What brokers actually do

Before I became a broker, I thought the job was simple: provide a fast execution platform and maybe give some stock tips. I was in for a surprise!

Liability for Everything

The buck always stops at the broker. Data center outage? Software vendor delays? Municipality digs up internet lines? Cloudflare goes down globally? Depository sends files late? Clearing corporation (the entity responsible for settling all trades) delays your money? Bank systems crash?

Doesn't matter whose fault it is, as the regulators hold us accountable and our clients understandably blame us.

So we run multiple leased lines, backup data centers, disaster recovery site and keep extra cash with clearing corporations. All to ensure that when something breaks, trading doesn't stop.

Constant Funding

For any default risk that one can think of, the Clearing Corporation preemptively requires the broker to put up extra funds. Four examples come to mind.

i. 90% cash margin rule: We deposit ₹100 of our or our client's money with the clearing corporation; we only get ₹90 margin credit. Even cash gets a 10% haircut. The balance 10% is funded by us for our clients.

ii. 50-50 rule: When a trader pledges ₹1L in stocks for margin, we have to fund ₹50K (or 50%) in cash or equivalents ourselves every time.

iii. Instant sale proceeds: When traders sell their holdings, they get to use the sales proceeds immediately. This is because the broker is fronting that money until ~2pm the next trading day.

iv. Banking delays: The bank transfers the money deposited by our clients in batches of 30 minutes, but when traders transfer money at 9.15am, they expect it to be available by 9:16am. Until then, we fund it so that the trader can use it immediately.

Essentially, brokers are the facilitators and financiers of the entire ecosystem.