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I presently own, for the sake of argument, one share of Bank of America. I purchased it through a broker presently owned by eTrade. The custodian for the acco

I presently own, for the sake of argument, one share of Bank of America. I purchased it through a broker presently owned by eTrade. The custodian for the account is Apex Clearing; they possess custody of the share. The underlying share is somewhere at (IIRC) the Depository Trust Corporation; there may or may not be a physical certificate. Which is a complicated way of saying that the share that I think I own actually exists in the world, through an admittedly complicated web of commercial relationships maintained by professionals at regulated financial institutions. It is not simply a bookkeeping entry that my broker made up to take my $2. If I sell it, I will likely end up selling it to an internalizer who pays eTrade for the privilege (Citadel?), rather than a counterparty on a lit exchange, but it still exists. It votes in BoA matters. It receives dividends. It seemlessly transfers when I migrate between brokerages, which I have done twice since buying this share. If I wanted to pay an irrational amount of money to win internet points, I could probably even gain physical custody of an actual share certificate. If you want to nerdsnipe further about the difference between bucket shops, Bitcoin exchanges, and financial institutions, I am happy to go into this topic in arbitrary depth.

deleted 9y ago
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vostok 9y ago
> Which is a complicated way of saying that the share that I think I own actually exists in the world, through an admittedly complicated web of commercial relationships maintained by professionals at regulated financial institutions. It is not simply a bookkeeping entry that my broker made up to take my $2. Why is this the line between investing and gambling? I might own $1 billion of equities on swap. This is just a bookkeeping entry that my dealer made up to take my money. I don't see how not owning the physical stock suddenly makes it gambling.
- qf303rjr3 9y ago
  If you own $1 billion of equities on swap, you can guarantee that your broker has actually bought the equities (or something close to them) as a hedge. There is no way that your broker has an unhedged $1 billion equity swap with you. They collect a spread on the swap transaction of a few basis points, which is hopefully less than the cost to hedge the swap. They don't want to take the risk of the position moving against them by more than a few basis points (typically the equity market moves hundreds of basis points per day) so they almost always hedge. The Japanese FX broker, on the other hand, has the odds so firmly stacked in their favour that they have no need to actually do any FX trading (though I expect that they do some). If the margin is high enough, the statistical fluctuations don't matter that much. That's the difference between a brokerage and a bucket shop.
  - lz400 9y ago
    What do we mean with "odds so firmly stacked in their favor" here? You seem to imply spreads so large they eat all the volatility? Is that all?
will_brown 9y ago
>If you want to nerdsnipe further about the difference between bucket shops, Bitcoin exchanges, and financial institutions My point is more about ownership (legal vs beneficial). See: https://www.sec.gov/comments/4-537/4537-25.pdf https://www.sec.gov/comments/4-537/4537-25.pdf It would be interesting to seeing a similar legal analysis of ownership applied to bitcoin exchanges (and wallets, bitcoin clients vs mobile).
vt100 9y ago
What you say is kind of true, but it's not that black and white, is it, when you consider naked shorts?
sudhirj 9y ago
The word you're looking for is dematerialised. Real trading happens with dematerialised assets, where actual assets are given a representation in a ledger and then moved around. This is similar to a currency on the gold standard, where a paper note is generated from and exchangeable for a noted amount of gold. In a Demat trading environment, assets like stocks, gold or any commodities are held somewhere and electronic tokens are issued for them, which are then traded by firms with compatible interfaces. Not to be confused with gambling, where your tokens do not represent your or anyone's ownership of any tangible asset.

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vostok 9y ago

> Which is a complicated way of saying that the share that I think I own actually exists in the world, through an admittedly complicated web of commercial relationships maintained by professionals at regulated financial institutions. It is not simply a bookkeeping entry that my broker made up to take my $2. Why is this the line between investing and gambling? I might own $1 billion of equities on swap. This is just a bookkeeping entry that my dealer made up to take my money. I don't see how not owning the physical stock suddenly makes it gambling.

qf303rjr3 9y ago
If you own $1 billion of equities on swap, you can guarantee that your broker has actually bought the equities (or something close to them) as a hedge. There is no way that your broker has an unhedged $1 billion equity swap with you. They collect a spread on the swap transaction of a few basis points, which is hopefully less than the cost to hedge the swap. They don't want to take the risk of the position moving against them by more than a few basis points (typically the equity market moves hundreds of basis points per day) so they almost always hedge. The Japanese FX broker, on the other hand, has the odds so firmly stacked in their favour that they have no need to actually do any FX trading (though I expect that they do some). If the margin is high enough, the statistical fluctuations don't matter that much. That's the difference between a brokerage and a bucket shop.
- lz400 9y ago
  What do we mean with "odds so firmly stacked in their favor" here? You seem to imply spreads so large they eat all the volatility? Is that all?

will_brown 9y ago

>If you want to nerdsnipe further about the difference between bucket shops, Bitcoin exchanges, and financial institutions My point is more about ownership (legal vs beneficial). See: https://www.sec.gov/comments/4-537/4537-25.pdf https://www.sec.gov/comments/4-537/4537-25.pdf It would be interesting to seeing a similar legal analysis of ownership applied to bitcoin exchanges (and wallets, bitcoin clients vs mobile).

vt100 9y ago

What you say is kind of true, but it's not that black and white, is it, when you consider naked shorts?

sudhirj 9y ago

The word you're looking for is dematerialised. Real trading happens with dematerialised assets, where actual assets are given a representation in a ledger and then moved around. This is similar to a currency on the gold standard, where a paper note is generated from and exchangeable for a noted amount of gold. In a Demat trading environment, assets like stocks, gold or any commodities are held somewhere and electronic tokens are issued for them, which are then traded by firms with compatible interfaces. Not to be confused with gambling, where your tokens do not represent your or anyone's ownership of any tangible asset.