Absolutely agree with everything. I could not have put it better. People have to stop being brainwashed and need to speak up against this ridiculously fragmented market system. Most don't even realize how shortchanged they are under the current system.
You want to talk about real markets with centralised trading and no selling of order flow? Korea and Hong Kong futures are more liquid then the US when it comes execution and is far superior. These markets can be traded over IB and they don't create volume (Churn) like US markets to trick you into thinking you will get better fills! US market makers play with themselves until retail orders come in and then the games begin in earnest. I say this having traded them all and looking at my profits. Big difference.
You're confusing two completely different things, market making and selling order flow. Market making doesn't require selling order flow and is absolutely essential to a functioning market. There are certainly entities acting as market makers on Korea and Hong Kong futures markets. Payment for order flow (or identically directing order flow to your wholley owned sub), on the other hand, I find difficult to defend unless you're in a situation like Nadex with a new exchange and you need to demonstrate viability of the marketplace to attract third party MMs and reach critical mass in volume. My inclination is that we'd be almost universally better off without it absent those edge cases, although there may be some benefit to the overall market that I'm not aware of.
People struggle to understand the conflict of interest until IB unilaterally increases margin on outstanding futures contracts. They do this when they see that their customers are too big on one side of the market and increasing margins force people to liquidate positions for a loss and locking in profits for Timberhill! The billion dollar fines on banks for putting profits ahead of customers is getting the attention of all the other players.
The real size is traded offscreen in SSFs. MMs facilitate this trade, but don't post on the visible CLOB.
Just to be clearer, the argument has been that client execution is better when directing order flow to a facilitator. My point is that it's not better but worse! Yes - conflicts of interest. Bad - internalize order flow. In the US, the difference between market making and facilitator is blurred. They are the same companies or related! Try trading Asia exchanges and experience the real difference. Make more money where venue is fair.
MMs don't "facilitate" anything, they take one side of a trade. A broker facilitates a trade, a MM takes a side of a trade, pretty much by definition. There are no MM on the vast majority of the SSF contracts, and if you post a limit order it won't be hit by anyone unless you're way out of market to your disadvantage and someone happens along to see it. I think you're describing how an OTC market works, which is my point exactly. An OTC market requires a high touch broker enabled trade, which requires size to make it economical, and which also isn't very conducive to trading time-wise. If you want a market to look like what you've come to expect on any U.S. exchange you have to have MMs except maybe for the most liquid of contracts like ES.
Unless TH coincidentally decides to stand on every level of the book for a given contract this simply isn't happening in reality. There is no internalization in futures. All the major entities are market making all the significant futures exchanges. US vs Asia has nothing to do with it.
I don't see how TH will profit from people liquidating positions... TH is not your counterparty, even if they might trade against you, in a centralized counterparty system there's hardly any chance that you trade in AND out with the same party. Or do you think that TH will have the exact opposite position of all IB clients combined? Nope...