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How Discount Brokerages Make Money

696 points by charlieirish 7y ago

kasey_junk 7y ago
I’d love to see the same treatment on discount auto insurers and large apartment realty groups and basically every other business that is actually about float.
npongratz 7y ago
Possible correction to the essay: I believe in this hypothetical you were actually supposed to be giving me one hundred dollars: > "Suppose I were to give you a dollar... You’d earn $2.26 in net interest in a year."
- imperialdrive 7y ago
  That threw me off right from the start, but I did follow down the rest of the way and enjoyed the knowledge transfer.
- benj111 7y ago
  Good question On the one hand I would prefer to be given $100. On the other, a 226% interest rate is very attractive. Can I have the $100 invested at 226%?
- patio11 7y ago
  Fixed, thanks. (The joys of doing final editing past midnight.)
skyraider 7y ago
How do you use Wealthfront if living abroad? Their FAQ states that they require a permanent US residential address. Also unclear to me whether Interactive Brokers transparently moves funds to brokerage accounts domiciled in your new jurisdiction, triggering FATCA filing requirements, and if they do a good job of making these clear to customers.
- davidw 7y ago
  People living abroad who are US citizens will often use an address they're associated with - parents or other close relatives. That's what I did for years. I think there are services you can use too. In turn, I'm curious why he bothers with Wealth Front rather than just parking it all in a few Vanguard funds. That cash account looks pretty attractive, but other than that...?
  - cbhl 7y ago
    There's a link to https://training.kalzumeus.com/newsletters/archive/investing-for-geeks https://training.kalzumeus.com/newsletters/archive/investing... which discusses this: Vanguard is one of the two Right Answers(TM). My experience with roboadvisors is that the pretty user interfaces encouraged me to save more. Your mileage may vary.
  - patio11 7y ago
    I am a huge fan of Vanguard, but Vanguard Japan has strong compliance concerns about providing services to Americans and Vanguard US has strong compliance concerns about providing services to people living in Japan, so I cannot conveniently consume Vanguard services directly.
- rb808 7y ago
  fbar is pretty trivial to file yourself, takes 20 minutes. https://www.fincen.gov/report-foreign-bank-and-financial-accounts https://www.fincen.gov/report-foreign-bank-and-financial-acc...
  - skyraider 7y ago
    Right, not unclear on that, just unclear on whether IKBR domiciles the accounts in such a way that you'd trigger filing requirements, and how to know this when using the platform.
- patio11 7y ago
  Also unclear to me... I think that's more an "Ask them" question than an "Ask me" question but single data point: neither my tax advisors nor myself felt a lack of clarity with respect to the treatment of their IBSJ and IBLLC accounts, a distinction they are (appropriately) pedantic about with respect to Japan.
jwr 7y ago
I would be very interested to know which online brokerages cater to US expats — @patio11 seems to have experience with this. In general, any advice and pointers about brokerages/banks/insurance for US expats from an actual expat would be immensely valuable. The googlable stuff is mostly fluff and SEO crap.
- cascom 7y ago
  Not exactly what you are looking for - but a pretty good organization/advocacy group if you live abroad https://www.americansabroad.org/ https://www.americansabroad.org/
- davidw 7y ago
  Depends what your needs are, I guess? I always kept my foreign stuff pretty separate from my US stuff. By keeping an address in the US (relatives) I mostly just used US services as anyone else would.
  - jwr 7y ago
    Many expats do not have a US address and can't reasonably pretend that they "reside" in the US. (the whole concept of "residence" is from the stone ages, but I digress)
- rb808 7y ago
  Schwab definitely has branches in a few countries and caters to expats. https://international.schwab.com/public/international/us_investing/us_expat_essentials https://international.schwab.com/public/international/us_inv... interactivebrokers is set up globally as well.
  - MandieD 7y ago
    IB was willing to take me, a US citizen residing in Germany, but the account was opened with their UK branch and falls under EU rules (no non-EU ETFs, for example). As a US citizen, you do not want any non-US-domiciled ETFs; PFIC is a nightmare. Schwab, on the other hand, opened a US-based account for me even though I was quite open about my German address and tax residency, and I can buy regular US-domiciled, low-cost index-tracking ETFs, which frankly is the only thing a non-enthusiast like me should be touching with their retirement money.
gist 7y ago
> A discount brokerage is not a full-service brokerage, which used to charge several hundred 1970s dollars to place a single stock trade and which used to call you to convince you of the desirability of paying them several hundred dollars to place a single stock trade. The implication (by the choice of words here) 'call you to convince you of the desirability of paying them several hundred dollars to place a single stock trade' implies incorrectly that retail brokers were not in some way able to earn that money by providing value. If that were the case they would not exist and money would flow elsewhere. That is if in the end the client did not feel they were getting value. Not everything out there is better DIY or even close to that. Some people actually don't want to search for hours figuring out the best place to travel or which airline flight to take or city to go to. They'd rather pay a travel agent or someone else to do that for them. Just because the masses do not have money to pay for advice does not mean that that advice is not of clear value to someone else who is situation differently financially. This is actually a problem in the computer business. People (en masse) free advice at no charge what others used to get paid to do. Some people actually just want a solution to a problem. They are not interested in doing it themselves, following tutorials or having to depend on some person being nice and not charging them for a solution.
- jdminhbg 7y ago
  > The implication (by the choice of words here) 'call you to convince you of the desirability of paying them several hundred dollars to place a single stock trade' implies incorrectly that retail brokers were not in some way able to earn that money by providing value. If that were the case they would not exist and money would flow elsewhere. The market doesn't correct itself overnight. In fact the market share of retail brokers has plummeted since the invention of index funds and now discount brokerages, suggesting that they were not providing that value.
  - bluGill 7y ago
    I would change that to not providing enough value. If good advice saves you $70 was it worth $700?
    - 7y ago
beezle 7y ago
Not sure what his point of including IB in there was? They are very up front about pretty much everything. Not sure you can find better than benchmark-50bp on cash balances and for accounts with larger balances they have a program in place to get you a little bit better. Also, its really on the account holder to manage their cash balances. Most brokers allow you to do t-bills at auction for no charge, durations are as short as 4 weeks. You can also (at higher risk) usually find a floating rate fund they handle for no commission, FLOT or FLRN or simiilar.
- homero 7y ago
  I wonder about Firstrade, they just went free
Scoundreller 7y ago
> since “retail investors destroy value when trading” is about as citation-needed as “smoking causes lung cancer” at this point I mean, it could be a confounding variable that’s causing cancer in smokers. We haven’t exactly run randomized control trials in humans to clearly show causation. The correlation sure is strong though.
- hcknwscommenter 7y ago
  Huh? Sure, randomized control trials in humans have not been performed. But, there is no debate about whether smoking causes cancer. From cell-based and animal models to retrospective epidemiological studies, the data are clear. Smoking causes cancer. Do we need randomized controlled trials to "prove" cutting someone's head off causes death?
  - Scoundreller 7y ago
    I’d go with cancer is correlated with smoking. But yes, I expect some rigour that avoids confounding variables by design to say “causes”. Great theories have been destroyed before. We should account for what degree other characteristics about smokers causes cancer (e.g. socioeconomics or other factors leading to addictions). You can still blink after your head’s chopped off. Debatable if you’re immediately dead or not.
    - woadwarrior01 7y ago
      > I’d go with cancer is correlated with smoking. Judea Pearl‘s book on causal inference, “The book of why” spends a couple of chapters on the fascinating story of how the causal connection between smoking and cancer was finally established.
- et2o 7y ago
  This goes to the definition of causality. Ultimately you can never "prove" causality, even with the best designed experiment. You are allowed to make causal claims for non-RCT data. Lookup Bradford Hill criteria, just to start.
- 7y ago
mwerty 7y ago
Had to look up internalizer (was a bit unclear): https://jwg-it.eu/defining-systematic-internaliser-under-mifid-ii https://jwg-it.eu/defining-systematic-internaliser-under-mif... but otherwise a good read.
lordnacho 7y ago
Ex options MM / hedge fund manager / HFT guy here. This is a really good article. The net interest thing has a parallel in the HF world. CTAs, a type of hedge fund, used to do substantially the same thing. The margin requirement for holding a load of futures is quite low, but the customers of the fund have put cash into the fund. So back when interest rates were higher, a fair bit of a CTA's returns would be interest on the cash. He's right about Robinhood. From the HFT side, the problem is if you're in the "real" institutional market, someone will run you over occasionally. With retail, that never happens, and the spread you can offer is thus tighter. There's no front running to it, just the ease of non toxic flow. So RH is trying to put forward zero comms as a way to get some deposits. He's also right about options. It's tempting to think that you can just sell some options to collect premium, or do a combination of some sort (iron condors, butterflies, etc) to save yourself from wasting money. But keep in mind the costs when you're doing this, and the fact that you are simply paying up to squish some risk into an unfamiliar shape. It also has a gambling-like tendency to create occasional wins to keep you interested. As for investment advice for retail people, if you are a coder there doesn't seem to be any reason to use anyone other than IB. They are the cheapest, and if you can code you can use their APIs to trade whatever it is you want. I'm not saying anyone can make a great trading strategy, but you can certainly manage some passive investments with barely any fees. Or just take advantage of RH and do it free I suppose.
- joyjoyjoy 7y ago
  What makes IB better then TOS? IB is more international. But in the end you will need at least 3-4 Brokers for a decent international exposure.
  - hbosch 7y ago
    In general, the top reason to pick IB is for it's customizability and it's super low commissions. TOS/TDA has some of the highest commissions in the industry at something like $7.95 per trade (before negotiating).
    - brianpgordon 7y ago
sg0 7y ago
I really like this article, although I don't fully understand most of the parts, mainly because I don't know much about brokerage and investment. But, I am joining the workforce soon, and it behooves me to have some grasp on these topics. Any non-Michael Lewis type book(s) you fine people would want to recommend?
- Scoundreller 7y ago
  When you have cash to invest in stocks/bonds/etc, just put your money in an appropriate Vanguard fund and don’t think too hard.
- sigstoat 7y ago
  https://www.bogleheads.org/wiki/Main_Page https://www.bogleheads.org/wiki/Main_Page is what you need if you're just joining the workforce. the details of how these large companies make their money is interesting, but tangential to your needs.
- mrich 7y ago
  Read "A Random Walk Down Wall Street" https://www.amazon.com/Random-Walk-Down-Wall-Street/dp/1324002182/ref=sr_1_1?crid=3JVL6R5DA0AR2&keywords=random+walk+down+wallstreet&qid=1561493764&s=gateway&sprefix=random+walk+down+wall%2Caps%2C288&sr=8-1 https://www.amazon.com/Random-Walk-Down-Wall-Street/dp/13240... I wish I had read it already at your age :)
  - mooreds 7y ago
    Second this. Really drives home what the average person should be doing in the markets. I also like "Are you a stock or a bond". https://www.amazon.com/Are-You-Stock-Bond-Financial/dp/0133115291 https://www.amazon.com/Are-You-Stock-Bond-Financial/dp/01331...
- sopooneo 7y ago
  1. You don't need fancy investment knowledge. In fact, you should actively avoid fancy knowledge until you have a firm grasp on the dead simple stuff. 2. Retirement investments should be: simple and boring. Once you have a solid financial plan in place that meets those criteria go ahead and gamble with whatever extra money you have if you wish. 3. Read this book cover to cover. It is very boring and very useful. After that read whatever else. https://www.amazon.com/Personal-Finance-Dummies-Eric-Tyson-ebook/dp/B019HRKY2U https://www.amazon.com/Personal-Finance-Dummies-Eric-Tyson-e...
whitepoplar 7y ago
patio11, if you're reading this, any chance you can comment further on Interactive Brokers? I've used them, along with Schwab, Fidelity, and Merrill Edge. From what I've read, IB used to have better execution than the rest, but now it seems like Schwab and Fidelity, at least, have caught up. Is there any <grinning because I know this and the rest don't> reason why a savvy user would prefer to use IB in 2019 over the others? I know they have ultra-low margin interest rates, a linked debit card, and a share lending program, but am I missing anything? Are there particular tax-avoidance techniques one can use with IB's building blocks? I'd love to know more!
- javert 7y ago
  patio11, if you're reading this, I'd also like to know the answer to that question, and I don't already know.
  - fyz 7y ago
    It's been a while since I've used IB, but they are one of the few retail front ends that offer algorithmic execution. i.e., instead of showing 1000 shares to the market, it might parcel it out in small chunks to hide your footprint. Although this typically isn't relevant for most orders, if you are trading something thin, it could be helpful.
    - djakjxnanjak 7y ago
      Patio11’s comment got me very curious and I’m not sure this quite explains it. If I’m selling millions of dollars worth of a tech stock, would IB give me a materially better price?
      - javert 7y ago
        Not patio11, but I interpreted that comment of his as referring to this particular part of his blog post: > A better reason for a technologist to be long a stock a lot of people want to short is because they have earned it through services and, for whatever reason, not sold it. If you own a material amount of stock in a publicly traded technology company, particularly a material amount of stock which is not widely available at the moment, you should probably devote non-zero effort to understanding whether you’re allowed to loan that stock out and, if so, whether your brokerage will pay you to do that. In other words, if you own millions of dollars of stock in a company but you aren't allowed to sell it or just aren't going to, you may be able to make serious money "for free" just by lending out your shares to short sellers. If your brokerage will pay you to do that, as IB will.
jmb12686 7y ago
Having worked in the industry (at a defunct brokerage with well known commercials featuring the owner/CEO in a purple helicopter), I would say this is a fairly accurate description of the industry's economics. Just like most topics in the financial world, the general public is left in the dark regarding the specifics...articles like this help shed a small light. *Updated spelling
galaxyLogic 7y ago
Here's some good advice I wish I had earlier. At least I think this is good advice. Tell me if I'm wrong. You need to maximize your IRA. Why? Because you can trade within your IRA without tax-consequences. Buy low and sell high. After selling keep the cash around until things go down again and it's time to buy.
- bluGill 7y ago
  If God is telling you when to buy and sell it is good advice. For the rest of us, buy low sell high correct but useless: you don't know what high and low are - unless of course you have supernatural sources of information. (there are other ways of getting this information, but they are illegal). An IRA is one of the best retirement accounts you can have, so you should put focus on getting it maxed out. (However if you get a match in your 401k you are throwing away free money to not take it, in general the difference between 401k and IRA doesn't make much a difference)
  - spiffyman 7y ago
    Actually, even God couldn't beat dollar-cost averaging[1]. [1]: https://ofdollarsanddata.com/even-god-couldnt-beat-dollar-cost-averaging/ https://ofdollarsanddata.com/even-god-couldnt-beat-dollar-co...
- function_seven 7y ago
  > Buy low and sell high. After selling keep the cash around until things go down again and it's time to buy. And what do you do when things never go down (below your selling price)? Stay in cash for the rest of your life? The S&P in 2013 was at an all-time high. If I sold then, I would have missed out on a tremendous amount of growth. Today the index is about double the 2013 level (which was itself an all-time high). So now that I've missed all this growth, what should I consider "buying low"?
  - hinkley 7y ago
    Up until about the time of Jobs' death there was a very clear market timing window on AAPL at every major product announcement. The stock would always run up in the day before the event. If the announcement was good, it would run up more after the event, but either way things would calm down after a few more days, because there was no way that price was sustainable. So every year you could make an extra 5% above the normal trend line for the stock by profit taking and buying back in immediately. The short term capital gains taxes would have eaten into that pretty hard.
sillypuddy 7y ago
*Google is listed on Nasdaq not NYSE
- eej71 7y ago
  Its primary is NASDAQ. But Google certainly trades on NYSE.
  - anonu 7y ago
    Within the US you can only be "listed" on 1 exchange. That listing exchange is considered the "primary" exchange. Trades can occur anywhere: on-exchange, off-exchange, ATSs, over-the-counter OTC, etc... But it gets more complicated when you go global as you can have cross-listings, as is common with Canadian stocks in the US. POT (Potash) for example is listed on TSX and cross-listed on NYSE... and can also trade on any other US exchange...
syn0byte 7y ago
I am absolutely winning by my generations standards. I own a home and have little doubt, no student loans, and health insurance that my doctor envies. I can only read articles like this wistfully imagining having some sort of "disposable income" for investments. The best long term familial/genetic survival strategy for a large and growing segment of the population is social and economic collapse. Factor that into your investment plans. I wish I could...
rb808 7y ago
I love IB but their API sucks, you have to run TWS or the gateway with manual 2 factor login. Anyone managed to improve on that? I'd like to get account and market data from code running on the cloud.
- cheez 7y ago
  You can disable 2FA if you like. However, if you set TWS to restart automatically, you only need to log in once a week which is what I have settled on. Very easy to run on the cloud as there are a bunch of container scripts online though I use a dedicated server. IB's API doesn't suck, it's very low level. It's asynchronous and works in multiple languages. There are a few good R and Python wrappers that you may want to check out.
  - Galanwe 7y ago
    > You can disable 2FA if you like. Sure, good idea, let's disable 2FA on your life savings account, just because you can't have 2 logins from different locations, or two different users. > IB's API doesn't suck, it's very low level. IB's "API" sucks hard, and it's not low level at all. First, it's not a real API between you and IB's servers. It's actually an API between your software and the IB heavy, graphical, client that you installed (the API gateway just being a lightweight client). You have to start a listening local socket on the heavy client, and send your messages to it. Which means the basis of IB automation starts with automating the start of a heavy graphical client, login with GUI input boxes, and keep the graphical client up (note that running this client will disconnect you from everywhere else, you now cannot use the IB phone app for instance). Second, it's not a real API, it basically just allows you to send messages to the client that emulates GUI actions you would have done with your mouse. Is that what you call "low level" ?! For instance, if you want to retrieve your executions > 2 days, you have to open a specific window on TWS and _THEN_ make your API call to the client. This is INSANE. Hell, even the documentation of their various API itself is a joke. You can find gems such as: > gateway may sometimes need to be restarted intraday. The possibility of avoiding intraday restarts so that gateway can typically remain running all day is under review. > It's asynchronous It's asynchronous in the _worst_ possible way. Basically you send messages to the heavy client, asynchronously, and you have a single stream of replies all tangled together with no means to know from which request they originate, which is why all wrapper implementations just _force_ you to make synchronous API calls: so that they can match the replies to the requests. > There are a few good R and Python wrappers There are only some half-baked, unfinished, tutorial-driven libraries that do synchronous request-reply for 50% of the protocol. The official library being an automatically-generated python binding of the Java SDK. Not my definition of "good". Did you actually ever used these APIs in real-life?!
bcp2384 7y ago
I honestly think there's an opportunity to create a YouTube channel that literally does nothing more than explain how X makes money, whether it's a VC firm, a Subway franchise, a toothpaste manufacturer, etc. As someone with an entrepreneurial tick but not someone who's gone all in it would be so helpful to have edu videos that just explained the basic business model of XYZ.
- patio11 7y ago
  Do you have a strong preference versus learning this from videos versus other potential form factors, like a podcast or e.g. glossy coffee-table book or less-glossy "this essay times N" book?
  - OldHand2018 7y ago
    I have a strong preference that if you were to do this, you keep it on your blog.
  - bradleyjg 7y ago
    It’s clear that there are lots of people that disagree with me but I have a terrible loathing for the YouTube video where someone looks at the camera and talks at you. Are other people getting a lot out of facial expressions or something?
    - Davertron 7y ago
      I don't feel quite as strongly as you, but I generally agree. I don't mind if the person is picture-in-picture-style in one of the corners, but I really would rather see something useful on the screen vs. just the person talking to me.
    - 55555 7y ago
      People like people. It's that simple. We are social animals.
  - Davertron 7y ago
    I feel the same way as the parent, and I would say I have a strong preference for Video. I wouldn't need crazy production value, even if you just did something Khan-Academy-style and wrote down terms and showed diagrams of how some of this works it would help me a lot. I found your article pretty interesting but also pretty overwhelming since I'm not fluent in this area. My next preference would be something like base.cs (https://medium.com/basecs https://medium.com/basecs) where, similarly, you at least define terms and draw some diagrams. I find it much easier to follow this stuff when there's something to look at with relations etc. While I love podcasts, I find learning anything like this pretty much impossible by listening to them. This is partially because it's harder for me to always follow the concepts just by listening, and partially because I'm usually only somewhat engaged (I'm exercising, or driving to work, etc.). But, maybe I'm also not your target audience, because I have far too basic an understanding of this stuff, so take it with a grain of salt.
ex3xu 7y ago
> Some people get mad about the financial industry for taking advantage of customers. I find it hard to get mad about a deal between willing counterparties, but if you think that Wall Street is soaking the US middle class, you should be monomanically focused on the interest spread between cash balances in brokerage accounts and high-interest bank accounts or money market funds. That is the cost that does not call itself a cost. I'm grateful for this insight provided by the article. As someone interested in the takes on inequality presented by thinkers like Piketty, Stiglitz and McChesney, I think it's important to consider the fact that ultimately, the public good will remain hamstrung by the fact that those with the greatest know-how to create returns on investment are also those with the greatest profit-driven motivations. The middle class gets to choose between getting fleeced by brokerage fees, getting fleeced by the low rates of return offered by the banks, or getting fleeced by your own ignorance and lack of access to the infrastructure to generate market returns in the adversarial world of modern finance. UBI and higher taxes I don't think can solve this problem, because as more and more of the market's growth is captured (extracted?) by the monoliths of private sector, who in a globalized world are not beholden to any one nation (just look at the effect of Brexit on Britain's financial sector), individual governments no longer really have the jurisdiction and leverage to capture enough of the market's return. In the past I have been quick to blame stuff like the repeal of Glass-Steagall and other bipartisan deregulation efforts, as well as the dangerous assumptions of competence behind stuff like Black-Scholes and the Harry Markowitz approach, but ultimately I can't see any way around the fact that the profit motive just seems to be the greatest available driver of financial competence. What can even be done beyond impotently hoping for Gates Foundation-style philanthropy? Maybe the Chinese are actually ahead of the game with their State capitalism approach, and moving forward we should just all turn our governments into fintech companies with a side hustle of providing public infrastructure and services to the citizenry...
- benj111 7y ago
  You know we're talking about 0.2% pa, and even that is optional. Investing in the stock market has never been cheaper. I've been investing for just over a decade and investing costs have easily more than halved in that time. I've got a mid 90s Motley Fool book somewhere, that quotes 1% as a reasonable management charge just for a tracker.
quenstionsasked 7y ago
Anyone knows what is meant by: "(Again, hate to belabor a point, but Wealthfront charges 25 bps all-in (on top of the underlying ETFs) and every customer knows it"?
- tempestn 7y ago
  Wealthfront charges 25 basis points, or 0.25%, of the value of your portfolio annually for their robo-advisor service. You also pay the fees for any ETFs or mutual funds held in your account, just as you would if you held them at a discount brokerage instead of a robo-advisor.
ForHackernews 7y ago
> you should be monomanically focused on the interest spread between cash balances in brokerage accounts and high-interest bank accounts or money market funds. That is the cost that does not call itself a cost. If you're keeping a large cash balance sitting uninvested in your brokerage account, sorry but that's on you.
- mrep 7y ago
  This is one of the many reasons why I love Vanguard. They default by putting all of your brokerage account money into their money market fund.
- mherdeg 7y ago
  Lately I have had a couple of reasons to keep cash in or near a brokerage account (brokerages offered signup bonuses for transferring assets, and affiliated banks offered mortgage relationship rates based on total balances in brokerage accounts). I've been buying one of VMMXX, VUSXX, or VMFXX and have been pretty happy with the results; the returns are comparable to a savings account, I'm not sure they're beating the current Wealthfront 2.51% cash account offer.
anonu 7y ago
Wow - first time I see some decent writing on the stock broker business, HFT, internalization. Good article... What I would add to the article: > Roboadvisors are a bad business below scale. I would say that roboadvisors are just a bad business. Theyve been around for a decade+ and we haven't really seen any large robos created from the concept. I think this is because ETFs effectively capture or can capture what Robos do. And we will continue trending towards that. In that way, you can encapsulate the benefits of Robo (div reinvestment, tax gains, target date strategies) within an ETF without having to move your money out of your current brokerage account. Also note that roboadvisors cant just do "robo". Today they are branching off into a dozen different services - so they look more and more like the traditional platforms. > And then there’s Robinhood, which is a discount brokerage whose marketing and product decisions probably do not assist their users in achieving successful outcomes. Yes - Robinhood is a gambling platform. Shameful IMHO but creates a field day for the owners and for internalizers/HFT folks.
- alasdair_ 7y ago
  >I think this is because ETFs effectively capture or can capture what Robos do I think the one "real" source of alpha that a robo offers the everyday user is automated tax loss harvesting, which is a pain in the ass to do otherwise.
  - harryh 7y ago
    Two important notes about tax loss harvesting: 1) For any given dollar you put into a robo-advisor any tax lost harvesting gains to be made based on that dollar will generally happen in the first 1-3 years. After that gains will generally approach zero. However, the fees you pay the robo-advisor will last as long as you keep your money there. 2) Once you make the decision to use a robo-advisor which purchases hundreds of stocks on your behalf, there is a lot of lock in. Automation becomes essentially required to continue to maintain the account. You do have the option of selling everything and going back to an ETF based approach but at that point you'll incur capital gains completely negating any positive impact you got up from by loss harvesting. These points were not clear to me when I began using one of the popular robo-advisors some years ago. I kind of wish they had been.
twic 7y ago
Suppose I were to give you $100, in return for your promise to give it back when I wanted it and pay me 0.27% annualized interest in the meanwhile. Suppose you invested this in a virtually riskless bond, perhaps a mortgage-backed security with government backing, offering 2.53% annualized interest. You’d earn $2.26 in net interest in a year. You would also bear the risk of me wanting my money back before the security matures, at a time when its price is less than you paid for it. A better example would be if you invested it by lending on an overnight inter-bank market, which is virtually risk-free, but gives you the option to stop lending at any time. You could make something like 2.38% in fed funds [1] or GC repo [2], so the argument still stands. [1] https://apps.newyorkfed.org/markets/autorates/fed%20funds https://apps.newyorkfed.org/markets/autorates/fed%20funds [2] https://www.newyorkfed.org/markets/treasury-repo-reference-rates https://www.newyorkfed.org/markets/treasury-repo-reference-r...
twic 7y ago
Matt Levine on Robinhood and payment for order flow: https://www.bloomberg.com/opinion/articles/2018-10-16/carl-icahn-wants-to-fight-dell-again https://www.bloomberg.com/opinion/articles/2018-10-16/carl-i...
- navigatesol 7y ago
  Yes, Levine does a great job conveying why both parties to the order flow sale benefit (and those outside it lose). I'm glad patio11 wrote this article, too, because sometimes this community is...ignorant to the world if finance.
cosmotron 7y ago
> Brokerage customers keep ~10% of their assets in cash. The 200 basis point spread between cash in brokerage accounts and money market funds or insured bank accounts [...] is equivalent to a 20 bps asset management fee across the portfolio. Could someone break this down a bit more? I'm trying to grok the point, but don't have the intuition. Where is the "200 basis point spread" coming from? Why is it equivalent to a 20 bps management fee?
- Iburinoc 7y ago
  The "200 basis point spread" comes from the difference between the very low or non-existent interest paid on the cash in brokerage accounts and the rates the brokerage can earn by lending that money out basically risk-free. If you keep 10% of your assets in cash, a 200 bp interest spread becomes effectively a 20 bp management fee on your assets.
randomuser22 7y ago
@patio11 The numbers for interactive brokers appear to add up to >100%
throaway2234 7y ago
Almost all of the discussion around payment for order flow is inaccurate. To highlight the worst, 1. Retail order flow is toxic like all other flow and trading against it blindly leads to material losses. Retail is particularly well informed with respect to news and major market events. "Retail investors destroy value when trading" is a fun quote and repeated assertion of the article, but is not true of any retail order flow I've seen (and I have seen all of it). 2. Wholesalers make surprisingly little money from the flow being uninformed. Most of the P&L is a result of (a) fee arbitrage (some strategies that aren't possible on public markets become possible with an internalizer because there are less market access fees), (b) queue priority (internalizing a market order allows the market maker to effectively rest at the inside without quoting there), and (c) strategies for executing special order types that cannot be traded against on exchanges (stops, for example). 3. Robinhood earns more for order flow because their order flow is less toxic (less informed) than other brokerages. It has nothing to do with options. 4. Retail order flow data is incredibly valuable since it's needed to build pricing and trading models. Citadel Securities, in fact, does run models (and machine learning models) against retail trade data and would not be profitable without it. Finally, if wholesalers are good for retail investors is an open question that won't be answered by this blog piece. A simple thought exercise: if I'm a retail investor with the most aggressive limit order in the market and a market maker internalizes a retail market order on the opposing side -- is the result net good, or net bad for the two retail participants?
ralph84 7y ago
Somewhat tangential, but I hope someday we can move more towards having stocks trade regularly but not on microsecond timescales. All of the fragmented liquidity being exploited by HFT is not a net economic gain. The exchanges already have an auction process to set opening and closing prices. Just run the same auction process every 10 minutes allowing liquidity to pool.
- 0b01 7y ago
  Then all the liquidity would aggregate within the last millisecond of that 10 minute interval
deleted 7y ago
[deleted]
bubblewrap 7y ago
Sorry I have troubles understanding. I gather the main money maker is "net interest" - but wouldn't that only apply if the Discount Broker sold me an investment (promising me x% in returns, while they make x+y% by reinvesting my money)? I thought that is exactly what Discount Brokers are not doing, I thought they only help me buy other people's investment vehicles? Or is it just the cash I have sitting at the Discount Broker, to be ready to trade, that produces the gains for the Broker (average 10% according to the article)? Or do the DBs usually offer "savings accounts" with interest x on your money, and all the other stuff (cheap stock trades and so on) are supposedly only the advertising, luring in customers so that you can send them offers? "high-interest bank accounts" - where can I get such a one, or do they only exist for very rich entities, or only in the US?
- bryan_w 7y ago
  It is literally the cash sitting in your account uninvested
spoonie 7y ago
I use a discount brokerage in Canada called Questrade. I keep as little cash as possible in my account (contributions and dividends get used within a few days to buy more ETFs), and my portfolio is entirely ETFs. If I also pay no commissions when issuing buy orders, how does the brokerage make money from me? Apart from the fees for order placement, is there interest earned for short-sellers borrowing ETFs?
- navigatesol 7y ago
  >how does the brokerage make money from me? Interest on any balance. Commission on sell orders, bonds, GICs, options, MFs. Order flow. Currency exchange. ECN fees when you buy in odd lots. I mean, if you're really diligent and restrictive in your usage, you can avoid your broker "making money off you". But as long as fees are transparent and fair, what's the problem with them making some money providing a service you like?
  - spoonie 7y ago
    No problem at all! :) Just curious about the sources of revenue from me as a customer if I don’t hold cash, don’t issue sell orders, and buy only ETFs.
- joelx 7y ago
  My personal opinion is that Questrade is terrible. I have been getting one of their customers emails for years and notified them about it and nothing has been done by them. If you want to risk losing all your money, go with Questrade since if I was a scammer I could use this to get access to this person's account.
anonu 7y ago
The shareholder letter from IB CEO Thomas Petterfly regarding the risks of HFT is quite interesting. (Page 14 https://investors.interactivebrokers.com/download/2018-IBG-AR.pdf https://investors.interactivebrokers.com/download/2018-IBG-A...) and copied partially below: Trading against HFTs and institutions taking liquidity is generally not profitable, at least in the short run. As a consequence, market participants are reluctant to place limit orders and the NBBO (the National Best Bid or Offer, or the highest limit order to buy and the lowest limit order to sell) becomes wider. HFTs are obligated to fill the orders they buy inside the NBBO to the extent of the size displayed. The wider the NBBO becomes, the more discretion an HFT has as to the price at which it fills the order and, therefore, the more profit it makes and the more it can then afford to pay for these orders. The more HFTs pay for retail orders, the more brokers will sell their orders to HFTs and, consequently, even fewer orders will trade at the exchanges in a competitive market. Also, the more payment the brokers receive for their customers' orders, the more they can discount the commissions they charge their customers. Hence the newly emerging zero commission brokers. However, the customer is likely to lose more on the execution price than she saves on the commission. This is a self-reinforcing feedback loop in which wider markets cause even wider markets, increasing payment for orders, moving more volume off the exchanges. Indeed, while in 2008 26.6% of the listed stock volume traded off the exchanges, by 2018 36.3% of the volume traded off exchange. What is the predictable consequence? Liquidity vanishes. Momentum traders drive the markets to more extreme highs and extreme lows in shorter periods of time. Investors holding margin accounts become less able to liquidate, adding to the price swings. This is a disaster waiting to happen. While all of us in the trading and investment community have in one way or another adapted, and would prefer to let things continue along the status quo, we cannot pretend that all is well the way it is. We must implement structural changes to the markets before it is too late.
johnflan 7y ago
Where would DEGIRO in Europe sit is this classification of brokerages?
simonebrunozzi 7y ago
Patrick is brilliant, as always. This piece is particularly brilliant, and I wish he will elaborate more on it in the future: > Some people get mad about the financial industry for taking advantage of customers. I find it hard to get mad about a deal between willing counterparties, but if you think that Wall Street is soaking the US middle class, you should be monomanically focused on the interest spread between cash balances in brokerage accounts and high-interest bank accounts or money market funds. That is the cost that does not call itself a cost.
runeks 7y ago
> Suppose I were to give you $100, in return for your promise to give it back when I wanted it and pay me 0.27% annualized interest in the meanwhile. Suppose you invested this in a virtually riskless bond, perhaps a mortgage-backed security with government backing, offering 2.53% annualized interest. You’d earn $2.26 in net interest in a year. How would you rectify the duration mismatch between the on-demand deposit (of $100) with the multi-year mortgage-backed security? For example, if the rate of interest increases, my $100 — that you invested in bonds — will now be worth less than $100 (since the price of the bond has fallen). How will you be able to honor my withdrawal when you’re insolvent?
lifeisstillgood 7y ago
Just dropping this thought off : patio11 just got himself and this article a nice write up on Matt Levine's Bloomberg newsletter (its v good too) But what I realised is that patio11 must have spent many days researching this and writing it up, then published it and it frankly it looks like "real" journalism. in fact it is, real journalism But it's not packaged like it. So for all the talk about death of newspapers etc, it is possible for someone who is not a journalist, and not paid like one, to do the work - maybe we will see citizen journalism ?
acct33571 7y ago
@patio11 - where did the 10% cash number come from for assets held in brokerage accounts? That seems very high, but I guess I have no clue.
- patio11 7y ago
  The annual reports and division.

696 points by charlieirish 7y ago

I’d love to see the same treatment on discount auto insurers and large apartment realty groups and basically every other business that is actually about float.

npongratz 7y ago

Possible correction to the essay: I believe in this hypothetical you were actually supposed to be giving me one hundred dollars: > "Suppose I were to give you a dollar... You’d earn $2.26 in net interest in a year."

imperialdrive 7y ago
That threw me off right from the start, but I did follow down the rest of the way and enjoyed the knowledge transfer.
benj111 7y ago
Good question On the one hand I would prefer to be given $100. On the other, a 226% interest rate is very attractive. Can I have the $100 invested at 226%?
patio11 7y ago
Fixed, thanks. (The joys of doing final editing past midnight.)

skyraider 7y ago

How do you use Wealthfront if living abroad? Their FAQ states that they require a permanent US residential address. Also unclear to me whether Interactive Brokers transparently moves funds to brokerage accounts domiciled in your new jurisdiction, triggering FATCA filing requirements, and if they do a good job of making these clear to customers.

davidw 7y ago
People living abroad who are US citizens will often use an address they're associated with - parents or other close relatives. That's what I did for years. I think there are services you can use too. In turn, I'm curious why he bothers with Wealth Front rather than just parking it all in a few Vanguard funds. That cash account looks pretty attractive, but other than that...?
- cbhl 7y ago
  There's a link to https://training.kalzumeus.com/newsletters/archive/investing-for-geeks https://training.kalzumeus.com/newsletters/archive/investing... which discusses this: Vanguard is one of the two Right Answers(TM). My experience with roboadvisors is that the pretty user interfaces encouraged me to save more. Your mileage may vary.
- patio11 7y ago
  I am a huge fan of Vanguard, but Vanguard Japan has strong compliance concerns about providing services to Americans and Vanguard US has strong compliance concerns about providing services to people living in Japan, so I cannot conveniently consume Vanguard services directly.
rb808 7y ago
fbar is pretty trivial to file yourself, takes 20 minutes. https://www.fincen.gov/report-foreign-bank-and-financial-accounts https://www.fincen.gov/report-foreign-bank-and-financial-acc...
- skyraider 7y ago
  Right, not unclear on that, just unclear on whether IKBR domiciles the accounts in such a way that you'd trigger filing requirements, and how to know this when using the platform.
patio11 7y ago
Also unclear to me... I think that's more an "Ask them" question than an "Ask me" question but single data point: neither my tax advisors nor myself felt a lack of clarity with respect to the treatment of their IBSJ and IBLLC accounts, a distinction they are (appropriately) pedantic about with respect to Japan.

jwr 7y ago

I would be very interested to know which online brokerages cater to US expats — @patio11 seems to have experience with this. In general, any advice and pointers about brokerages/banks/insurance for US expats from an actual expat would be immensely valuable. The googlable stuff is mostly fluff and SEO crap.

cascom 7y ago
Not exactly what you are looking for - but a pretty good organization/advocacy group if you live abroad https://www.americansabroad.org/ https://www.americansabroad.org/
davidw 7y ago
Depends what your needs are, I guess? I always kept my foreign stuff pretty separate from my US stuff. By keeping an address in the US (relatives) I mostly just used US services as anyone else would.
- jwr 7y ago
  Many expats do not have a US address and can't reasonably pretend that they "reside" in the US. (the whole concept of "residence" is from the stone ages, but I digress)
rb808 7y ago
Schwab definitely has branches in a few countries and caters to expats. https://international.schwab.com/public/international/us_investing/us_expat_essentials https://international.schwab.com/public/international/us_inv... interactivebrokers is set up globally as well.
- MandieD 7y ago
  IB was willing to take me, a US citizen residing in Germany, but the account was opened with their UK branch and falls under EU rules (no non-EU ETFs, for example). As a US citizen, you do not want any non-US-domiciled ETFs; PFIC is a nightmare. Schwab, on the other hand, opened a US-based account for me even though I was quite open about my German address and tax residency, and I can buy regular US-domiciled, low-cost index-tracking ETFs, which frankly is the only thing a non-enthusiast like me should be touching with their retirement money.

gist 7y ago

> A discount brokerage is not a full-service brokerage, which used to charge several hundred 1970s dollars to place a single stock trade and which used to call you to convince you of the desirability of paying them several hundred dollars to place a single stock trade. The implication (by the choice of words here) 'call you to convince you of the desirability of paying them several hundred dollars to place a single stock trade' implies incorrectly that retail brokers were not in some way able to earn that money by providing value. If that were the case they would not exist and money would flow elsewhere. That is if in the end the client did not feel they were getting value. Not everything out there is better DIY or even close to that. Some people actually don't want to search for hours figuring out the best place to travel or which airline flight to take or city to go to. They'd rather pay a travel agent or someone else to do that for them. Just because the masses do not have money to pay for advice does not mean that that advice is not of clear value to someone else who is situation differently financially. This is actually a problem in the computer business. People (en masse) free advice at no charge what others used to get paid to do. Some people actually just want a solution to a problem. They are not interested in doing it themselves, following tutorials or having to depend on some person being nice and not charging them for a solution.

jdminhbg 7y ago
> The implication (by the choice of words here) 'call you to convince you of the desirability of paying them several hundred dollars to place a single stock trade' implies incorrectly that retail brokers were not in some way able to earn that money by providing value. If that were the case they would not exist and money would flow elsewhere. The market doesn't correct itself overnight. In fact the market share of retail brokers has plummeted since the invention of index funds and now discount brokerages, suggesting that they were not providing that value.
- bluGill 7y ago
  I would change that to not providing enough value. If good advice saves you $70 was it worth $700?
  - 7y ago

beezle 7y ago

Not sure what his point of including IB in there was? They are very up front about pretty much everything. Not sure you can find better than benchmark-50bp on cash balances and for accounts with larger balances they have a program in place to get you a little bit better. Also, its really on the account holder to manage their cash balances. Most brokers allow you to do t-bills at auction for no charge, durations are as short as 4 weeks. You can also (at higher risk) usually find a floating rate fund they handle for no commission, FLOT or FLRN or simiilar.

homero 7y ago
I wonder about Firstrade, they just went free

Scoundreller 7y ago

> since “retail investors destroy value when trading” is about as citation-needed as “smoking causes lung cancer” at this point I mean, it could be a confounding variable that’s causing cancer in smokers. We haven’t exactly run randomized control trials in humans to clearly show causation. The correlation sure is strong though.

hcknwscommenter 7y ago
Huh? Sure, randomized control trials in humans have not been performed. But, there is no debate about whether smoking causes cancer. From cell-based and animal models to retrospective epidemiological studies, the data are clear. Smoking causes cancer. Do we need randomized controlled trials to "prove" cutting someone's head off causes death?
- Scoundreller 7y ago
  I’d go with cancer is correlated with smoking. But yes, I expect some rigour that avoids confounding variables by design to say “causes”. Great theories have been destroyed before. We should account for what degree other characteristics about smokers causes cancer (e.g. socioeconomics or other factors leading to addictions). You can still blink after your head’s chopped off. Debatable if you’re immediately dead or not.
  - woadwarrior01 7y ago
    > I’d go with cancer is correlated with smoking. Judea Pearl‘s book on causal inference, “The book of why” spends a couple of chapters on the fascinating story of how the causal connection between smoking and cancer was finally established.
et2o 7y ago
This goes to the definition of causality. Ultimately you can never "prove" causality, even with the best designed experiment. You are allowed to make causal claims for non-RCT data. Lookup Bradford Hill criteria, just to start.
7y ago

mwerty 7y ago

Had to look up internalizer (was a bit unclear): https://jwg-it.eu/defining-systematic-internaliser-under-mifid-ii https://jwg-it.eu/defining-systematic-internaliser-under-mif... but otherwise a good read.

lordnacho 7y ago

Ex options MM / hedge fund manager / HFT guy here. This is a really good article. The net interest thing has a parallel in the HF world. CTAs, a type of hedge fund, used to do substantially the same thing. The margin requirement for holding a load of futures is quite low, but the customers of the fund have put cash into the fund. So back when interest rates were higher, a fair bit of a CTA's returns would be interest on the cash. He's right about Robinhood. From the HFT side, the problem is if you're in the "real" institutional market, someone will run you over occasionally. With retail, that never happens, and the spread you can offer is thus tighter. There's no front running to it, just the ease of non toxic flow. So RH is trying to put forward zero comms as a way to get some deposits. He's also right about options. It's tempting to think that you can just sell some options to collect premium, or do a combination of some sort (iron condors, butterflies, etc) to save yourself from wasting money. But keep in mind the costs when you're doing this, and the fact that you are simply paying up to squish some risk into an unfamiliar shape. It also has a gambling-like tendency to create occasional wins to keep you interested. As for investment advice for retail people, if you are a coder there doesn't seem to be any reason to use anyone other than IB. They are the cheapest, and if you can code you can use their APIs to trade whatever it is you want. I'm not saying anyone can make a great trading strategy, but you can certainly manage some passive investments with barely any fees. Or just take advantage of RH and do it free I suppose.

joyjoyjoy 7y ago
What makes IB better then TOS? IB is more international. But in the end you will need at least 3-4 Brokers for a decent international exposure.
- hbosch 7y ago
  In general, the top reason to pick IB is for it's customizability and it's super low commissions. TOS/TDA has some of the highest commissions in the industry at something like $7.95 per trade (before negotiating).
  - brianpgordon 7y ago

sg0 7y ago

I really like this article, although I don't fully understand most of the parts, mainly because I don't know much about brokerage and investment. But, I am joining the workforce soon, and it behooves me to have some grasp on these topics. Any non-Michael Lewis type book(s) you fine people would want to recommend?

Scoundreller 7y ago
When you have cash to invest in stocks/bonds/etc, just put your money in an appropriate Vanguard fund and don’t think too hard.
sigstoat 7y ago
https://www.bogleheads.org/wiki/Main_Page https://www.bogleheads.org/wiki/Main_Page is what you need if you're just joining the workforce. the details of how these large companies make their money is interesting, but tangential to your needs.
mrich 7y ago
Read "A Random Walk Down Wall Street" https://www.amazon.com/Random-Walk-Down-Wall-Street/dp/1324002182/ref=sr_1_1?crid=3JVL6R5DA0AR2&keywords=random+walk+down+wallstreet&qid=1561493764&s=gateway&sprefix=random+walk+down+wall%2Caps%2C288&sr=8-1 https://www.amazon.com/Random-Walk-Down-Wall-Street/dp/13240... I wish I had read it already at your age :)
- mooreds 7y ago
  Second this. Really drives home what the average person should be doing in the markets. I also like "Are you a stock or a bond". https://www.amazon.com/Are-You-Stock-Bond-Financial/dp/0133115291 https://www.amazon.com/Are-You-Stock-Bond-Financial/dp/01331...
sopooneo 7y ago
1. You don't need fancy investment knowledge. In fact, you should actively avoid fancy knowledge until you have a firm grasp on the dead simple stuff. 2. Retirement investments should be: simple and boring. Once you have a solid financial plan in place that meets those criteria go ahead and gamble with whatever extra money you have if you wish. 3. Read this book cover to cover. It is very boring and very useful. After that read whatever else. https://www.amazon.com/Personal-Finance-Dummies-Eric-Tyson-ebook/dp/B019HRKY2U https://www.amazon.com/Personal-Finance-Dummies-Eric-Tyson-e...

whitepoplar 7y ago

patio11, if you're reading this, any chance you can comment further on Interactive Brokers? I've used them, along with Schwab, Fidelity, and Merrill Edge. From what I've read, IB used to have better execution than the rest, but now it seems like Schwab and Fidelity, at least, have caught up. Is there any <grinning because I know this and the rest don't> reason why a savvy user would prefer to use IB in 2019 over the others? I know they have ultra-low margin interest rates, a linked debit card, and a share lending program, but am I missing anything? Are there particular tax-avoidance techniques one can use with IB's building blocks? I'd love to know more!

javert 7y ago
patio11, if you're reading this, I'd also like to know the answer to that question, and I don't already know.
- fyz 7y ago
  It's been a while since I've used IB, but they are one of the few retail front ends that offer algorithmic execution. i.e., instead of showing 1000 shares to the market, it might parcel it out in small chunks to hide your footprint. Although this typically isn't relevant for most orders, if you are trading something thin, it could be helpful.
  - djakjxnanjak 7y ago
    Patio11’s comment got me very curious and I’m not sure this quite explains it. If I’m selling millions of dollars worth of a tech stock, would IB give me a materially better price?
    - javert 7y ago
      Not patio11, but I interpreted that comment of his as referring to this particular part of his blog post: > A better reason for a technologist to be long a stock a lot of people want to short is because they have earned it through services and, for whatever reason, not sold it. If you own a material amount of stock in a publicly traded technology company, particularly a material amount of stock which is not widely available at the moment, you should probably devote non-zero effort to understanding whether you’re allowed to loan that stock out and, if so, whether your brokerage will pay you to do that. In other words, if you own millions of dollars of stock in a company but you aren't allowed to sell it or just aren't going to, you may be able to make serious money "for free" just by lending out your shares to short sellers. If your brokerage will pay you to do that, as IB will.

jmb12686 7y ago

Having worked in the industry (at a defunct brokerage with well known commercials featuring the owner/CEO in a purple helicopter), I would say this is a fairly accurate description of the industry's economics. Just like most topics in the financial world, the general public is left in the dark regarding the specifics...articles like this help shed a small light. *Updated spelling

galaxyLogic 7y ago

Here's some good advice I wish I had earlier. At least I think this is good advice. Tell me if I'm wrong. You need to maximize your IRA. Why? Because you can trade within your IRA without tax-consequences. Buy low and sell high. After selling keep the cash around until things go down again and it's time to buy.

bluGill 7y ago
If God is telling you when to buy and sell it is good advice. For the rest of us, buy low sell high correct but useless: you don't know what high and low are - unless of course you have supernatural sources of information. (there are other ways of getting this information, but they are illegal). An IRA is one of the best retirement accounts you can have, so you should put focus on getting it maxed out. (However if you get a match in your 401k you are throwing away free money to not take it, in general the difference between 401k and IRA doesn't make much a difference)
- spiffyman 7y ago
  Actually, even God couldn't beat dollar-cost averaging[1]. [1]: https://ofdollarsanddata.com/even-god-couldnt-beat-dollar-cost-averaging/ https://ofdollarsanddata.com/even-god-couldnt-beat-dollar-co...
function_seven 7y ago
> Buy low and sell high. After selling keep the cash around until things go down again and it's time to buy. And what do you do when things never go down (below your selling price)? Stay in cash for the rest of your life? The S&P in 2013 was at an all-time high. If I sold then, I would have missed out on a tremendous amount of growth. Today the index is about double the 2013 level (which was itself an all-time high). So now that I've missed all this growth, what should I consider "buying low"?
- hinkley 7y ago
  Up until about the time of Jobs' death there was a very clear market timing window on AAPL at every major product announcement. The stock would always run up in the day before the event. If the announcement was good, it would run up more after the event, but either way things would calm down after a few more days, because there was no way that price was sustainable. So every year you could make an extra 5% above the normal trend line for the stock by profit taking and buying back in immediately. The short term capital gains taxes would have eaten into that pretty hard.

sillypuddy 7y ago

*Google is listed on Nasdaq not NYSE

eej71 7y ago
Its primary is NASDAQ. But Google certainly trades on NYSE.
- anonu 7y ago
  Within the US you can only be "listed" on 1 exchange. That listing exchange is considered the "primary" exchange. Trades can occur anywhere: on-exchange, off-exchange, ATSs, over-the-counter OTC, etc... But it gets more complicated when you go global as you can have cross-listings, as is common with Canadian stocks in the US. POT (Potash) for example is listed on TSX and cross-listed on NYSE... and can also trade on any other US exchange...

syn0byte 7y ago

I am absolutely winning by my generations standards. I own a home and have little doubt, no student loans, and health insurance that my doctor envies. I can only read articles like this wistfully imagining having some sort of "disposable income" for investments. The best long term familial/genetic survival strategy for a large and growing segment of the population is social and economic collapse. Factor that into your investment plans. I wish I could...

rb808 7y ago

I love IB but their API sucks, you have to run TWS or the gateway with manual 2 factor login. Anyone managed to improve on that? I'd like to get account and market data from code running on the cloud.

cheez 7y ago
You can disable 2FA if you like. However, if you set TWS to restart automatically, you only need to log in once a week which is what I have settled on. Very easy to run on the cloud as there are a bunch of container scripts online though I use a dedicated server. IB's API doesn't suck, it's very low level. It's asynchronous and works in multiple languages. There are a few good R and Python wrappers that you may want to check out.
- Galanwe 7y ago
  > You can disable 2FA if you like. Sure, good idea, let's disable 2FA on your life savings account, just because you can't have 2 logins from different locations, or two different users. > IB's API doesn't suck, it's very low level. IB's "API" sucks hard, and it's not low level at all. First, it's not a real API between you and IB's servers. It's actually an API between your software and the IB heavy, graphical, client that you installed (the API gateway just being a lightweight client). You have to start a listening local socket on the heavy client, and send your messages to it. Which means the basis of IB automation starts with automating the start of a heavy graphical client, login with GUI input boxes, and keep the graphical client up (note that running this client will disconnect you from everywhere else, you now cannot use the IB phone app for instance). Second, it's not a real API, it basically just allows you to send messages to the client that emulates GUI actions you would have done with your mouse. Is that what you call "low level" ?! For instance, if you want to retrieve your executions > 2 days, you have to open a specific window on TWS and _THEN_ make your API call to the client. This is INSANE. Hell, even the documentation of their various API itself is a joke. You can find gems such as: > gateway may sometimes need to be restarted intraday. The possibility of avoiding intraday restarts so that gateway can typically remain running all day is under review. > It's asynchronous It's asynchronous in the _worst_ possible way. Basically you send messages to the heavy client, asynchronously, and you have a single stream of replies all tangled together with no means to know from which request they originate, which is why all wrapper implementations just _force_ you to make synchronous API calls: so that they can match the replies to the requests. > There are a few good R and Python wrappers There are only some half-baked, unfinished, tutorial-driven libraries that do synchronous request-reply for 50% of the protocol. The official library being an automatically-generated python binding of the Java SDK. Not my definition of "good". Did you actually ever used these APIs in real-life?!

bcp2384 7y ago

I honestly think there's an opportunity to create a YouTube channel that literally does nothing more than explain how X makes money, whether it's a VC firm, a Subway franchise, a toothpaste manufacturer, etc. As someone with an entrepreneurial tick but not someone who's gone all in it would be so helpful to have edu videos that just explained the basic business model of XYZ.

patio11 7y ago
Do you have a strong preference versus learning this from videos versus other potential form factors, like a podcast or e.g. glossy coffee-table book or less-glossy "this essay times N" book?
- OldHand2018 7y ago
  I have a strong preference that if you were to do this, you keep it on your blog.
- bradleyjg 7y ago
  It’s clear that there are lots of people that disagree with me but I have a terrible loathing for the YouTube video where someone looks at the camera and talks at you. Are other people getting a lot out of facial expressions or something?
  - Davertron 7y ago
    I don't feel quite as strongly as you, but I generally agree. I don't mind if the person is picture-in-picture-style in one of the corners, but I really would rather see something useful on the screen vs. just the person talking to me.
  - 55555 7y ago
    People like people. It's that simple. We are social animals.
- Davertron 7y ago
  I feel the same way as the parent, and I would say I have a strong preference for Video. I wouldn't need crazy production value, even if you just did something Khan-Academy-style and wrote down terms and showed diagrams of how some of this works it would help me a lot. I found your article pretty interesting but also pretty overwhelming since I'm not fluent in this area. My next preference would be something like base.cs (https://medium.com/basecs https://medium.com/basecs) where, similarly, you at least define terms and draw some diagrams. I find it much easier to follow this stuff when there's something to look at with relations etc. While I love podcasts, I find learning anything like this pretty much impossible by listening to them. This is partially because it's harder for me to always follow the concepts just by listening, and partially because I'm usually only somewhat engaged (I'm exercising, or driving to work, etc.). But, maybe I'm also not your target audience, because I have far too basic an understanding of this stuff, so take it with a grain of salt.

ex3xu 7y ago

> Some people get mad about the financial industry for taking advantage of customers. I find it hard to get mad about a deal between willing counterparties, but if you think that Wall Street is soaking the US middle class, you should be monomanically focused on the interest spread between cash balances in brokerage accounts and high-interest bank accounts or money market funds. That is the cost that does not call itself a cost. I'm grateful for this insight provided by the article. As someone interested in the takes on inequality presented by thinkers like Piketty, Stiglitz and McChesney, I think it's important to consider the fact that ultimately, the public good will remain hamstrung by the fact that those with the greatest know-how to create returns on investment are also those with the greatest profit-driven motivations. The middle class gets to choose between getting fleeced by brokerage fees, getting fleeced by the low rates of return offered by the banks, or getting fleeced by your own ignorance and lack of access to the infrastructure to generate market returns in the adversarial world of modern finance. UBI and higher taxes I don't think can solve this problem, because as more and more of the market's growth is captured (extracted?) by the monoliths of private sector, who in a globalized world are not beholden to any one nation (just look at the effect of Brexit on Britain's financial sector), individual governments no longer really have the jurisdiction and leverage to capture enough of the market's return. In the past I have been quick to blame stuff like the repeal of Glass-Steagall and other bipartisan deregulation efforts, as well as the dangerous assumptions of competence behind stuff like Black-Scholes and the Harry Markowitz approach, but ultimately I can't see any way around the fact that the profit motive just seems to be the greatest available driver of financial competence. What can even be done beyond impotently hoping for Gates Foundation-style philanthropy? Maybe the Chinese are actually ahead of the game with their State capitalism approach, and moving forward we should just all turn our governments into fintech companies with a side hustle of providing public infrastructure and services to the citizenry...

benj111 7y ago
You know we're talking about 0.2% pa, and even that is optional. Investing in the stock market has never been cheaper. I've been investing for just over a decade and investing costs have easily more than halved in that time. I've got a mid 90s Motley Fool book somewhere, that quotes 1% as a reasonable management charge just for a tracker.

quenstionsasked 7y ago

Anyone knows what is meant by: "(Again, hate to belabor a point, but Wealthfront charges 25 bps all-in (on top of the underlying ETFs) and every customer knows it"?

tempestn 7y ago
Wealthfront charges 25 basis points, or 0.25%, of the value of your portfolio annually for their robo-advisor service. You also pay the fees for any ETFs or mutual funds held in your account, just as you would if you held them at a discount brokerage instead of a robo-advisor.

ForHackernews 7y ago

> you should be monomanically focused on the interest spread between cash balances in brokerage accounts and high-interest bank accounts or money market funds. That is the cost that does not call itself a cost. If you're keeping a large cash balance sitting uninvested in your brokerage account, sorry but that's on you.

mrep 7y ago
This is one of the many reasons why I love Vanguard. They default by putting all of your brokerage account money into their money market fund.
mherdeg 7y ago
Lately I have had a couple of reasons to keep cash in or near a brokerage account (brokerages offered signup bonuses for transferring assets, and affiliated banks offered mortgage relationship rates based on total balances in brokerage accounts). I've been buying one of VMMXX, VUSXX, or VMFXX and have been pretty happy with the results; the returns are comparable to a savings account, I'm not sure they're beating the current Wealthfront 2.51% cash account offer.

anonu 7y ago

Wow - first time I see some decent writing on the stock broker business, HFT, internalization. Good article... What I would add to the article: > Roboadvisors are a bad business below scale. I would say that roboadvisors are just a bad business. Theyve been around for a decade+ and we haven't really seen any large robos created from the concept. I think this is because ETFs effectively capture or can capture what Robos do. And we will continue trending towards that. In that way, you can encapsulate the benefits of Robo (div reinvestment, tax gains, target date strategies) within an ETF without having to move your money out of your current brokerage account. Also note that roboadvisors cant just do "robo". Today they are branching off into a dozen different services - so they look more and more like the traditional platforms. > And then there’s Robinhood, which is a discount brokerage whose marketing and product decisions probably do not assist their users in achieving successful outcomes. Yes - Robinhood is a gambling platform. Shameful IMHO but creates a field day for the owners and for internalizers/HFT folks.

alasdair_ 7y ago
>I think this is because ETFs effectively capture or can capture what Robos do I think the one "real" source of alpha that a robo offers the everyday user is automated tax loss harvesting, which is a pain in the ass to do otherwise.
- harryh 7y ago
  Two important notes about tax loss harvesting: 1) For any given dollar you put into a robo-advisor any tax lost harvesting gains to be made based on that dollar will generally happen in the first 1-3 years. After that gains will generally approach zero. However, the fees you pay the robo-advisor will last as long as you keep your money there. 2) Once you make the decision to use a robo-advisor which purchases hundreds of stocks on your behalf, there is a lot of lock in. Automation becomes essentially required to continue to maintain the account. You do have the option of selling everything and going back to an ETF based approach but at that point you'll incur capital gains completely negating any positive impact you got up from by loss harvesting. These points were not clear to me when I began using one of the popular robo-advisors some years ago. I kind of wish they had been.

twic 7y ago

Suppose I were to give you $100, in return for your promise to give it back when I wanted it and pay me 0.27% annualized interest in the meanwhile. Suppose you invested this in a virtually riskless bond, perhaps a mortgage-backed security with government backing, offering 2.53% annualized interest. You’d earn $2.26 in net interest in a year. You would also bear the risk of me wanting my money back before the security matures, at a time when its price is less than you paid for it. A better example would be if you invested it by lending on an overnight inter-bank market, which is virtually risk-free, but gives you the option to stop lending at any time. You could make something like 2.38% in fed funds [1] or GC repo [2], so the argument still stands. [1] https://apps.newyorkfed.org/markets/autorates/fed%20funds https://apps.newyorkfed.org/markets/autorates/fed%20funds [2] https://www.newyorkfed.org/markets/treasury-repo-reference-rates https://www.newyorkfed.org/markets/treasury-repo-reference-r...

twic 7y ago

Matt Levine on Robinhood and payment for order flow: https://www.bloomberg.com/opinion/articles/2018-10-16/carl-icahn-wants-to-fight-dell-again https://www.bloomberg.com/opinion/articles/2018-10-16/carl-i...

navigatesol 7y ago
Yes, Levine does a great job conveying why both parties to the order flow sale benefit (and those outside it lose). I'm glad patio11 wrote this article, too, because sometimes this community is...ignorant to the world if finance.

cosmotron 7y ago

> Brokerage customers keep ~10% of their assets in cash. The 200 basis point spread between cash in brokerage accounts and money market funds or insured bank accounts [...] is equivalent to a 20 bps asset management fee across the portfolio. Could someone break this down a bit more? I'm trying to grok the point, but don't have the intuition. Where is the "200 basis point spread" coming from? Why is it equivalent to a 20 bps management fee?

Iburinoc 7y ago
The "200 basis point spread" comes from the difference between the very low or non-existent interest paid on the cash in brokerage accounts and the rates the brokerage can earn by lending that money out basically risk-free. If you keep 10% of your assets in cash, a 200 bp interest spread becomes effectively a 20 bp management fee on your assets.

randomuser22 7y ago

@patio11 The numbers for interactive brokers appear to add up to >100%

throaway2234 7y ago

Almost all of the discussion around payment for order flow is inaccurate. To highlight the worst, 1. Retail order flow is toxic like all other flow and trading against it blindly leads to material losses. Retail is particularly well informed with respect to news and major market events. "Retail investors destroy value when trading" is a fun quote and repeated assertion of the article, but is not true of any retail order flow I've seen (and I have seen all of it). 2. Wholesalers make surprisingly little money from the flow being uninformed. Most of the P&L is a result of (a) fee arbitrage (some strategies that aren't possible on public markets become possible with an internalizer because there are less market access fees), (b) queue priority (internalizing a market order allows the market maker to effectively rest at the inside without quoting there), and (c) strategies for executing special order types that cannot be traded against on exchanges (stops, for example). 3. Robinhood earns more for order flow because their order flow is less toxic (less informed) than other brokerages. It has nothing to do with options. 4. Retail order flow data is incredibly valuable since it's needed to build pricing and trading models. Citadel Securities, in fact, does run models (and machine learning models) against retail trade data and would not be profitable without it. Finally, if wholesalers are good for retail investors is an open question that won't be answered by this blog piece. A simple thought exercise: if I'm a retail investor with the most aggressive limit order in the market and a market maker internalizes a retail market order on the opposing side -- is the result net good, or net bad for the two retail participants?

ralph84 7y ago

Somewhat tangential, but I hope someday we can move more towards having stocks trade regularly but not on microsecond timescales. All of the fragmented liquidity being exploited by HFT is not a net economic gain. The exchanges already have an auction process to set opening and closing prices. Just run the same auction process every 10 minutes allowing liquidity to pool.

0b01 7y ago
Then all the liquidity would aggregate within the last millisecond of that 10 minute interval

deleted 7y ago

[deleted]

bubblewrap 7y ago

Sorry I have troubles understanding. I gather the main money maker is "net interest" - but wouldn't that only apply if the Discount Broker sold me an investment (promising me x% in returns, while they make x+y% by reinvesting my money)? I thought that is exactly what Discount Brokers are not doing, I thought they only help me buy other people's investment vehicles? Or is it just the cash I have sitting at the Discount Broker, to be ready to trade, that produces the gains for the Broker (average 10% according to the article)? Or do the DBs usually offer "savings accounts" with interest x on your money, and all the other stuff (cheap stock trades and so on) are supposedly only the advertising, luring in customers so that you can send them offers? "high-interest bank accounts" - where can I get such a one, or do they only exist for very rich entities, or only in the US?

bryan_w 7y ago
It is literally the cash sitting in your account uninvested

spoonie 7y ago

I use a discount brokerage in Canada called Questrade. I keep as little cash as possible in my account (contributions and dividends get used within a few days to buy more ETFs), and my portfolio is entirely ETFs. If I also pay no commissions when issuing buy orders, how does the brokerage make money from me? Apart from the fees for order placement, is there interest earned for short-sellers borrowing ETFs?

navigatesol 7y ago
>how does the brokerage make money from me? Interest on any balance. Commission on sell orders, bonds, GICs, options, MFs. Order flow. Currency exchange. ECN fees when you buy in odd lots. I mean, if you're really diligent and restrictive in your usage, you can avoid your broker "making money off you". But as long as fees are transparent and fair, what's the problem with them making some money providing a service you like?
- spoonie 7y ago
  No problem at all! :) Just curious about the sources of revenue from me as a customer if I don’t hold cash, don’t issue sell orders, and buy only ETFs.
joelx 7y ago
My personal opinion is that Questrade is terrible. I have been getting one of their customers emails for years and notified them about it and nothing has been done by them. If you want to risk losing all your money, go with Questrade since if I was a scammer I could use this to get access to this person's account.

anonu 7y ago

The shareholder letter from IB CEO Thomas Petterfly regarding the risks of HFT is quite interesting. (Page 14 https://investors.interactivebrokers.com/download/2018-IBG-AR.pdf https://investors.interactivebrokers.com/download/2018-IBG-A...) and copied partially below: Trading against HFTs and institutions taking liquidity is generally not profitable, at least in the short run. As a consequence, market participants are reluctant to place limit orders and the NBBO (the National Best Bid or Offer, or the highest limit order to buy and the lowest limit order to sell) becomes wider. HFTs are obligated to fill the orders they buy inside the NBBO to the extent of the size displayed. The wider the NBBO becomes, the more discretion an HFT has as to the price at which it fills the order and, therefore, the more profit it makes and the more it can then afford to pay for these orders. The more HFTs pay for retail orders, the more brokers will sell their orders to HFTs and, consequently, even fewer orders will trade at the exchanges in a competitive market. Also, the more payment the brokers receive for their customers' orders, the more they can discount the commissions they charge their customers. Hence the newly emerging zero commission brokers. However, the customer is likely to lose more on the execution price than she saves on the commission. This is a self-reinforcing feedback loop in which wider markets cause even wider markets, increasing payment for orders, moving more volume off the exchanges. Indeed, while in 2008 26.6% of the listed stock volume traded off the exchanges, by 2018 36.3% of the volume traded off exchange. What is the predictable consequence? Liquidity vanishes. Momentum traders drive the markets to more extreme highs and extreme lows in shorter periods of time. Investors holding margin accounts become less able to liquidate, adding to the price swings. This is a disaster waiting to happen. While all of us in the trading and investment community have in one way or another adapted, and would prefer to let things continue along the status quo, we cannot pretend that all is well the way it is. We must implement structural changes to the markets before it is too late.

johnflan 7y ago

Where would DEGIRO in Europe sit is this classification of brokerages?

simonebrunozzi 7y ago

Patrick is brilliant, as always. This piece is particularly brilliant, and I wish he will elaborate more on it in the future: > Some people get mad about the financial industry for taking advantage of customers. I find it hard to get mad about a deal between willing counterparties, but if you think that Wall Street is soaking the US middle class, you should be monomanically focused on the interest spread between cash balances in brokerage accounts and high-interest bank accounts or money market funds. That is the cost that does not call itself a cost.

runeks 7y ago

> Suppose I were to give you $100, in return for your promise to give it back when I wanted it and pay me 0.27% annualized interest in the meanwhile. Suppose you invested this in a virtually riskless bond, perhaps a mortgage-backed security with government backing, offering 2.53% annualized interest. You’d earn $2.26 in net interest in a year. How would you rectify the duration mismatch between the on-demand deposit (of $100) with the multi-year mortgage-backed security? For example, if the rate of interest increases, my $100 — that you invested in bonds — will now be worth less than $100 (since the price of the bond has fallen). How will you be able to honor my withdrawal when you’re insolvent?

lifeisstillgood 7y ago

Just dropping this thought off : patio11 just got himself and this article a nice write up on Matt Levine's Bloomberg newsletter (its v good too) But what I realised is that patio11 must have spent many days researching this and writing it up, then published it and it frankly it looks like "real" journalism. in fact it is, real journalism But it's not packaged like it. So for all the talk about death of newspapers etc, it is possible for someone who is not a journalist, and not paid like one, to do the work - maybe we will see citizen journalism ?

acct33571 7y ago

@patio11 - where did the 10% cash number come from for assets held in brokerage accounts? That seems very high, but I guess I have no clue.

patio11 7y ago
The annual reports and division.