4 ms·

How does your employer pay you if they don't take money from anyone?

by dahfizz 4y ago

stouset 4y ago
By providing a service to customers, rather than finding ways to skim money off the top of markets?
- nostrademons 4y ago
  If you ask most financial institutions they would say the service they provide is "liquidity" - they let you put your money in or take your money out at any time (in exchange for securities), as well as make decisions about where you want to allocate your capital based on your personal view of the world. This always fell a little flat to me (hence why I left the financial industry early in my career), but it's pretty analogous to merchants or retail. What service does a storefront provide, other than marking up the wholesale price of a good by 3x? They offer convenience - you can buy anything you want at the time you want it just by picking it up and swiping a credit card, vs. having to contract with a wholesaler for delivery, which might be months in the future, at a place that's convenient for the wholesaler, and needing to buy in quantities that no individual really needs. So it is with brokerages & exchanges - they let you buy any security with a couple clicks of a button, vs. needing to get an ISDA and pay a lawyer to write a contract, plus find someone else that wants to trade with you, plus take on the risk that your counterparty goes insolvent. And so it is with market-makers like Citadel or Jane Street: they ensure that you can always find a buyer for your securities (for a price), and that you don't have to worry that about simply not being able to sell stocks at any price.
  - stouset 4y ago
    The average retail investor just does not need that much liquidity, especially if they're not buying individual stocks (which by and large they shouldn't be).
    - nostrademons 4y ago
      And the average retail investor pays pennies to market-makers - if a typical spread is 1-2 cents and you make 5 trades a year, you've paid between a nickel and a dime. As with advertising, when you sum up dimes across hundreds of millions of people, it becomes an appreciable amount. Particularly when you also include trades made by institutions on behalf of retail investors. Your 0.5-1.5% management fee on an actively-managed mutual fund is partially going to pay salaries for the fund manager, and partially toward brokerage commissions, spreads, etc. for the trading itself. And mutual funds care a great deal about getting liquidity when they need it, since they're in breach of contract if a flood of redemptions come in and they can't liquidate assets to pay them. (Market makers are also analogous to the credit card industry in that a small fraction of dumb people subsidize a large number of fiscally responsible people. If you get a rewards card with no annual fee and always pay it off on time, you turn a profit, paid for partially by merchant fees and partially by idiots who carry a huge balance at 25% interest rates. Similarly, if you buy-and-hold a good stock or index fund, you're making profits far in excess off what the financial industry can skim off you. The suckers are largely made up of day traders, wage slaves who can't save anything, and underfunded pension funds with principal agent problems.)
      - dmurray 4y ago
        > Your 0.5-1.5% management fee on an actively-managed mutual fund is partially going to pay salaries for the fund manager, and partially toward brokerage commissions, spreads, etc. for the trading itself. Good post but your management fee isn't generally paying for crossing the spread. That's extra slippage. It may show up as tracking error in the fund (the price was 10.25/10.26, the fund had to buy, it bought at 10.26 and the index trackers said the price was 10.255, it had 0.5c of slippage). But more likely the fund traded in the closing auction, there was only one price so it officially had zero tracking error, but the price was silently a little higher than it would have been if the fund wasn't buying.
  - bobsomers 4y ago
    > If you ask most financial institutions they would say the service they provide is "liquidity". I've honestly never understood this. Economics 101 teaches us that artificially manipulating supply (liquidity) is at direct odds with a free market's ability to do price discovery. If there is effectively infinite supply of any security (because all these high frequency firms are instantly hedging out the risk against their entire portfolio), why should anyone believe the NBBO? It's just a made up fantasy number at that point. It doesn't represent what the real security is worth because there are an infinite number of buyers and sellers willing to transact at any moment. It really does feel like an enormous grift.
    - bostik 4y ago
      > artificially manipulating supply (liquidity) is at direct odds with a free market's ability to do price discovery. [...] there are an infinite number of buyers and sellers willing to transact at any moment. No, there are not. There is a limited (and not really that large) number of active participants in any given market segment, and the 80/20 rule holds among them pretty well too. Thanks to Money Stuff it dawned on me recently that market makers are not really providing liquidity. They provide immediacy. Buyers and sellers have to meet not just in price, but in time too. The spread paid by market participants should be seen as their baked in commission for providing a very specific service: reduced wait time. We can certainly disagree about the societal value of what that service has morphed into, but the reality is that for other than the most liquid[ß] assets, participants are willing to pay extra for the ability to transact NOW, and not in some unspecified time in the future. My personal opinion is that NBBO is an imperfect mechanism to set upper bounds to these commissions. In other words, it limits how much retail transactions can be fleeced for. I am without a doubt a retail investor: I generate maybe three transactions a year, and I'm happy to pay something like 0.15% to 0.25% transaction fee each time, in the knowledge that I am getting a fair price at the time. To me that is a reasonable cost of convenience. My transactions are so small compared to the trading volume that they have zero price impact: in purely financial terms I could be paying a smaller commission if I set up the limit order thresholds myself - but that would take more time and be less convenient. [ß] Read: continuously traded in very large quantities
    - nostrademons 4y ago
- Gigachad 4y ago
  Levelling prices between markets is a useful service. Eventually the amount being skimmed is tiny and regular consumers are much more likely to be getting a fair price without having to shop around.
- whiddershins 4y ago
  Just try imagining in what ways the world would be different if financial markets were very slow and inefficient.
perlgeek 4y ago
Of course they take money, but they hopefully also create real value. Providing liquidity a fraction of a microsecond faster than a competitor doesn't seem like real value to me, more like a cover story so that politics doesn't outright forbid high-speed quantitative trading.
- mr_00ff00 4y ago
  Ahh classic. Obviously only these financial firms are the only ones not creating value. Those social media companies, start-ups people do for venture capital cash grabs, Web3, and addictive mobile games all create such value. EDIT: Okay, as the replies mentioned, OP did not make this argument. I still feel it’s valid, as a lot of big tech is neutral/worse for society, yet they are some of the loudest critics of low latency liquidity.
  - saagarjha 4y ago
    I don’t see that being argued.
  - bobsomers 4y ago
    This is a strawman argument. GP never claimed what you stated.

How does your employer pay you if they don't take money from anyone?

stouset 4y ago

By providing a service to customers, rather than finding ways to skim money off the top of markets?

nostrademons 4y ago
If you ask most financial institutions they would say the service they provide is "liquidity" - they let you put your money in or take your money out at any time (in exchange for securities), as well as make decisions about where you want to allocate your capital based on your personal view of the world. This always fell a little flat to me (hence why I left the financial industry early in my career), but it's pretty analogous to merchants or retail. What service does a storefront provide, other than marking up the wholesale price of a good by 3x? They offer convenience - you can buy anything you want at the time you want it just by picking it up and swiping a credit card, vs. having to contract with a wholesaler for delivery, which might be months in the future, at a place that's convenient for the wholesaler, and needing to buy in quantities that no individual really needs. So it is with brokerages & exchanges - they let you buy any security with a couple clicks of a button, vs. needing to get an ISDA and pay a lawyer to write a contract, plus find someone else that wants to trade with you, plus take on the risk that your counterparty goes insolvent. And so it is with market-makers like Citadel or Jane Street: they ensure that you can always find a buyer for your securities (for a price), and that you don't have to worry that about simply not being able to sell stocks at any price.
- stouset 4y ago
  The average retail investor just does not need that much liquidity, especially if they're not buying individual stocks (which by and large they shouldn't be).
  - nostrademons 4y ago
    And the average retail investor pays pennies to market-makers - if a typical spread is 1-2 cents and you make 5 trades a year, you've paid between a nickel and a dime. As with advertising, when you sum up dimes across hundreds of millions of people, it becomes an appreciable amount. Particularly when you also include trades made by institutions on behalf of retail investors. Your 0.5-1.5% management fee on an actively-managed mutual fund is partially going to pay salaries for the fund manager, and partially toward brokerage commissions, spreads, etc. for the trading itself. And mutual funds care a great deal about getting liquidity when they need it, since they're in breach of contract if a flood of redemptions come in and they can't liquidate assets to pay them. (Market makers are also analogous to the credit card industry in that a small fraction of dumb people subsidize a large number of fiscally responsible people. If you get a rewards card with no annual fee and always pay it off on time, you turn a profit, paid for partially by merchant fees and partially by idiots who carry a huge balance at 25% interest rates. Similarly, if you buy-and-hold a good stock or index fund, you're making profits far in excess off what the financial industry can skim off you. The suckers are largely made up of day traders, wage slaves who can't save anything, and underfunded pension funds with principal agent problems.)
    - dmurray 4y ago
      > Your 0.5-1.5% management fee on an actively-managed mutual fund is partially going to pay salaries for the fund manager, and partially toward brokerage commissions, spreads, etc. for the trading itself. Good post but your management fee isn't generally paying for crossing the spread. That's extra slippage. It may show up as tracking error in the fund (the price was 10.25/10.26, the fund had to buy, it bought at 10.26 and the index trackers said the price was 10.255, it had 0.5c of slippage). But more likely the fund traded in the closing auction, there was only one price so it officially had zero tracking error, but the price was silently a little higher than it would have been if the fund wasn't buying.
- bobsomers 4y ago
  > If you ask most financial institutions they would say the service they provide is "liquidity". I've honestly never understood this. Economics 101 teaches us that artificially manipulating supply (liquidity) is at direct odds with a free market's ability to do price discovery. If there is effectively infinite supply of any security (because all these high frequency firms are instantly hedging out the risk against their entire portfolio), why should anyone believe the NBBO? It's just a made up fantasy number at that point. It doesn't represent what the real security is worth because there are an infinite number of buyers and sellers willing to transact at any moment. It really does feel like an enormous grift.
  - bostik 4y ago
    > artificially manipulating supply (liquidity) is at direct odds with a free market's ability to do price discovery. [...] there are an infinite number of buyers and sellers willing to transact at any moment. No, there are not. There is a limited (and not really that large) number of active participants in any given market segment, and the 80/20 rule holds among them pretty well too. Thanks to Money Stuff it dawned on me recently that market makers are not really providing liquidity. They provide immediacy. Buyers and sellers have to meet not just in price, but in time too. The spread paid by market participants should be seen as their baked in commission for providing a very specific service: reduced wait time. We can certainly disagree about the societal value of what that service has morphed into, but the reality is that for other than the most liquid[ß] assets, participants are willing to pay extra for the ability to transact NOW, and not in some unspecified time in the future. My personal opinion is that NBBO is an imperfect mechanism to set upper bounds to these commissions. In other words, it limits how much retail transactions can be fleeced for. I am without a doubt a retail investor: I generate maybe three transactions a year, and I'm happy to pay something like 0.15% to 0.25% transaction fee each time, in the knowledge that I am getting a fair price at the time. To me that is a reasonable cost of convenience. My transactions are so small compared to the trading volume that they have zero price impact: in purely financial terms I could be paying a smaller commission if I set up the limit order thresholds myself - but that would take more time and be less convenient. [ß] Read: continuously traded in very large quantities
  - nostrademons 4y ago
Gigachad 4y ago
Levelling prices between markets is a useful service. Eventually the amount being skimmed is tiny and regular consumers are much more likely to be getting a fair price without having to shop around.
whiddershins 4y ago
Just try imagining in what ways the world would be different if financial markets were very slow and inefficient.

perlgeek 4y ago

Of course they take money, but they hopefully also create real value. Providing liquidity a fraction of a microsecond faster than a competitor doesn't seem like real value to me, more like a cover story so that politics doesn't outright forbid high-speed quantitative trading.

mr_00ff00 4y ago
Ahh classic. Obviously only these financial firms are the only ones not creating value. Those social media companies, start-ups people do for venture capital cash grabs, Web3, and addictive mobile games all create such value. EDIT: Okay, as the replies mentioned, OP did not make this argument. I still feel it’s valid, as a lot of big tech is neutral/worse for society, yet they are some of the loudest critics of low latency liquidity.
- saagarjha 4y ago
  I don’t see that being argued.
- bobsomers 4y ago
  This is a strawman argument. GP never claimed what you stated.