India's retail brokers miss out on equities party India's stock market has been rallying to new highs, but far from joining the party the country's nearly 10,000 retail brokers are facing their toughest trading conditions in more than a decade. Some 500 brokerages have shut up shop in the past year or so; UK-based HSBC last month becoming the latest casualty when it announced plans to shutter its retail brokerage division with a loss of 300 jobs. The dim fortunes of local brokerages stand in contrast to their bigger peers serving foreign investors, which have benefited from the rally that saw India's benchmark Sensex index hit an all-time peak this month, surpassing the heady levels set during the country's stock market boom up to 2008. The situation is also a mirror image of Japan, where trading volumes have fallen back from the all-time highs of May but are still proving lucrative for domestic retail brokers. Net profits at Nomura Holdings, Japan's largest brokerage, hit a 10-year high for the six months to September. Shares of Matsui Securities, a second-tier Japanese brokerage, are up 40 per cent so far this year; those of India's Motilal Oswal, a large Mumbai-based broker, are down by the same amount. The plight of Indian brokers reflects rampant overcapacity alongside volatility in the market, which has put off local investors. Hence the closures of more than 500 mostly small local players in the last financial year, according to data from the Securities and Exchange Board of India - a decline of 5 per cent that leaves roughly 9,600 operators in the country. India Infoline, which runs one of largest retail brokerage networks in India, also plans to scale down its business in the sector. "There is an acute problem of overcapacity in an Indian brokerage industry which is already one of the most competitive in the world, and we are seeing a lot of retail players closing or downsizing," says Nick Paulson Ellis, the head of institutional brokerage Espirito Santo in Mumbai The brokers" woes stem from a slump in trade. Overall market volumes increased from Rs1.3tn ($21bn) to Rs1.7tn over the past three years, according to Espirito, but that is entirely due to a surge in futures and options trading, which dominates Indian exchanges. Cash volumes, where local brokerages make most of their commissions, fell by nearly a quarter over the same three-year period to just Rs131bn, while a rise in the number of discount brokers also pressured trading commissions as competition increased. Yet their troubles have deeper causes too, in particular the patchy recent performance of India's stock market, which has proved volatile in the years since the global financial crisis. That has prompted investors to seek returns in other asset classes, in particular gold and property. The recent market surge followed an influx of foreign portfolio investment, but retail investors and domestic mutual funds have both pulled out money. Equity mutual funds, for instance, have sold off about Rs1tn so far this month, according to latest SEBI data, taking advantage of the recent Sensex high. As India's economy slowed sharply over the past year, small and mid-cap companies, which Indian retail investors favour, have also made especially poor returns relative to the blue-chip stocks preferred by foreign institutions, according to H Nemkumar, head of equities at India Infoline The broader trend of shrinking market volumes remains relatively unusual in Asia. In Japan, for example, volumes reached all-time highs in May as excitement over Prime Minister Shinzo Abe's reform programme sparked tens of billions of dollars in inflows from foreign funds, and revived interest in stocks among domestic retail participants. Volumes have fallen back since, but daily average trading of about Y1.9tn ($19bn) so far this quarter is almost double last year's levels. Interest among Japanese investors should be sustained by the launch next year of a new tax-free shares savings scheme designed to enlarge the nation's share-owning classes. In India, however, optimism remains rare. "It looks like gold prices have peaked, and land as well, so equities may in time begin to look a better bet," India Infoline's Mr Nemkumar says. And when there is a broader economic recovery the retail guys could come back. But for the moment things are tough.