7 ms·

I rely on Matt Levine to explain, more clearly than I could, how brokerages make money ("The Trades Will Be Free Now"): https://www.bloomberg.com/opinion/artic

I rely on Matt Levine to explain, more clearly than I could, how brokerages make money ("The Trades Will Be Free Now"): https://www.bloomberg.com/opinion/articles/2019-10-02/the-trades-will-be-free-now https://www.bloomberg.com/opinion/articles/2019-10-02/the-tr... Let me highlight a key passage: "Even this understates the change, because the actual way that stock brokers work today is that you keep some cash in your brokerage account to fund potential trades, and the broker earns interest on that cash and pays you less than it earns, and all the trading stuff is almost irrelevant. ... Commissions are way down there; in 2018, they represented a bit less than 7% of Schwab’s net revenue." I don't think this is about consolidation in the brokerage space because of zero fees. I think this is about investment banks getting into the retail space (see Goldman's Apple card). Once again, I rely on Matt Levine to explain it ("Goldman Has Some Boring Plans"): https://www.bloomberg.com/opinion/articles/2020-01-29/goldman-has-some-boring-plans https://www.bloomberg.com/opinion/articles/2020-01-29/goldma... The whole thing is worth a read, but here is one key paragraph: "One way to interpret this is that Goldman has embarked on a quest to be boring. This interpretation seems plainly correct. The old Goldman approach—making a lot of money on lumpy investment-banking fees, risky balance-sheet-intensive trading, and both-lumpy-and-risky principal investing—is disfavored in modern banking. It is disfavored by regulation (the Volcker Rule, capital requirements) and by market conditions, but it is also particularly disfavored by Goldman’s own investors, who want reliable recurring revenues." Edit: I should add this interpretation is also the one offered by the author of the NY times article, although the author also claims that slashed fees played a role: "It continues Morgan Stanley’s strategy of increasingly focusing on asset management rather than investment banking and high-stakes trading, betting on steady fees over bigger paydays and bigger risks."

frockington1 7y ago
I agree with the premise that GS is trying to break into more retail and boring banking. In my opinion they may have already missed the opportunity. JPM/Chase and Bank of America/Merril Lynch figured out this business model over a decade ago and have been building customer bases. Last earnings showed the Apple card to be a disappointment
- omarhaneef 7y ago
  You are right in that Chase, BofA, Citi and the like have a pretty large head start, but this is just the first innings. I can't even imagine the coming disruptions and ideas in the space. Partnering with Apple -- or Google, which I am sure people have and will -- seems like the right way to get into the space since the mobile phone is the key platform at the moment.
  - frockington1 7y ago
    I haven't used apple pay since touch-less cards came out. It'll be interesting to see how they pivot to something beyond pure convenience. I highly doubt the target consumer cares about security. It'll also be interesting to see how far tech companies are willing to partner given increased regulation and scrutiny when finance is involved
    - cactus2093 7y ago
      Huh, so the friction for you is the actual swipe or chip read? To me the benefit of Apple Pay is not bringing your wallet everywhere, or not taking it out if you already have your phone in your hand.
      - eropple 7y ago
        I use a phone case that holds my cards, so I've got my cards with me already. For me it's how much faster Apple Pay is. Also works way better when I travel out of the U.S., because U.S. cards overseas end up being chip-and-sig, they have to go find a pen, etcetera etcetera. Tap phone, done. I also like the integration that the Apple Card has with Apple Wallet. I'm not all-in on Apple, I don't own a Mac anymore, but the iPhone and closely related bits are just really nice.
        ghaff 7y ago
        Using my Apple Watch when traveling in Europe is very convenient because of the sig thing. Unfortunately, the max transaction is often pretty limited.
basch 7y ago
this is a good explanation too, and from a local. https://www.kalzumeus.com/2019/6/26/how-brokerages-make-money/ https://www.kalzumeus.com/2019/6/26/how-brokerages-make-mone... The writing was on the wall for E-Trade. Banking is in an ebb of consolidation. E-Trade and TD Ameritrade had to sell once Interactive Brokers / Schwab started that game of dropping commission. They didnt add enough other value besides stock trading. They are a component to a larger banking suite. I have to think Wealthfront and Betterment are targets now too. I have to think American Express is still a viable target as well. The next thing empires SHOULD be looking at, is overall life management software. Personal Capital, YNAB. I am somewhat surprised nobody offers an abstracted savings account, that handles 401k, IRA, HSA, paying rent and bills, and access to credit. Instead of showing you the balance of each account, it would show you how much you have, how much you need in the future, and how much you can spend today. And then automatically apply extra cash to the best spots, and automatically use credit and pay it off. Using credit AS part of the budget process. Not completely dissimilar from Singapore's Central Provident Fund.
- lotsofpulp 7y ago
  > Banking is in an ebb of consolidation. All businesses are consolidating due to economies of scale and low marginal costs from automation and computing power. > I am somewhat surprised nobody offers an abstracted savings account, that handles 401k, IRA, HSA, paying rent and bills, and access to credit. There are numerous differing laws for each kind of account and required disclosures. You also can’t have joint tax advantaged retirement savings accounts.
  - basch 7y ago
    >All businesses are consolidating And a lack of trust busting. Government deregulation, cheap cash, big exits. >There are numerous differing laws for each kind Thats why I said an abstraction. All the underlying accounts exist, but are hidden behind a layer. You can peak in and see individual balances, but thats not how the data is presented to you. You dont interact with it and make decisions based on the components. You set parameters, percentages, and targets, and it autobalances the rest. It would need to be able to tap into employer 401K's to make holistic decisions, doing something like blooom combined with automatic tax efficient fund placement. Automatic output of tax documents. Automatic HSA tagging. Scan and digitize receipts. Maybe even a more advanced "invest the hsa, keep track of the receipts, set targets for optimal reimbursement (potentially years down the road.)" There is so much innovation space left on the consumer experience side of banking. Like Personal Capital, I have to think Credit Karma is an attractive buy as well, getting into life management: a bank that does your taxes for you, that comparison shops your auto insurance. Personal Capital, Credit Karma, M1, Blooom, Angieslist, HomeAdvisor, and TrueCar would be a really slick bundle if some VC wanted to make an Office 365/AdobeCloud of life management.
sparkling 7y ago
> you keep some cash in your brokerage account to fund potential trades, and the broker earns interest on that cash What if the US joins the negative/penalty-interest club like the Eurozone countries?
- omarhaneef 7y ago
  Great question. I will point out that most of the money is made in the overnight REPO market, and those rates seem to be shooting higher even as the interest rates are cut. I know, I am his biggest fan, but this is Matt Levine again on the REPO rates: https://www.bloomberg.com/opinion/articles/2019-09-30/a-repo-crisis-isn-t-all-bad https://www.bloomberg.com/opinion/articles/2019-09-30/a-repo...
throwawayhhakdl 7y ago
It seems probable that the more boring finance is, the more momentum mainstream equities have, and the more irrational it becomes. If everybody pours their money into a us equity index every month, the value of us stocks will go up, absent of any perceived change in value.
hartator 7y ago
It’s not complicated. They sell the actual transactions to other companies who make money on each stock spread.
- basch 7y ago
  Schwab earned 1.4% of revenues from payment for order flow Schwab earned 57% of revenues from net interest on cash
pbreit 7y ago
Summary: if you can make a financial service that people want, it is EASY to make money.
anonu 7y ago
If you're a retail brokerage, most of your revenue (60%+) comes from net-interest. This means taking your clients money and lending it out long at 8% when your short-term funding costs you 2%. For an established bank like MS, the net-interest is a drop in the bucket. The strategy here is about getting a young, educated, well-off retail base. The demographic trends are such that there is a multi-trillion inter-generational wealth transfer occurring over the next decade as the baby-boomers pass on their wealth to their millennial kids. You want to get in front of that.
dntbnmpls 7y ago
> I rely on Matt Levine to explain, more clearly than I could, how brokerages make money You rely on someone who never worked for a brokerage to teach you how brokerages worked? > and the broker earns interest on that cash and pays you less than it earns This has been standard practice forever. It isn't a secret. Also, with interest rates as low as they are, I don't think it is a move for the interest on the cash sitting in these accounts. > and all the trading stuff is almost irrelevant Irrelevant? The "trading stuff" is data. Trading commissions isn't that important, but the data is very valuable. > I don't think this is about consolidation in the brokerage space because of zero fees. That's right. It isn't about zero fees. It's about data. Trading/investing/customer data. Zero fees is to lure more customers and get more data. Just like Microsoft giving away their OS for "free". Just like google/facebook/etc giving away their services for "free". "Free trades" ( no fee trades ) are about getting more customers, more trades and more data. > I think this is about investment banks getting into the retail space (see Goldman's Apple card). It isn't about getting into retail space. Goldman isn't going open a store in malls around the country and sell t-shirts. Goldman's Apple Card is about data. From wall street to tech to even telcoms... https://news.ycombinator.com/item?id=22375269 https://news.ycombinator.com/item?id=22375269 everybody is positioning themselves for the data goldrush. Even nations and regional blocs like the EU are doing so. Whether data has intrinsic valuable or not, who really knows. But those with money and power have decided it has value and we are off to the races.

frockington1 7y ago

I agree with the premise that GS is trying to break into more retail and boring banking. In my opinion they may have already missed the opportunity. JPM/Chase and Bank of America/Merril Lynch figured out this business model over a decade ago and have been building customer bases. Last earnings showed the Apple card to be a disappointment

omarhaneef 7y ago
You are right in that Chase, BofA, Citi and the like have a pretty large head start, but this is just the first innings. I can't even imagine the coming disruptions and ideas in the space. Partnering with Apple -- or Google, which I am sure people have and will -- seems like the right way to get into the space since the mobile phone is the key platform at the moment.
- frockington1 7y ago
  I haven't used apple pay since touch-less cards came out. It'll be interesting to see how they pivot to something beyond pure convenience. I highly doubt the target consumer cares about security. It'll also be interesting to see how far tech companies are willing to partner given increased regulation and scrutiny when finance is involved
  - cactus2093 7y ago
    Huh, so the friction for you is the actual swipe or chip read? To me the benefit of Apple Pay is not bringing your wallet everywhere, or not taking it out if you already have your phone in your hand.
    - eropple 7y ago
      I use a phone case that holds my cards, so I've got my cards with me already. For me it's how much faster Apple Pay is. Also works way better when I travel out of the U.S., because U.S. cards overseas end up being chip-and-sig, they have to go find a pen, etcetera etcetera. Tap phone, done. I also like the integration that the Apple Card has with Apple Wallet. I'm not all-in on Apple, I don't own a Mac anymore, but the iPhone and closely related bits are just really nice.
      - ghaff 7y ago
        Using my Apple Watch when traveling in Europe is very convenient because of the sig thing. Unfortunately, the max transaction is often pretty limited.

basch 7y ago

this is a good explanation too, and from a local. https://www.kalzumeus.com/2019/6/26/how-brokerages-make-money/ https://www.kalzumeus.com/2019/6/26/how-brokerages-make-mone... The writing was on the wall for E-Trade. Banking is in an ebb of consolidation. E-Trade and TD Ameritrade had to sell once Interactive Brokers / Schwab started that game of dropping commission. They didnt add enough other value besides stock trading. They are a component to a larger banking suite. I have to think Wealthfront and Betterment are targets now too. I have to think American Express is still a viable target as well. The next thing empires SHOULD be looking at, is overall life management software. Personal Capital, YNAB. I am somewhat surprised nobody offers an abstracted savings account, that handles 401k, IRA, HSA, paying rent and bills, and access to credit. Instead of showing you the balance of each account, it would show you how much you have, how much you need in the future, and how much you can spend today. And then automatically apply extra cash to the best spots, and automatically use credit and pay it off. Using credit AS part of the budget process. Not completely dissimilar from Singapore's Central Provident Fund.

lotsofpulp 7y ago
> Banking is in an ebb of consolidation. All businesses are consolidating due to economies of scale and low marginal costs from automation and computing power. > I am somewhat surprised nobody offers an abstracted savings account, that handles 401k, IRA, HSA, paying rent and bills, and access to credit. There are numerous differing laws for each kind of account and required disclosures. You also can’t have joint tax advantaged retirement savings accounts.
- basch 7y ago
  >All businesses are consolidating And a lack of trust busting. Government deregulation, cheap cash, big exits. >There are numerous differing laws for each kind Thats why I said an abstraction. All the underlying accounts exist, but are hidden behind a layer. You can peak in and see individual balances, but thats not how the data is presented to you. You dont interact with it and make decisions based on the components. You set parameters, percentages, and targets, and it autobalances the rest. It would need to be able to tap into employer 401K's to make holistic decisions, doing something like blooom combined with automatic tax efficient fund placement. Automatic output of tax documents. Automatic HSA tagging. Scan and digitize receipts. Maybe even a more advanced "invest the hsa, keep track of the receipts, set targets for optimal reimbursement (potentially years down the road.)" There is so much innovation space left on the consumer experience side of banking. Like Personal Capital, I have to think Credit Karma is an attractive buy as well, getting into life management: a bank that does your taxes for you, that comparison shops your auto insurance. Personal Capital, Credit Karma, M1, Blooom, Angieslist, HomeAdvisor, and TrueCar would be a really slick bundle if some VC wanted to make an Office 365/AdobeCloud of life management.

sparkling 7y ago

> you keep some cash in your brokerage account to fund potential trades, and the broker earns interest on that cash What if the US joins the negative/penalty-interest club like the Eurozone countries?

omarhaneef 7y ago
Great question. I will point out that most of the money is made in the overnight REPO market, and those rates seem to be shooting higher even as the interest rates are cut. I know, I am his biggest fan, but this is Matt Levine again on the REPO rates: https://www.bloomberg.com/opinion/articles/2019-09-30/a-repo-crisis-isn-t-all-bad https://www.bloomberg.com/opinion/articles/2019-09-30/a-repo...

throwawayhhakdl 7y ago

It seems probable that the more boring finance is, the more momentum mainstream equities have, and the more irrational it becomes. If everybody pours their money into a us equity index every month, the value of us stocks will go up, absent of any perceived change in value.

hartator 7y ago

It’s not complicated. They sell the actual transactions to other companies who make money on each stock spread.

basch 7y ago
Schwab earned 1.4% of revenues from payment for order flow Schwab earned 57% of revenues from net interest on cash

pbreit 7y ago

Summary: if you can make a financial service that people want, it is EASY to make money.

anonu 7y ago

If you're a retail brokerage, most of your revenue (60%+) comes from net-interest. This means taking your clients money and lending it out long at 8% when your short-term funding costs you 2%. For an established bank like MS, the net-interest is a drop in the bucket. The strategy here is about getting a young, educated, well-off retail base. The demographic trends are such that there is a multi-trillion inter-generational wealth transfer occurring over the next decade as the baby-boomers pass on their wealth to their millennial kids. You want to get in front of that.

dntbnmpls 7y ago

> I rely on Matt Levine to explain, more clearly than I could, how brokerages make money You rely on someone who never worked for a brokerage to teach you how brokerages worked? > and the broker earns interest on that cash and pays you less than it earns This has been standard practice forever. It isn't a secret. Also, with interest rates as low as they are, I don't think it is a move for the interest on the cash sitting in these accounts. > and all the trading stuff is almost irrelevant Irrelevant? The "trading stuff" is data. Trading commissions isn't that important, but the data is very valuable. > I don't think this is about consolidation in the brokerage space because of zero fees. That's right. It isn't about zero fees. It's about data. Trading/investing/customer data. Zero fees is to lure more customers and get more data. Just like Microsoft giving away their OS for "free". Just like google/facebook/etc giving away their services for "free". "Free trades" ( no fee trades ) are about getting more customers, more trades and more data. > I think this is about investment banks getting into the retail space (see Goldman's Apple card). It isn't about getting into retail space. Goldman isn't going open a store in malls around the country and sell t-shirts. Goldman's Apple Card is about data. From wall street to tech to even telcoms... https://news.ycombinator.com/item?id=22375269 https://news.ycombinator.com/item?id=22375269 everybody is positioning themselves for the data goldrush. Even nations and regional blocs like the EU are doing so. Whether data has intrinsic valuable or not, who really knows. But those with money and power have decided it has value and we are off to the races.