What a Broker Does Between a Client and the Trading Venue

A broker is the party standing between a client and a trading venue the client cannot reach directly. The broker identifies the client, checks the order, carries it under its own membership, stands behind what the client owes and keeps the record. Kaveri Stock Exchange Limited, invented, matches that order against somebody else's. Its clearing corporation, a separate company, then steps into the middle and becomes the party each side faces.

The thing nobody says at the beginning is this. A trading venue does not deal with the public. The venue deals with a short list of parties that have signed up to its rules, put up resources against what they will owe, and can be held to both. A private client is not on that list, and cannot get on it in order to buy ten shares any more than a person can get a lorry licence in order to move one sofa. So the access has to be borrowed from somebody who already has it, and what looks like a client's own connection to the market turns out to be somebody else's connection, rented one order at a time.

Borrowed access decides everything that follows: what a broker does, what it can charge for, what happens when a broker is taken out, and why a second party few clients have heard of appears in the middle a fraction of a second after the order is matched.

Who stands between a client and a trading venue?

The venue deals with members. A client is not one. The broker is one, and the client's order travels on the broker's membership rather than on any relationship the client has with the venue. A party admitted to a venue's rules and allowed to send orders into it is called a trading memberA party admitted to a trading venue's rules and permitted to send orders into it. What it takes to be admitted is set by the authority named in the reference table below., and the conditions on which anybody becomes one are set by the Securities and Exchange Board of India (SEBI) at sebi.gov.in.

A broker does not sell a service sitting beside the trade. The standing in between is the entire product. Standing in between is what the charge described below pays for. The client is not paying somebody to press a button on their behalf. The client is paying for the fact that the broker is inside a place the client is not allowed into, and that the broker is willing to be answerable for the client while the client is there.

Here is the everyday version, and it is closer than it looks. A wholesale market where only licensed stallholders may set up a pitch. A farmer arrives with a sack of rice and no licence. She does not argue with the gate, and she does not apply for a licence to sell one sack. She hands the sack to a stallholder, the stallholder sells it under their own pitch and their own name, and she pays them for the pitch. The market's records show the stallholder sold a sack of rice. The stallholder's own book shows whose sack it was. Change three nouns and that is the whole of the arrangement described here.

What does a broker actually do with an order?

Five separate jobs, not one. The charge described below attaches to all five and not to the last of them. The broker identifies the client, so the venue never has to. The broker checks the order against what the client actually has, so an order that could not be honoured never reaches the venue at all. The broker carries the order to the venue under its own membership. The broker stands behind the obligation to the venue. And it keeps the record of what the client holds and what the client owes, with the securities themselves sitting in a depositoryThe institution that holds securities in electronic form against a name, so that a transfer is a change in a record rather than a movement of paper. Covered separately. rather than in the broker's cupboard.

As far as the venue is concerned the broker is the party to the trade, and the client is a name in the broker's own records. Readers almost never guess this one, and everything awkward about the arrangement follows from it. The venue is not being rude in ignoring the client. The venue has built its entire structure around holding a short list of parties to their obligations, and it can only do that if the list stays short and every name on it is one the venue has admitted itself.

The second job looks like a courtesy and is not. When the broker checks an order against what the client has before sending it, it is not protecting the client from themselves. The broker is protecting itself. The venue will come to the broker, not to the client. The check exists because of the fourth job, and that is the answer to why a broker refuses an order it thinks the client cannot honour.

Take the broker out of the middle: what stops working?

Removal is the test to keep. A dozen more parties sit in the middle of things, and the same question sorts every one of them. Remove the party and see what fails. Where nothing fails, the party was not earning its place. Where something fails, what fails is exactly the job the party was doing.

Take the broker out. The client is left with money and an intention, standing outside a venue that has no way to identify them, no way to check the order before it lands, no name to hold responsible when the money is due, and no record of what is held once the trade is done. Four things break at once, and speed is not one of them.

Removing the broker costs not convenience but access and accountability, and those two are precisely what a broker is paid for. Access means the order can get in at all. Accountability means somebody the venue already trusts has agreed to answer for what the client owes. Neither has anything to do with how fast the screen refreshes, and an account that had brokers existing for convenience would point at the wrong thing to value.

What does a broker charge, and what shape does the charge take?

Two shapes, and both are worked below on one order of Rs 1,00,000/-. Every broker figure below is a setting chosen to show the shape of a charge rather than to report a price. Shape one is a share of the order valueThe price multiplied by the quantity on a single order, before any charge is added. A base, not a charge.: 0.10 per cent of order value, which on that order is Rs 100.00/-, and which doubles if the order doubles. Shape two is a flat amount for the order: Rs 20.00/-, whatever the order is worth.

The two shapes disagree about one thing only: the first says the work of carrying an order rises with the size of the order, and the second says it does not. Of the five jobs, only one costs more on a larger order. Identifying the client costs the same. Checking the order costs the same. Carrying it costs the same. Keeping the record costs the same. Only standing behind the obligation is genuinely larger when the number is larger, and that is one job out of five. Which is why the flat shape exists at all, and why it is closer to what actually happens inside the broker than the share of order value is.

The two shapes cross at one order value, and it is worth finding it rather than being told. Set 0.10 per cent of the order value equal to Rs 20.00/-: the order value is Rs 20,000/-. Below Rs 20,000/- the flat charge is the larger of the two. Above it, the share of order value is. At Rs 1,00,000/- the two sit at Rs 100.00/- against Rs 20.00/-, five times apart, from the same pair of rules that were exactly equal one fifth of the way along.

Full-Service: what goes inside the middle?

A price means nothing until the contents are known, so contents come before price here. A full-service arrangement puts more than the carrying of the order into the middle. There is research written for clients. There is a named person to call, which sounds small until the day something has gone wrong and there is a name to reach instead of a queue. There is help with the paperwork of getting money and securities in and out, which is more work than anybody expects the first time. And in some arrangements there is a view on what to hold, which is a different kind of thing altogether from the other three.

A client is buying a bundle, and the only way to compare a bundle with a bare service is to know what is in it. The fourth item deserves its own sentence rather than a footnote. Whether a view on what to hold may be offered at all, by whom, on what conditions, and what has to be disclosed alongside it, is set by SEBI at sebi.gov.in, and not one word of it is stated here. A view on what to hold is also the item most likely to be the real reason somebody chose the arrangement, and leaving it unexamined is expensive.

The household version is a wedding caterer. One quotes for the food. Another quotes for the food, the crockery, the serving staff, the clearing up and somebody who answers the telephone at eleven at night when the count changes. The second number is larger. Whether it is worse depends entirely on whether the host was going to have to arrange the other five things themselves, and nobody can answer that from the two numbers alone.

Discount Broker: what comes out of the middle?

The right-hand column of that drawing carries the whole answer. A discount arrangement strips the middle back to the three rows that were the same on both sides: carrying the order, keeping the record, and standing behind the obligation. The research goes. The named person goes. The view goes. Nothing about access or accountability changes, because those two live entirely in the three rows that stayed.

Once the bundle is gone the charge usually stops looking like a share of order value and starts looking like a flat amount for the order, because a flat amount is what the remaining work actually resembles. The same conclusion arrives from a second direction, and that is usually a sign the reasoning is sound. Counting the five jobs showed that four of them cost the same on a large order as on a small one. Taking the four bundled items away leaves exactly the jobs that do not scale with size. Two roads, one destination.

On an order of Rs 1,00,000/-, the settings worked here put Rs 100.00/- beside Rs 20.00/-. A smaller number next to a shorter list of contents is not by itself a better deal, and it is not a worse one either. The two are different bundles at different prices, and the only honest comparison starts by writing out what each one contains.

How Brokerages and Exchanges Make Money: are they the same kind of money?

Broker money and venue money are not the same kind, and merging them is one of the most common quiet errors in this part of finance. A broker earns per order, or per rupee of order value, from the person whose order it is, and on a day that person does nothing the broker earns nothing from them. A trading venue earns a rate on everything that changes hands on it, from its members rather than from the public, and it does not know or care whose order any particular rupee belonged to.

Work the venue's side and show the multiplication rather than quoting the answer. Kaveri Stock Exchange Limited, invented, had turnoverThe value of everything that changed hands on a venue over a stated period. A flow measured over time, not an amount held at a date. of Rs 48,00,000 crore in the stated year. A transaction fee of 0.00325 per cent of turnover means multiplying that by 0.0000325, which gives Rs 156 crore of fee revenue for the same year. One rate, one flow, one multiplication, and the period is named on both sides of it.

Read that same rate on one order and it comes to Rs 3.25/- on Rs 1,00,000/-, which is a small fraction of the Rs 100.00/- or the Rs 20.00/- that the control settings put beside it, and that is the whole point. A tiny rate on an enormous flow is a real business. A visible charge on one order is a real business. The two are not the same business and neither is a version of the other. The venue's Rs 156 crore for the year came from a rate nobody notices on a number nobody can picture. The broker's charge came from a visible rate, on a number the client chose.

One thing is left open here. Whether that turnover figure counts a trade once or on both sides of it is not settled anywhere in the record behind it, and there is no honest way to guess. So the fee revenue above is worked on the turnover exactly as given, and anybody who needs the answer has to go and ask which of the two the figure is.

Where does the exchange stop and the clearing corporation start?

Kaveri Stock Exchange Limited runs the place where orders meet, and its job ends at the match. Not at the money moving. Not at the shares arriving. At the match. The instant two orders meet, the exchange has finished what it does, and something else has to happen or nothing further happens at all.

A separate company steps in next. The clearing corporation of Kaveri Stock Exchange Limited moves into the middle of the matched trade and becomes the party each side faces. After it does, the buying client owes the clearing corporation rather than the selling client, and the selling client is owed by the clearing corporation rather than by the buying client. Two obligations replace one, and neither of them points at a stranger any more. The exchange does not stand behind the settlementThe step at which money and securities actually change hands, as opposed to the moment two orders agree a price. When it happens is set by the authority named in the reference table below. of that trade, and saying that it does is the error this guide ends on.

Without that second party in the middle, each side would be left holding the other side's name and the other side's risk, and would have to find out who they had traded with before agreeing a price with them. Consider what that would actually mean. A buyer would need to know, before buying, whether the person selling was good for it. Every price would carry a discount for who was on the other end. Most trades simply would not happen, because most of the time that cannot be found out. Remove this middle and what fails is not speed. The ability to trade with a stranger at all is what fails, and trading with strangers is the only kind of trading a market of this shape can do.

What does the clearing corporation hold, and whose money is it?

The clearing corporation of Kaveri Stock Exchange Limited holds marginsAmounts collected in advance against obligations that have not yet been settled. How much, in what form and how often are all set by the authority named in the reference table below. of Rs 11,000 crore, collected from its members, and a settlement guarantee fund of Rs 2,750 crore. Divide Rs 11,000 crore by Rs 2,750 crore and margins are 4.00 times the fund. Both of those amounts sit at the clearing corporation. Neither of them belongs to the exchange, and that sentence belongs in the same breath as the figures because separating them afterwards never works.

Margins are collected member by member against each member's own obligations, while the fund is a pooled resource, so the two are not two sizes of the same thing and adding them together answers no question anybody has. A margin is somebody's own money put up against their own exposure, and if that member never fails, that member's margin was never anybody else's protection. The fund is different in kind: it is there because members stand behind each other, and a party that stands behind the settlement of trades at a clearing corporation is called a clearing memberA party that stands behind the settlement of trades at a clearing corporation, and puts up resources with it against that undertaking. What it takes to become one is set by the authority named in the reference table below..

The everyday version is a shared building. Every flat pays its own maintenance, and the money for one flat repairs that flat. The building also keeps a common sinking fund that belongs to everybody and to nobody in particular. Both are money the association holds. Adding one flat's maintenance balance to the sinking fund gives a number that describes nothing, because one of them can only be spent on that flat and the other one cannot be spent on that flat alone. How much margin is collected, in what form, and how often, is set by SEBI at sebi.gov.in.

Why does the order matter more than the total?

When a member fails and cannot settle, the losses are met out of a set of resources in a stated order, and that order was written down before anything went wrong. The idea carries in full without any single step of the order being named.

The order has to be fixed in advance because in the hour a member fails nobody could agree one, and every party in the room would argue for the order that spares them. Think about who is in that room. The failed member has nothing left to argue with. The clearing corporation would rather reach the failed member's own resources first. Every other member would rather the pooled resources were reached last, or never. All of those preferences are perfectly reasonable and all of them point in different directions, and an argument that starts at the moment of a failure has no time to finish. Fixing the order in advance is the protection. The fact that everybody knew it before they joined is what makes them willing to stand behind each other at all.

So the order appears below as a ladder of empty slots. The actual order, every threshold inside it, and how many resources sit on that ladder are all set by SEBI at sebi.gov.in, and they all move. A value printed today would be a wrong answer within a year rather than merely an old one, and a wrong answer is far more expensive than a blank. A blank sends somebody to go and check. A wrong answer gives no reason to.

How does somebody opening an account actually use any of this?

Who sets the conditions a broker works under?

Several of the conditions circled above are not the broker's to state. The conditions are set by an authority, they are revised, and a value printed here would be an incorrect figure rather than an ageing one. The net worthWhat is left of an entity's own resources after everything it owes is taken off. A condition here, not a subject: how it is arrived at is settled separately. row below is a good example: it is a real condition, and it has a real number attached to it at the authority that sets it. So each row carries an empty value column, with the authority printed inside the row where a value would otherwise sit. Even blank, a sheet like this is genuinely useful, and what it carries is which condition exists and where the answer lives.