tax levied on every purchase and sale of securities listed on the stock exchange.

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For brokerages like Zerodha, this change is expected to increase STT collections from approximately Rs 1,500 crore to around Rs 2,500 crore, assuming trading volumes remain steady.

Nithin Kamath, Founder of Zerodha, expressed concerns on social media platform X, stating that these tax hikes could potentially dampen market activity. With higher transaction costs, traders might reduce their trading frequency, leading to a decline in overall market volumes. This, in turn, could affect the revenue of brokerages as their earnings are closely tied to trading volumes.

"If the idea was to cool down the activity in the markets, this might just do the trick," Kamath said in a post on social media.

However, Devam Sardana, Business Head of PeepalCo-owned stock brokerage Lemonn, believes these hikes won't significantly impact trading volumes.

"Most of the bets made in the futures and options markets are outsized bets designed to yield heavy returns. While the hikes are relatively significant, these charges make up a minuscule percentage of the total size of the bets. Most traders don't even take such charges into account," Sardana said.

"While we may see some fall in trading activity due to the negativity arising from the STT hikes coupled with changes in capital gains taxation, in the long run, this might have no effect," he added.

Both 5paisa and Lemonn noted that the impact will be felt in high-frequency trading where investors buy and sell shares up to 1,000 times every day. Jain noted that only a small portion of its revenues come from such high-frequency trading.