9 ms·

Probably a good time to mention this* excellent piece on how they make money. In short: it’s interest on cash deposits. Not payment for order flow. * https://

Probably a good time to mention this* excellent piece on how they make money. In short: it’s interest on cash deposits. Not payment for order flow. * https://www.kalzumeus.com/2019/6/26/how-brokerages-make-money/ https://www.kalzumeus.com/2019/6/26/how-brokerages-make-mone...

prostoalex 7y ago
To be fair to Schwab, they keep advertising SWVXX on sign-in page, which yields 2.02%, but getting in/out does take a day to settle.
- dehrmann 7y ago
  1) this doesn't affect settlement times (which are another scam the industry pulls) 2) that's a mutual fund, so it just works differently.
Fomite 7y ago
And they've done a good job convincing me to park my cash there - they're also a convenient and responsive bank.
H8crilA 7y ago
And probably also a lot on short fees on the securities they lend out. Cheap brokers lend out the securities you own to short sellers, short sellers have to pay interest for such privilege (there's essentially an OTC market for the % rate). Note that this is not much different from earning interest on lending out cash. Respectable brokers pass at least some of the short fees to the investor. Interactive Brokers, which I use, pays back around 50%.
- gibybo 7y ago
  This only applies if you have a margin account, right?
  - bdonlan 7y ago
    Your shares can only be lent if you have a margin account and have a negative cash balance (or collateral placed with other parties in excess of your cash balance), or if you have opted into a securities lending program like the one at IB.
    - scurvy 7y ago
      I've seen this oft repeated bit about only margin account holdings can be lent out to shorts. Do you happen to know the regulation or law that says this is the case? Or is this another instance of drinking 8 glasses of water a day?
  - Scoundreller 7y ago
    No, this is about lending stock you own to short sellers because they’re not supposed to short naked.
    - koolba 7y ago
      No you can only lend out the securities of clients that are themselves on margin or have an explicit borrow agreement (which grants you a kickback of the money made from the stock loan). Cash accounts without a margin balance cannot be lent out.
      - Scoundreller 7y ago
        Ok, but where do my holdings in a mutual fund or ETF fit?
        koolba 7y ago
        ETFs are treated like stocks. That's kind of the point. They can be lent out by your broker if you're on margin. Mutual funds are opaque. It's up to the fund to decide if they want to make some extra money lending their securities out to speculators. As they're holding the stocks long term and standard securities lending is over collateralized, the risk profile is relatively low compared to the extra return.
- PhantomGremlin 7y ago
  And probably also a lot on short fees on the securities they lend out. That depends on the actual security. Currently at Schwab it is free to short a very liquid stock or ETF, because Schwab has access to a very large supply. Which means Schwab only passes along a very de minimis amount to the lender. I assume they eat this amount out of their commission. They do of course charge appropriate fees for hard-to-borrow stocks. Every stock has a different fee. This will probably change once Schwab stops charging commissions. Their fine print on that announcement says "Stock Borrow fees still apply". So those fees will apply to more/all stocks going forward?
  - zaroth 7y ago
    My understanding is that if you’re long a stock that the brokerage needs permission from you to loan the shares you have to other short sellers. For example this program at Schwab [1] where they actually pay you a small interest rate to borrow your shares. Can they lend out your shares without permission? [1] - https://client.schwab.com/secure/file/P-5182696/MKT33373-05.pdf https://client.schwab.com/secure/file/P-5182696/MKT33373-05....
- southerndrift 7y ago
  Does this mean that using those brokers means that I 'nakedly' own those shares? I.e. if I actually pick a successful share and the price explodes, the shorter or the broker cannot buy it back and I end up owning nothing? With all the people shorting Tesla, who will own Tesla if Tesla succeeds and the price explodes?
  - manigandham 7y ago
    No, if you short shares and the price rises too much, your account will go into a margin call and your broker will liquidate all of your positions. All brokers have complex risk management to protect their interests. In the extremely rare case that you end up with a negative balance, the broker will cover the shares and collect the money from you like any other debt.
    - southerndrift 7y ago
      But the broker doesn't necessarily lend out the shares to his own clients. And even if he does, how does he get back the shares from the person who went long? The broker will have to buy other shares. But if the price of those shares is exploding, who is willing to sell them?
      - manigandham 7y ago
        I'm not sure what you're asking. You only borrow shares if you're shorting. You just buy them if you want to go long. The broker will handle finding shares to lend to you if you want to short. Liquidity is a separate problem, which is why you might have low spreads or not even be able to find shares to short in the first place. Your ability to short a stock is not guaranteed and up to the market conditions and broker risk. And like I described, if you borrow shares to short and the prices increases greatly, then the broker will margin call your account to buy them back forcefully.
        southerndrift 7y ago
        I am not asking what happens if I short shares but if I lend to others my shares. If the broker cannot buy those shares back, I face the risk of losing them, don't I? So I am wondering: does using those brokers come with the risk that I end up owning nothing if I pick a very successful stock?
yskchu 7y ago
> Probably a good time to mention this* excellent piece on how they make money. > In short: it’s interest on cash deposits. Not payment for order flow. Are you sure Schwab don't sell order flow? "Order flow revenue was $139 million during 2018, $114 million for 2017, and $103 million in 2016." https://content.schwab.com/web/retail/public/about-schwab/schw_annual_report_2018.pdf https://content.schwab.com/web/retail/public/about-schwab/sc... The one broker that is clear that that doesn't sell order flow is Interactive Brokers
- kelnos 7y ago
  The point is that while of course they do make money from order flow, it's usually actually a small part of their revenue. Most of the revenue comes from interest on cash deposits (and other things), so even dropping trade commissions to zero won't materially reduce their profits. Schwab's total 2018 revenue was over $10B; I expect they're more worried about losing potential and existing customers to the likes of RobinHood than they are about 1% of that revenue.
- deleted 7y ago
  [deleted]
js2 7y ago
If you want to recover the interest spread on Treasury MM funds for yourself, Fidelity makes it trivial to buy 4-week Treasury bills[1] which auto roll (repurchase at maturity). Interest is state income tax free and Treasuries are the safest place you can park cash. 1. Any duration offered of course. You can do this at Schwab and Vanguard too with varying degrees of ease and convenience. https://thefinancebuff.com/treasury-bills-cd-money-market.html https://thefinancebuff.com/treasury-bills-cd-money-market.ht...
- ethbro 7y ago
  This blew my mind when I discovered it. It's essentially a "literally get the best (short term, stable) for your savings, always." And it's cash-equivalent, so can be purchased and held in any cash management Fidelity account. The only caveat I've found is that the online tools for interacting with orders can be a bit hit or miss. But just calling into their fixed income desk will get someone to do what you need ASAP. And that you have to schedule buys on Treasury's schedule. (Thursdays, so enter orders on Wednesdays, I think?) But past that, just setting up several non-overlapping auto-buys is a great way to get good interest on a < 2 week liquid account. And say to hell with all those "reward checking" criteria.

prostoalex 7y ago

To be fair to Schwab, they keep advertising SWVXX on sign-in page, which yields 2.02%, but getting in/out does take a day to settle.

dehrmann 7y ago
1) this doesn't affect settlement times (which are another scam the industry pulls) 2) that's a mutual fund, so it just works differently.

Fomite 7y ago

And they've done a good job convincing me to park my cash there - they're also a convenient and responsive bank.

H8crilA 7y ago

And probably also a lot on short fees on the securities they lend out. Cheap brokers lend out the securities you own to short sellers, short sellers have to pay interest for such privilege (there's essentially an OTC market for the % rate). Note that this is not much different from earning interest on lending out cash. Respectable brokers pass at least some of the short fees to the investor. Interactive Brokers, which I use, pays back around 50%.

gibybo 7y ago
This only applies if you have a margin account, right?
- bdonlan 7y ago
  Your shares can only be lent if you have a margin account and have a negative cash balance (or collateral placed with other parties in excess of your cash balance), or if you have opted into a securities lending program like the one at IB.
  - scurvy 7y ago
    I've seen this oft repeated bit about only margin account holdings can be lent out to shorts. Do you happen to know the regulation or law that says this is the case? Or is this another instance of drinking 8 glasses of water a day?
- Scoundreller 7y ago
  No, this is about lending stock you own to short sellers because they’re not supposed to short naked.
  - koolba 7y ago
    No you can only lend out the securities of clients that are themselves on margin or have an explicit borrow agreement (which grants you a kickback of the money made from the stock loan). Cash accounts without a margin balance cannot be lent out.
    - Scoundreller 7y ago
      Ok, but where do my holdings in a mutual fund or ETF fit?
      - koolba 7y ago
        ETFs are treated like stocks. That's kind of the point. They can be lent out by your broker if you're on margin. Mutual funds are opaque. It's up to the fund to decide if they want to make some extra money lending their securities out to speculators. As they're holding the stocks long term and standard securities lending is over collateralized, the risk profile is relatively low compared to the extra return.
PhantomGremlin 7y ago
And probably also a lot on short fees on the securities they lend out. That depends on the actual security. Currently at Schwab it is free to short a very liquid stock or ETF, because Schwab has access to a very large supply. Which means Schwab only passes along a very de minimis amount to the lender. I assume they eat this amount out of their commission. They do of course charge appropriate fees for hard-to-borrow stocks. Every stock has a different fee. This will probably change once Schwab stops charging commissions. Their fine print on that announcement says "Stock Borrow fees still apply". So those fees will apply to more/all stocks going forward?
- zaroth 7y ago
  My understanding is that if you’re long a stock that the brokerage needs permission from you to loan the shares you have to other short sellers. For example this program at Schwab [1] where they actually pay you a small interest rate to borrow your shares. Can they lend out your shares without permission? [1] - https://client.schwab.com/secure/file/P-5182696/MKT33373-05.pdf https://client.schwab.com/secure/file/P-5182696/MKT33373-05....
southerndrift 7y ago
Does this mean that using those brokers means that I 'nakedly' own those shares? I.e. if I actually pick a successful share and the price explodes, the shorter or the broker cannot buy it back and I end up owning nothing? With all the people shorting Tesla, who will own Tesla if Tesla succeeds and the price explodes?
- manigandham 7y ago
  No, if you short shares and the price rises too much, your account will go into a margin call and your broker will liquidate all of your positions. All brokers have complex risk management to protect their interests. In the extremely rare case that you end up with a negative balance, the broker will cover the shares and collect the money from you like any other debt.
  - southerndrift 7y ago
    But the broker doesn't necessarily lend out the shares to his own clients. And even if he does, how does he get back the shares from the person who went long? The broker will have to buy other shares. But if the price of those shares is exploding, who is willing to sell them?
    - manigandham 7y ago
      I'm not sure what you're asking. You only borrow shares if you're shorting. You just buy them if you want to go long. The broker will handle finding shares to lend to you if you want to short. Liquidity is a separate problem, which is why you might have low spreads or not even be able to find shares to short in the first place. Your ability to short a stock is not guaranteed and up to the market conditions and broker risk. And like I described, if you borrow shares to short and the prices increases greatly, then the broker will margin call your account to buy them back forcefully.
      - southerndrift 7y ago
        I am not asking what happens if I short shares but if I lend to others my shares. If the broker cannot buy those shares back, I face the risk of losing them, don't I? So I am wondering: does using those brokers come with the risk that I end up owning nothing if I pick a very successful stock?

yskchu 7y ago

> Probably a good time to mention this* excellent piece on how they make money. > In short: it’s interest on cash deposits. Not payment for order flow. Are you sure Schwab don't sell order flow? "Order flow revenue was $139 million during 2018, $114 million for 2017, and $103 million in 2016." https://content.schwab.com/web/retail/public/about-schwab/schw_annual_report_2018.pdf https://content.schwab.com/web/retail/public/about-schwab/sc... The one broker that is clear that that doesn't sell order flow is Interactive Brokers

kelnos 7y ago
The point is that while of course they do make money from order flow, it's usually actually a small part of their revenue. Most of the revenue comes from interest on cash deposits (and other things), so even dropping trade commissions to zero won't materially reduce their profits. Schwab's total 2018 revenue was over $10B; I expect they're more worried about losing potential and existing customers to the likes of RobinHood than they are about 1% of that revenue.
deleted 7y ago
[deleted]

js2 7y ago

If you want to recover the interest spread on Treasury MM funds for yourself, Fidelity makes it trivial to buy 4-week Treasury bills[1] which auto roll (repurchase at maturity). Interest is state income tax free and Treasuries are the safest place you can park cash. 1. Any duration offered of course. You can do this at Schwab and Vanguard too with varying degrees of ease and convenience. https://thefinancebuff.com/treasury-bills-cd-money-market.html https://thefinancebuff.com/treasury-bills-cd-money-market.ht...

ethbro 7y ago
This blew my mind when I discovered it. It's essentially a "literally get the best (short term, stable) for your savings, always." And it's cash-equivalent, so can be purchased and held in any cash management Fidelity account. The only caveat I've found is that the online tools for interacting with orders can be a bit hit or miss. But just calling into their fixed income desk will get someone to do what you need ASAP. And that you have to schedule buys on Treasury's schedule. (Thursdays, so enter orders on Wednesdays, I think?) But past that, just setting up several non-overlapping auto-buys is a great way to get good interest on a < 2 week liquid account. And say to hell with all those "reward checking" criteria.