7 ms·

With the move to $0 order fees for online brokerages, not surprised to see more tie-ups. Even running the business at break-even, MS gets to market their other

by ethbro 7y ago

With the move to $0 order fees for online brokerages, not surprised to see more tie-ups. Even running the business at break-even, MS gets to market their other products to all E-Trade's customers. That said, what's the current economic model for independent online brokerages? Sell order flow? Rate arbitrage off uninvested assets?

blahbhthrow3748 7y ago
Matt Levine has said the majority of online brokerage revenue is from collecting interest on cash balances.
markvdb 7y ago
There was a somewhat revealing interview by the people behind Flatex, a big discount broker from Germany [0]. Dutch source, do use a translator https://www.tijd.be/markten-live/nieuws/algemeen/nieuwe-eigenaar-degiro-de-prijzen-voor-onlinebeleggen-gaan-omhoog/10208604.html https://www.tijd.be/markten-live/nieuws/algemeen/nieuwe-eige... "Is it easier for a pan European company to keep big US competition like Robin Hood and Ameritrade out? Niehage: 'The companies you name are very badly positioned for Europe. Their economic model is based on two pillars. Firstly, they want to offer everything for free. But if you offer all services for free, you have to earn money with the capital in the investors' accounts. That is possible in the US, where you can still get 2% of interest. In Europe, with zero interest rates, that's very different.' And the second pillar of their economic model? Niehage: 'That's the high frequency traders. As far as I know, Robin Hood sells its customer orders to this kind of parties. They are prepared to pay good money for that. According to the European MiFID II-regulation, that is illegal. Those two examples show that the US and EU markets are totally different. That's why American brokers have difficulties breaking into the EU market.' "
- rwmj 7y ago
  > 'That's the high frequency traders. As far as I know, Robin Hood sells its customer orders to this kind of parties. Is this front running (and hence illegal), or do they mean to say customer trades, or something else?
  - auntienomen 7y ago
    They sell the order flow. It's not front running.
    - hcknwscommenter 7y ago
      The entity selling the order flow is not front-running, but the entity buying the order flow (market maker, HF trading firm) is basically front-running. It's just that the front running is done in a way to actually lower prices or increase liquidity for the underlying trades in the order flow being sold.
      - sseveran 7y ago
        It's not basically front running. Front running is specifically when a broker gets your order and sits on it until either they or another client can trade in front of it before the market moves. Market makers want to interact with retail orders since they typically don't have size and in aggregate are either non-directional or predictably directional. This reduces the market makers risk of adverse selection.
        hcknwscommenter 7y ago
        If you want to define front-running that way, then I agree HFTs don't front-run. But they do step in between buyers and sellers. If you want to call that something else, shrug.
        sseveran 7y ago
        Stepping in between buyers and sellers is called market making. They smooth supply and demand across time. Also I don't define front running that way, FINRA does. https://www.finra.org/rules-guidance/rulebooks/finra-rules/5270?element_id=10860&rbid=2403 https://www.finra.org/rules-guidance/rulebooks/finra-rules/5...
        7y ago
- frockington1 7y ago
  With 0% interest rates in Europe, do you think this will encourage large savers to get their money invested? I think the idea of negative interest rates is absurd however it might encourage Europeans to invest more money versus stashing in savings accounts
  - martin_bech 7y ago
    My coworker just did this, moved from savings to passive investments, because of 0% interest rates, and the warning of potential negative rates for "consumer" accounts. Bussiness accounts are already at negative interest rates at some banks.
  - StarDucks 7y ago
    This is really going to end up biting everyone in the ass though. What happens when we have another market crash and everyone is broke because they put money they would have saved into investments instead and now they have no safety net?
    - BurningFrog 7y ago
      I don't understand negative interest rates at all, but surely something is deeply broken behind this, and it will crash in one spectacular way or another.
      - pas 7y ago
        It's a cost of having money, but not spending it. The central bank pays a negative interest on excess deposits. So banks are motivated to lend it out. (Eg. take on more risk.) https://www.ecb.europa.eu/pub/pdf/scpwps/ecb.wp2283~2ccc074964.en.pdf https://www.ecb.europa.eu/pub/pdf/scpwps/ecb.wp2283~2ccc0749... One problem that becomes a bit hard is that in the retail sector if interest rates go below zero people are willing to simply withdraw the money, which would hurt banks' ability to lend. (Eg. the central bank would have to add funding via some mechanism, such as lowering the fractional ratio, or QE . [Or paying interest on reserves. But that would go against the negative interest on excess reserves.]) The paper concludes that the negative interest rates resulted in more loans.
- sparkling 7y ago
  Not just zero interest, but also negative interest. Some Brokers in Germany (e.g. Flatex) are already charging a -0.5% interest rate on unspent EUR cash sitting around in trading accounts.
lifeslogit 7y ago
Some other ways Brokers make money: Market Making operations that leverage the same infrastructure and market position, Interest on Margin, Stock Loan/Borrow activity with other Brokers, and Market Data Access. Still with these items, I agree that a move to 0 commission trading will cause a shift.

by ethbro 7y ago

blahbhthrow3748 7y ago

Matt Levine has said the majority of online brokerage revenue is from collecting interest on cash balances.

markvdb 7y ago

There was a somewhat revealing interview by the people behind Flatex, a big discount broker from Germany [0]. Dutch source, do use a translator https://www.tijd.be/markten-live/nieuws/algemeen/nieuwe-eigenaar-degiro-de-prijzen-voor-onlinebeleggen-gaan-omhoog/10208604.html https://www.tijd.be/markten-live/nieuws/algemeen/nieuwe-eige... "Is it easier for a pan European company to keep big US competition like Robin Hood and Ameritrade out? Niehage: 'The companies you name are very badly positioned for Europe. Their economic model is based on two pillars. Firstly, they want to offer everything for free. But if you offer all services for free, you have to earn money with the capital in the investors' accounts. That is possible in the US, where you can still get 2% of interest. In Europe, with zero interest rates, that's very different.' And the second pillar of their economic model? Niehage: 'That's the high frequency traders. As far as I know, Robin Hood sells its customer orders to this kind of parties. They are prepared to pay good money for that. According to the European MiFID II-regulation, that is illegal. Those two examples show that the US and EU markets are totally different. That's why American brokers have difficulties breaking into the EU market.' "

rwmj 7y ago
> 'That's the high frequency traders. As far as I know, Robin Hood sells its customer orders to this kind of parties. Is this front running (and hence illegal), or do they mean to say customer trades, or something else?
- auntienomen 7y ago
  They sell the order flow. It's not front running.
  - hcknwscommenter 7y ago
    The entity selling the order flow is not front-running, but the entity buying the order flow (market maker, HF trading firm) is basically front-running. It's just that the front running is done in a way to actually lower prices or increase liquidity for the underlying trades in the order flow being sold.
    - sseveran 7y ago
      It's not basically front running. Front running is specifically when a broker gets your order and sits on it until either they or another client can trade in front of it before the market moves. Market makers want to interact with retail orders since they typically don't have size and in aggregate are either non-directional or predictably directional. This reduces the market makers risk of adverse selection.
      - hcknwscommenter 7y ago
        If you want to define front-running that way, then I agree HFTs don't front-run. But they do step in between buyers and sellers. If you want to call that something else, shrug.
        sseveran 7y ago
        Stepping in between buyers and sellers is called market making. They smooth supply and demand across time. Also I don't define front running that way, FINRA does. https://www.finra.org/rules-guidance/rulebooks/finra-rules/5270?element_id=10860&rbid=2403 https://www.finra.org/rules-guidance/rulebooks/finra-rules/5...
        7y ago
frockington1 7y ago
With 0% interest rates in Europe, do you think this will encourage large savers to get their money invested? I think the idea of negative interest rates is absurd however it might encourage Europeans to invest more money versus stashing in savings accounts
- martin_bech 7y ago
  My coworker just did this, moved from savings to passive investments, because of 0% interest rates, and the warning of potential negative rates for "consumer" accounts. Bussiness accounts are already at negative interest rates at some banks.
- StarDucks 7y ago
  This is really going to end up biting everyone in the ass though. What happens when we have another market crash and everyone is broke because they put money they would have saved into investments instead and now they have no safety net?
  - BurningFrog 7y ago
    I don't understand negative interest rates at all, but surely something is deeply broken behind this, and it will crash in one spectacular way or another.
    - pas 7y ago
      It's a cost of having money, but not spending it. The central bank pays a negative interest on excess deposits. So banks are motivated to lend it out. (Eg. take on more risk.) https://www.ecb.europa.eu/pub/pdf/scpwps/ecb.wp2283~2ccc074964.en.pdf https://www.ecb.europa.eu/pub/pdf/scpwps/ecb.wp2283~2ccc0749... One problem that becomes a bit hard is that in the retail sector if interest rates go below zero people are willing to simply withdraw the money, which would hurt banks' ability to lend. (Eg. the central bank would have to add funding via some mechanism, such as lowering the fractional ratio, or QE . [Or paying interest on reserves. But that would go against the negative interest on excess reserves.]) The paper concludes that the negative interest rates resulted in more loans.
sparkling 7y ago
Not just zero interest, but also negative interest. Some Brokers in Germany (e.g. Flatex) are already charging a -0.5% interest rate on unspent EUR cash sitting around in trading accounts.

lifeslogit 7y ago

Some other ways Brokers make money: Market Making operations that leverage the same infrastructure and market position, Interest on Margin, Stock Loan/Borrow activity with other Brokers, and Market Data Access. Still with these items, I agree that a move to 0 commission trading will cause a shift.