Trading & Capital Markets · Chapter 6 of 8
The full cost of a trade — worked, in both markets
The arithmetic almost nobody does. The brokerage everyone compares is usually the smallest line on the bill.
This chapter is the most immediately useful thing in the book, whether you are interviewing or trading your own money. Almost every retail comparison of brokers is a comparison of the smallest term in the equation, and almost every naive backtest is invalidated by the terms it left out.
A note on the numbers in this chapter. Indian statutory rates changed materially in 2024 — securities transaction tax on futures and options was raised, and exchange transaction charges moved to a uniform structure. American exchange fee schedules change monthly and the Section 31 rate is reset by the SEC at least annually.
So treat every figure here as the shape and the method, not as a current quote. The skill being taught is knowing which lines exist and how they compose — and in an interview, saying ‘these are the components; I would pull the current schedule for the exact rates’ is a stronger answer than reciting a number that may be stale.
The Indian cost stack, line by line
| Line | Applies to | Charged on |
|---|---|---|
| Brokerage | All segments | Per order or per turnover, depending on the broker's model. Discount brokers typically flat per executed order, zero on delivery |
| STT / CTT | Securities / commodities | The largest statutory line. Delivery: both legs. Intraday and derivatives: sell side only |
| Exchange transaction charges | All segments | Percentage of turnover; for options, on premium turnover, not notional — which is why the options rate looks enormous by comparison |
| SEBI turnover fee | All segments | A very small percentage of turnover |
| Stamp duty | All segments | State-level, on the buy side only |
| GST | All segments | 18% on brokerage plus exchange and SEBI charges — a tax on the fees, not on the trade |
| DP charges | Equity delivery sell | A flat rupee amount per scrip per day, regardless of quantity — which makes small delivery sells disproportionately expensive |
| Auto square-off | Intraday, if you do not close | A flat charge, plus you get whatever price the broker's algorithm achieves |
The single most important structural fact about Indian costs
For options, exchange charges and STT are on premium, not notional. A NIFTY option with a notional value of ₹20 lakh might have a premium turnover of ₹5,000. The percentage rate looks alarming and the rupee amount is small.
This is why comparing the headline percentage across segments is meaningless, and why an options cost model must be built on premium. A backtest that applies a notional-based cost to an options strategy will report costs that are wrong by two orders of magnitude — in either direction depending on which way the error runs. I have seen both.
A worked example: Indian equity intraday, ₹5,00,000 round trip
Buy ₹5,00,000 of a liquid large-cap and sell it the same day. Discount broker at a flat ₹20 per executed order.
| Line | Basis | Approximate amount |
|---|---|---|
| Brokerage | ₹20 × 2 orders | ₹40 |
| STT (intraday) | Sell side only, ~0.025% | ₹125 |
| Exchange transaction charges | ~0.00297% on ₹10,00,000 total turnover | ₹30 |
| SEBI turnover fee | ~₹10 per crore | ₹1 |
| Stamp duty | Buy side, ~0.003% | ₹15 |
| GST | 18% on brokerage + charges | ₹13 |
| Total explicit | ≈ ₹224, about 4.5 basis points round trip | |
| Half-spread, each way | 1 tick on a ₹2,500 stock, 200 shares | ≈ ₹20 — small here |
| Slippage if you use market orders in size | Frequently larger than everything above combined |
The lesson is in the last two rows. On a liquid large-cap at this size, explicit costs dominate and the spread is trivial. Move to a mid-cap, or multiply the size by twenty, and the proportions invert entirely. The cost that matters depends on liquidity and size, not on the fee schedule — and a cost model that does not vary with those two inputs is not a cost model.
A worked example: Indian index options
Buy one lot of a NIFTY option at ₹120 premium and sell at ₹150. Premium turnover is small; notional is large.
- Brokerage ₹20 × 2 = ₹40. On a premium turnover of a few tens of thousands of rupees, this is now the largest single line — the opposite of the equity case.
- STT on options is charged on the sell-side premium, and was raised in the 2024 changes. On a small premium this is a modest rupee amount.
- Exchange charges on premium turnover are, in percentage terms, the highest of any segment — because the base is premium and not notional.
- And if you let an in-the-money option expire rather than selling it, STT is charged on the settlement value in some cases, which can be dramatically larger than anything above. This has produced genuinely shocking bills for people who did not know. Know the current treatment before holding to expiry.
The US cost stack
| Line | Who charges it | Note |
|---|---|---|
| Commission | Broker | Zero at most retail brokers for equities; per-contract for options |
| Section 31 fee | SEC, via the exchange | On the sell side of equity transactions. The rate is reset periodically and has varied by an order of magnitude across years |
| FINRA TAF | FINRA | Per share on sales, with a cap per trade |
| Exchange fee or rebate | The venue | Maker-taker: you may be paid to post and charged to take. Retail rarely sees this directly; it is embedded in routing economics |
| Clearing fee | NSCC / OCC | Small, per transaction or per contract |
| Options per-contract | Broker + OCC | Typically the dominant retail options cost |
| Spread and impact | The market | As in India, usually larger than everything above at size |
The structural difference worth naming: an American retail equity trade often has near-zero explicit cost, because commission is zero and the wholesaler pays the broker. The cost is instead embedded in the execution price. An Indian retail trade has visible statutory costs and a transparent execution against a single order book. Neither is straightforwardly cheaper; they are differently visible — and being able to say that is a genuinely good answer to a comparative market-structure question.
Building a cost model that will not embarrass you
- Separate fixed from proportional. A flat ₹20 brokerage dominates small trades and vanishes on large ones. A percentage fee does the opposite.
- Get the base right. Premium for options, notional for futures, turnover for equities, and one leg or two depending on the specific tax.
- Add half the spread, each way, always. Even for limit orders — because a limit order that does not fill has an opportunity cost you must also model.
- Add a size-dependent impact term. Square-root of participation is the standard approximation and is far better than nothing. A model with no impact term will make any high-turnover strategy look profitable.
- Then run the strategy at 2× and 5× the assumed size. If the edge disappears, you have found the capacity, which is a number every serious research conversation will ask you for.
Check yourself