What if and can the brokers copy the trades of the successful client-traders ?
From the above post>
“Brokers can make money when clients lose money, i.e., by broker counter trading”
Here is something startling—on an overall basis, active F&O and intraday equity traders lose more money to trading costs (STT, Stamp duty, and other charges) and impact cost (money lost due to the bid-ask spread), than actually to the markets. This is likely to be the same across all stock brokers.
If a broker does keep taking opposite trades on the exchange for their client trades, the broker would end up losing significant money eventually on the impact cost alone. Moreover, this would be noticed by the exchanges and regulators, who not only do audits but have realtime monitoring systems. Also, common sense would dictate that no smart broker would force their clients into losses and out of the markets, especially one that does not advertise and relies on clients’ word-of-mouth referrals for growth.
Also, in India, every single order placed by clients hits the exchange systems in real time, where they are matched. This is different from many other markets where orders may be matched and filled by non-exchange intermediaries (or “darkpools”).
The only place where this sort of activity is possible are places like illegal CFD (Contract for Difference) and binary options trading platforms that essentially take counter trades to every trade taken by clients, as there are no exchanges involved. There, when a client loses, the platform earns. Since there are no trade or impact costs, such platforms make profits if all the clients on an overall basis lose money. These platforms are banned in most parts of the world, so they are usually based out of tax havens like Belize, Malta, etc., and entice people to trade by offering extreme amounts of leverage using online ads. Every once in a while, when there is a black swan event and a group of traders earn significant amounts of money quickly and much more than those who are losing, these CFD / binary trading platforms go bankrupt. The last really big one was in 2015 when Swiss franc was unpegged and it soared 30% in one day.
Prop desk: Like almost every other broker, we do have a proprietary trading desk. We can’t be building a brokerage business with so much passion and conviction if we didn’t believe that profits can be generated from the markets. Most of what we trade are low-risk positional delta-neutral strategies and investments in stocks and bonds. What we do as a prop desk has no effect on our clients’ trades.
Also, brokers are required to upload detailed reports on self and client fund splits at the end of every trading day. Not once in the last 9 years of our business has our prop positions exceeded margins beyond our own funds. We are audited frequently by exchanges and SEBI and have never had any violation with regards to ours or our clients’ funds and prop trading.
The above explanation was for brokers doing the opposite of losing traders, similar argument holds good for following winning traders. Apart from of course not knowing when the winning trader is going to start losing.