4 ms·

I wonder why this wouldn't work. If 90% of retail traders lose money, then why doesn't Etrade and Robinhood bet against its worst performing customers? Is there

by zelly 7y ago

I wonder why this wouldn't work. If 90% of retail traders lose money, then why doesn't Etrade and Robinhood bet against its worst performing customers? Is there some law against this?

cameronh90 7y ago
Consider that even if you're right 75% of the time, if you bet all your money each time, you're going to go broke pretty quickly. Their biggest losers are probably making essentially random bets in such a stupid way that they lose all their money.
- zelly 7y ago
  The Kelly criterion provides the optimum bet size given the chance of winning. The adversarial brokerage could use the Kelly criterion and only make a wager commensurate with the likelihood of the trader's failure. It should be profitable. Suppose the brokerage just puts 5% of their cash toward this. It could be a nice profit center without risking everything.
  - imtringued 7y ago
    They could also just keep your money since you lost it on bad trades.
lmm 7y ago
IIRC there was a scandal not so long ago with a forex broker that was just not executing trades from dumb clients, sitting on the other side of them itself instead. I don't know if it's exactly illegal in a direct way, but it's a bad look, and I think there was a fine in this case.
- sireat 7y ago
  Basically a bucket shop: https://en.wikipedia.org/wiki/Bucket_shop_(stock_market) https://en.wikipedia.org/wiki/Bucket_shop_(stock_market) Those are considered illegal in US. CFD and like skirt the law here. The big problem with bucket shops is that they tend to not honor the bets once you start winning too much as Jesse Livermore found out in late 1890s. Still common today with all the fake forex exchanges. The rare winners have trouble getting money out.
  - blaser-waffle 7y ago
    What are some examples of Fake Forex shops?
    - sireat 7y ago
      There are many of them in Europe and the smaller ones change names quickly. Turn off adblock and go to finance and forex oriented sites. You will see many ads for them at least in Europe. A common marketing strategy for them is to offer heavy affiliate comissions and this leads to make-money-with-forex type of affiliate sites. That's another sign. Bigger ones would be someone like Saxo Bank which started as a bucket shop in 90s and now is medium sized and somewhat legitimate now. Another sign to be aware is the use of Metatrader software. Up to version 5 now. I am sure there are turnkey solutions offering a whole bucket-shop as a service. Even if there are honest bucket-shops you are still betting against the house not against other players in the market. Might as well bet on horses or sports then. EDIT: nice discussion here on situation in UK: https://www.elitetrader.com/et/threads/is-there-an-actual-market-for-cfds-or-are-cfd-firms-just-bucket-shops.318978/ https://www.elitetrader.com/et/threads/is-there-an-actual-ma...
      - blaser-waffle 7y ago
        Good reply. Thank you for the detail!
SifJar 7y ago
As I understand it, this is effectively what CFDs (Contracts For Difference) are, which seem to be offered by a lot of discount brokerages etc. (at least here in UK, not sure if CFDs exist in US) A bet between trader & brokerage that the price will move a particular direction, with no actual trading or stock ownership occurring https://www.investopedia.com/articles/stocks/09/trade-a-cfd.asp https://www.investopedia.com/articles/stocks/09/trade-a-cfd.... EDIT: It occurs to me this may not be quite what you meant after all, but I think the end result is fairly similar

by zelly 7y ago

I wonder why this wouldn't work. If 90% of retail traders lose money, then why doesn't Etrade and Robinhood bet against its worst performing customers? Is there some law against this?

cameronh90 7y ago

Consider that even if you're right 75% of the time, if you bet all your money each time, you're going to go broke pretty quickly. Their biggest losers are probably making essentially random bets in such a stupid way that they lose all their money.

zelly 7y ago
The Kelly criterion provides the optimum bet size given the chance of winning. The adversarial brokerage could use the Kelly criterion and only make a wager commensurate with the likelihood of the trader's failure. It should be profitable. Suppose the brokerage just puts 5% of their cash toward this. It could be a nice profit center without risking everything.
- imtringued 7y ago
  They could also just keep your money since you lost it on bad trades.

lmm 7y ago

IIRC there was a scandal not so long ago with a forex broker that was just not executing trades from dumb clients, sitting on the other side of them itself instead. I don't know if it's exactly illegal in a direct way, but it's a bad look, and I think there was a fine in this case.

sireat 7y ago
Basically a bucket shop: https://en.wikipedia.org/wiki/Bucket_shop_(stock_market) https://en.wikipedia.org/wiki/Bucket_shop_(stock_market) Those are considered illegal in US. CFD and like skirt the law here. The big problem with bucket shops is that they tend to not honor the bets once you start winning too much as Jesse Livermore found out in late 1890s. Still common today with all the fake forex exchanges. The rare winners have trouble getting money out.
- blaser-waffle 7y ago
  What are some examples of Fake Forex shops?
  - sireat 7y ago
    There are many of them in Europe and the smaller ones change names quickly. Turn off adblock and go to finance and forex oriented sites. You will see many ads for them at least in Europe. A common marketing strategy for them is to offer heavy affiliate comissions and this leads to make-money-with-forex type of affiliate sites. That's another sign. Bigger ones would be someone like Saxo Bank which started as a bucket shop in 90s and now is medium sized and somewhat legitimate now. Another sign to be aware is the use of Metatrader software. Up to version 5 now. I am sure there are turnkey solutions offering a whole bucket-shop as a service. Even if there are honest bucket-shops you are still betting against the house not against other players in the market. Might as well bet on horses or sports then. EDIT: nice discussion here on situation in UK: https://www.elitetrader.com/et/threads/is-there-an-actual-market-for-cfds-or-are-cfd-firms-just-bucket-shops.318978/ https://www.elitetrader.com/et/threads/is-there-an-actual-ma...
    - blaser-waffle 7y ago
      Good reply. Thank you for the detail!

SifJar 7y ago

As I understand it, this is effectively what CFDs (Contracts For Difference) are, which seem to be offered by a lot of discount brokerages etc. (at least here in UK, not sure if CFDs exist in US) A bet between trader & brokerage that the price will move a particular direction, with no actual trading or stock ownership occurring https://www.investopedia.com/articles/stocks/09/trade-a-cfd.asp https://www.investopedia.com/articles/stocks/09/trade-a-cfd.... EDIT: It occurs to me this may not be quite what you meant after all, but I think the end result is fairly similar