Indian markets are much better than the US markets

09 Jun 2022

In India, users see the price and liquidity on both exchanges, pick the best, and then place an order. A brokerage firm just enables this transaction. In the US, almost all platforms are exchange agnostic. The broker just shows a bid, ask, and last traded price.

The order placed is mostly sent to a market maker—typically hedge funds, that will either be the counterparty to the trade or send them to the US exchanges. They make a small amount per order and pass back a portion to the broker. This is called payment for order flow (PFOF).

These small amounts add up to billions of dollars a year for market-makers & brokers. This is how firms offer trading at 0 brokerages in the US. In India, we can offer 0 brokerage for investing as we charge active day & F&O traders. Active traders subsidise investors.

Billions of $s earned from unaware customers. The SEC seems to be finally looking into this convoluted market structure & hinting at removing PFOF. One of the reasons why broking stocks have taken a knock. Interesting titbit: Bernie Maddoff made PFOF order flow popular.

The logic behind PFOF is that it helps in better execution compared to orders placed on the exchange. It makes no sense because today most orders aren’t sent to exchanges. If they are sent automatically, the execution quality on the exchanges will be much better.

PFOF practice has also meant that exchanges rely on charging for data to earn revenue, anywhere from $1 to 100’s of $s/month/user. The more you pay, the better the quality of data. In India, exchanges charge for txns & we get access to same data on trading apps & at no cost.

Another weird practice is that by default, the account opened with a broker in the US is a margin account. Stocks are held in the street name of the brokerage, exposing the users to broker risk unlike in India where it is by default held in customer’s demat at the depository.

The ability to fulfil the customer orders outside the exchange allows US brokerage firms to offer certain special order types & features. But that apart, our markets are much better even in terms of product offerings & not just because of better regulations & market infra.

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