"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"):
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."
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.
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.
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.
>I am somewhat surprised nobody offers an abstracted savings account, that handles 401k, IRA, HSA, paying rent and bills, and access to credit.
I think it'd be complicated to regulate from a risk perspective. Checking and savings accounts get insured by the FDIC, how do you insure a large pile of money invested practically everywhere in varying risky scenarios? You'd need to at least create a boundary between "FDIC-insured low interest funds" and "your results may vary but will probably be fine" funds.
that would still exist, you just wouldnt see it from the UI/dashboard that you interact with day to day. There would be risk parameters, not dissimilar to the "find your risk tolerance" type wizards today.
the important part being to eliminate too many choices. the more choices people have, the more chances they choose a suboptimal one or panic and choose nothing. (paradox of choice.)
Think of the traditional baby boomer era story-- "Dad brings home the paycheque, Mom does the budget."
Give me Mom as a service. Don't let me touch my full salary, just what's left after a responsible adult has done with it.
Let me plug in every account I have, and set up rules like
* Pay the rent on the first cheque of the month and the electric company on the second
* Pay credit cards in full up to a total of $1200/month; if beyond that pay towards the highest rates first while still covering minimum balances
* If there's a break in of cash flow, draw down from savings to $500 to retain the current pay rates, then drop payments on all accounts to minimum.
* Leave $150 per week from cash flow where I can withdraw it for petty cash.
* Anything unspoken for is sent to an automatic purchase of (broad index fund|treasury debt|Pokemon cards) on a weekly basis
After a few years of using the account with $150 per week on it, you check the statement and see that the money that Mom-as-a-service has withheld from you is enough to buy the entirety of Alberta.
Exactly. That is exactly what I am describing. What I would add is a built in line of credit that allows rent to be paid, bills to be paid, without a paycheck being deposited, and without needing to withdraw money from investments, money market etc. This would basically eliminate the need to keep cash in a checking account. Once per period, whatever that period is, money would move from savings to the line of credit. This line of credit would be accessible as a bank account, and as a credit card, to pay bills.
What needs to be displayed to you is some equivalent to cash flow or net income combined with a budget. Knowing you spend x on rent and y on food a month, are you on track to keep cash flow positive?
Yeah, I've been meaning to consolidate accounts for a while now and just haven't gotten around to it. There was value in the E-Trades and Ameritrades when their commissions were a lot lower than Fidelity, etc. So even if you had an account with one of the traditional brokerages for 401ks, etc. it made sense to have an Etrade account for various personal stock trading. That's not true any longer and there's at least some mental overhead to tracking multiple accounts.
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
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.
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
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.
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.
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:
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.
> 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.
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?
"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.'
"
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.
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
With the dollar getting so strong and since we are now post brexit, I expect capital flight.
The people running the show have zero understanding of how banking works. And no, I’m not being arrogant - negative rates destroy capital, which is not what you want in a bank.
If you look at the largest European banks, they are all very weak (due to many factors, not just this one). However, negative rates is making them weaker.
Further, the aging demographics of Europe are going to continue to drive lower and lower growth.
In sum, I believe that all of this will cause smart money to leave Europe. At least in part as a hedge if nothing else.
The central bank could start raising rates. There are very good arguments for temporarily lowering rates to stimulate the economy, but the arguments for keeping it this way for 5-10 years are weaker. Especially if it discourages savings, as in the long term economic growth requires savings (in the economic sense, wherein there is a choice to "save" or "consume" our output, and only the "saved" output can be invested to increase future productivity).
There is also little empirical evidence that such low rates help (or no evidence, because negative rates were never tried before). Japan's had low rates for a while and they didn't seem to help, but the argument could be made that without those low rates the situation would be even worse (you could find economists who'd argue both sides). Personally I think it's better to err on the side of favouring whatever the "market rate" of interest would be (the rate if the central bank was taking no action to alter the supply of money or loans), and I'm very doubtful that would be negative.
Sweden raised rates recently, but only back to zero.
Swedish banks - for some reason - simply waited for the NIRP to pass and moaned.
[from the link]: Johan Torgeby, chief executive of one of Sweden’s largest banks SEB, says lenders involved in fixed income “struggled for years” and calls the end of sub-zero rates “good news”. He adds: “We have never really understood what effect negative yields have on [boosting] consumption.”
It certainly helps expanding the money supply. That should help increase savings, that then can be loaned out. (And simply increasing savings doesn't automatically lead to more investment: https://en.wikipedia.org/wiki/Saving_identity - I know wikipedia is not a proper source, sorry, anyway: "This identity only holds true because investment here is defined as including inventory accumulation, both deliberate and unintended. As such, this does not imply that an increase in saving must lead directly to an increase in investment. Indeed, businesses may respond to increased inventories by decreasing both output and intended investment.")
"Given this finding and its robustness when tested using a variety of standard robustness checks, we conclude that NIRP has acted as an empowerment to the ECB’s asset purchase programme (APP). Banks most reliant on retail deposits have the strongest incentive to convert their EL (excess liquidity), created by the APP, into loans - and our results document that they did so."
> Personally I think it's better to err on the side of favouring whatever the "market rate" of interest would be (the rate if the central bank was taking no action to alter the supply of money or loans), and I'm very doubtful that would be negative.
Isn't the problem that the market rate would lead us to deflation?
>And simply increasing savings doesn't automatically lead to more investment
Yep, but in the longer term (decades), all other things being equal a country that is saving 2% will have less investment taking place than that same country saving 5%.
> Banks most reliant on retail deposits have the strongest incentive to convert their EL (excess liquidity), created by the APP, into loans - and our results document that they did so.
One problem is we don't have clear insight into how risky these loans are. If a bank is incentivised to give out loans just to avoid having to pay the central bank interest, it may end up taking on riskier loans than it otherwise would have (if it didn't think they were too risky, it would already have made them). And even if this is not the case, and it's only giving loans because now even a low return of e.g. 0.5% looks good, there's a limit on how cheaply it can offer loans because it still has to cover all its own costs.
>Isn't the problem that the market rate would lead us to deflation?
Empirically it's not clear that would definitely lead to worse outcomes. Europe and the US managed to sustain high rates of growth during deflationary times throughout the 19th century, and while there were crashes during that period they weren't as severe as the Great Depression. In the short run it would definitely be painful, as savings rates increased, but there's a hard cap on this. E.g. everybody needs to eat, they're not going to starve themselves for a week just because food will be marginally cheaper next week. Like how people kept buying computers during the 2000s even though the price of compute was halving every year.
There's an interesting argument for why deflation is bad that I read in a labour economics textbook once, termed wage stickiness. Essentially, if there's deflation we might see labour prices falling every year (but falling less than other prices, so purchasing power still increases). Wage floors (minimum wages, inflexible contracts) however prevent this from happening, prevent the market from clearing. This is one reason unemployment was so bad during the great depression: wage floors introduced by the government to stabilise things ended up preventing wages from adjusting to the new price levels, causing unemployment as the value of good produced wasn't enough to pay those wages. Imagine if the price of every good fell by 90% today: suddenly a $10 minimum wage would be the equivalent of a $100 minimum wage in real terms, causing massive unemployment.
Politically, that's a hard problem to solve, so I can see why many people prefer inflation.
> Yep, but in the longer term (decades), all other things being equal a country that is saving 2% will have less investment taking place than that same country saving 5%.
Sure, but that means they are rather different economies. If one economy can save 5% it will - by definition of the identity - invest 5%, so it'll grow much faster. If it can find the demand to service, which directly leads back to the problem of consumption (spending vs saving).
The interest rate should be orthogonal to actually saving or spending. It just happens that since we want stability of prices, coins, notes, money in our accounts, and steady growth, instead of constant 2.00% central bank interest rate we vary the rate. If the central bank could simply rewrite a lot of numbers all around it could keep the base rate constant. But people would go mad, and people would come up with a new model that just translates back everything and blurts out the actual money supply and base rate changes.
Yes, there's talk about zombie corps, because money is cheap. But so is money to invest in new companies to compete with these zombies. Plus, if they don't make real money, then investing them makes no sense, buying their bonds make no sense, and extending them credit makes no sense, no matter how small the interest rate is. (Sure, they can live on smaller margins, but that doesn't make them literal zombies.)
Even in a negative interest situation creditors still need to price in risks. (People still need to pay them back on time. There's still administration and other kinds of overhead as you said.) For example the Danish mortgages are low risk, that's why the bank was able to offer them at negative rates. The moment negative interest rates start to seep into retail people will start to buy shit like there's no tomorrow. Which will push inflation up, and then the central bank moves out of the negative regime. And if all else fails, the central bank can simply buy government bonds, basically financing and encouraging public spending, which should open up the legislature to lower taxes, procure more stuff, etc.
> One problem is we don't have clear insight into how risky these loans are. If a bank is incentivised to give out loans just to avoid having to pay the central bank interest, it may end up taking on riskier loans than it otherwise would have (if it didn't think they were too risky, it would already have made them).
Agreed, yet in the face of deflation even risky busywork is better than nothing. At that point it's up to people, investors, speculators, legislators, to take risks and invest (to increase efficiency so more of the output becomes economic surplus which can be then spent/invested) or consume (to increase demand so investment becomes profitable).
The financial sector can scream all it wants about being squeezed tight, but it's not like they are the paragons of efficiency and foresight. Sometimes they are too risky (2008) sometimes they are too cautious (last year - all the talk about an impending recession, too long business cycle, etc.). And ultimately it's up to the population to prod their legislature to spend. (Related, but might be too cutting-edge: https://johnhcochrane.blogspot.com/2020/02/new-paper-fiscal-... - tl;dr a model that reproduces a lot of the empirical data, and shows how risk free return [gov debt] pays for itself)
The latest Eurostat report ( https://ec.europa.eu/eurostat/documents/2995521/10159412/2-2... ) states EU inflation is around 1.4%. (0.2 %points of that is energy, which is pretty much just natural resource extraction, and should be ignored, as it's not something that results in economic growth in the EU - I'd argue.) So still a bit far from the 2% mark.
But at least the curve inches up.
> Like how people kept buying computers during the 2000s even though the price of compute was halving every year.
Interesting example. A lot of people bought the new computer because it enabled different things. And "decommissioned" the old one because it got obsolete. The desire for new coupled with the low price (thanks to mass production of standardized components) allowed people to substitute their old computer, even though they had to pay the "transaction price" (the price of the new computer, plus setup).
Similarly some folks argue that a Tesla car is so much better all around and it just happens to be an EV. (Though they are pretty pricey, so mass adoption is not happening, but stock prices indicate that a lot of folks think it or something like that will indeed happen.)
Companies/businesses were relatively slow to replace their computers. The large technology churn was (and is) fueled by newcomers, and people replacing their old rig.
That said, I have no problem with experimenting with deflation (especially because I despise these dumb hard-limit policies like minimum wage - https://danluu.com/discontinuities/ ), just as I have no problem with negative interest rates (because our central banks [and models, interchangeably] seem to understand that better).
Tough question. Short answer is nobody really knows.
What you're asking is sort of like this, "the big dam is breaking apart right now because of all the rain, and the rain isn't letting up. What do we do?"
Demographic challenges are really tough to overcome because they affect the demand of everything. As people have fewer kids, there is not as much need for schools, or teachers, or pencils, or wood to make those pencils...
As people get older, they tend to want smaller houses (kids are grown and out of the house). Smaller houses use less wood, less heating and air conditioning, etc.
One last thought for you: Japan, doesn't have millennials. That's right - there was never a second big population boom after their baby boomer generation.
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.
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?
Government props up equity values again, especially since everyone is invested in them. People with savings in cash lose via loss of value of currency, just like last time.
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.
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.)
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.
Money is just a piece of the underlying monetary system, which is constantly priced based on what the economy using that money does.
If that economy expands without corresponding increase in the money supply, then prices go down (because there are more stuff, but the same amount of money, so the same amount of money now represent more stuff). But this represents a deflation, which would auto-magically counteract the expansion, because it would incentivize people to wait and spend just at the last minute. (Time value of money and all would revert, wages would fall, fixed amount mortgages would start to spiral out, and all the regular deflation doomsday scenarios.) So the central banks make sure that even in an expanding economy the money supply "stays ahead" of the expansion of the economy. Targeting 2%. (And usually falling short, so inflation is somewhere between 1-2%.)
So holding money did not became worthless, quite the opposite, holding cash is now better than holding it in a bank. But the central bank has only a few policy tools available, and one of them is the interest rate manipulation.
The central banks want to encourage people to make some investments, to take on some risk, or at least spend. Sure, one way is to simply fund the government, as that usually seems the least risky. And it's not like there's nothing to spend on - the Green New Deal and co, but governments are quite reluctant to do so.
No, what's actually broken is positive investment rates. Why would the central bank pay you (i.e. print new money and give it to you) just because you have some money lying on the central bank's account? And by "you" of course I mean big 1% banks, not the 99% population who don't have access to this feature. Commercial banks should be making money by taking consumers' deposits and loaning them out to businesses, taking a cut of the earned interest. If they can't do that, do they actually have a reason to exist?
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.
No it isn't. I've worked at an HFT, this is not why they buy the order flow.
Retail order flow is worth buying because it's what's called "non-toxic". That means the retail traders generally don't know which way the market is going, ie they are either wrong or too small to make the market move against the market maker.
Contrast that to trading against a hedge fund which might have a better clue and is potentially large enough to push the market in some stock.
I agree that HFT don't buy order flow in order to make trades execute better for retail investors. They buy order flow in order to make money. The retail order flow is, as you say, non-toxic. That is, HFT can reasonably expect to make money with the data and not get rolled over. The question then becomes, who is paying HFTs and why. The highly simplified answer is that HFTs are allowed by the regulatory agencies/exchanges to pay themselves a slice of the bid offer spread in return for the liquidity benefit their market making activity provides. How do they do it? By using the retail order flow information, which allows them to "front-run" the order (step in between offers and asks) and provide liquidity. The offeror gets a better fill and the askor gets a better take and the HFT gets a profit and the exchange has vastly higher liquidity and everyone is happy with this type of front-running.
No, if the flow is non toxic it's easy to make money from. You pocket the spread and eventually you do the same on the other side to get flat. No shenanigans required.
Nothing you state above contradicts anything I stated. I explicitly stated that non-toxic flow is easy to make money from. I explicitly said that you make money by capturing some of the spread. You say "pocket the spread" which is simply wrong. No market maker gets the entire spread. My point is that there are many versions of "front-running" that are not "shenanigans." You seem confused as to how all this works.
Liquidity is a product like a hamburger is a product. Some firms expose themselves to the ability to sell liquidity for the same reason that other firms expose themselves to the ability to sell hamburgers. They think they can make money doing that.
Liquidity is unlike hamburgers in that there is a risk profile associated with it if you sell it to anyone who wants it. Adverse selection happens as detailed elsewhere; you lose money on their custom, potentially a lot of money relative to the margin on your product.
Certain buyers of liquidity are, like essentially all buyers of hamburgers, functionally riskless. You can profitably sell your product to them at a positive margin all day long, at virtually any quantity they could demand.
Payment for order flow is setting up a liquidity stand in a place where you structurally only get the non-risky customers. That liquidity stand is, like a hamburger shop, a cash machine, and justifies CapEx and OpEx to run. Part of the OpEx is paying your landlord for prominent placement of your liquidity stand in front of willing customers who are buying that sweet, sweet liquidity you're selling.
The price of liquidity changes moment-to-moment based on market conditions but is effectively standardized by law nationwide (NBBO). You are not overcharging your customers for liquidity; they pay the same price literally anyone in the country buying it in that instant does and you can, at your option, discount it further to reward them for buying it from you.
You are making superior margins on their custom because you don't inevitably lose lots of money by being in the liquidity business. The liquidity stand down the street is doing the same thing; your vicious competition against each other has caused the prices for your product to crater, to the enduring joy of the people who line up daily to buy your liquidity.
You might also think about it as the difference between opening up a cafe with unlimited free refills in San Francisco versus doing the same thing in exurban Utah.
You don't want the information. You want the order, so that you can be the other side of the trade. As long as the order arrival isn't too correlated with price movements, the market maker can buy a little above the bid price and sell a little below the ask price and make some fraction of a cent on each share, on average.
It's called adverse selection. You don't want to be on the other side of an order from an informed trader, because the market is moving against you in the short run. In the longer run, if the big fund is more often correct than not, then you are also more likely to have made a losing trade. HFTs care mostly about the effect on the market today, so they probably don't care whether the information is correct or not, they just want to get out of the way of big moves.
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.
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.
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.
If you're considering using E-Trade you may want to consider that E-Trade does not take responsibility if they are hacked. They group cybersecurity events and software malfunction under "Force Majeure" events ("acts of God"). That means if your retirement savings vanish because they are hacked you're out of luck. See https://content.etrade.com/etrade/estation/pdf/10118customer...
Fidelity and Vanguard don't have such clauses. Hope Morgan Stanley fixes this.
Basically everyone has $500k insured in their trading account. Are you concerned about people with more than that, or concerned that it wouldn't cover hacking?
FDIC payouts are extremely rare. As far as I know, it only kicks in if the entire bank fails. I don’t think it covers fraud.
Having said that, I’d be surprised if E Trade were not legally required to cover losses in the event of account break ins, regardless of what their customer agreement says.
I am guessing you mean 500k cash. Regardless, I'm not sure if your point holds. If I have $1m in stocks, and my account is hacked, the stocks are sold, and the money funneled out, am I protected?
It's an interesting and unsettled area of the law. It gets even more interesting when the perpetrator behind the cybersecurity incident is a state because, some have argued, it constitutes an "act of war" which has long been considered covered by a force majeure. Though FWIW I think eTrade's stance is here is very aggressive and I'm surprised it hasn't caught the attention of regulators yet. If financial institutions can be allowed to disclaim any and all responsibility for cybersecurity then our whole system will be in serious trouble.
Also - likely a move to gain access to large 'dark pools' of mom&pop trades (orders) so that they aren't front run on institutional block trades & et cetera.
Aw man, I just got moved from Capital One 360 Investing to E-Trade. Now I'll have to move to Morgan Stanley? Any way to just transfer my sh*t from E-Trade to Robinhood without just selling and re-buying, incurring a change in tax status? Seems Robinhood has unfortunately sunset that option...
I think you're going to be quite OK for a while at least, it looks like the current e-trade CEO would end up running the E-Trade unit inside of Morgan Stanley at least for a while. If they ever merged e-trade accounts into Morgan Stanley, I'm sure it'd be a no/low-touch thing, they'd be risking too much to make all those e-trade accounts liable to churn.
Totally my opinion but I'd stay away from the upstarts like M1 & Robinhood (saying this as a current M1 customer). With free trades from e-trade / schwab / td / etc. it just doesn't make sense anymore, and things seem to move way slower (for instance, I think M1 just today has their tax data integrations going live, but large shops have been set up for longer). I know some people like Robinhood and the stripped down interfaces but if you're already comfortable with interacting with the large-shop software (which I assume you are, going through e-trade and capital one), you're gonna get a lot more from that side of the market than the upstarts.
outside of the flashy app, is there really anything Robinhood does better than Schwab or Fidelity? And in the realm of newcomers, M1 offers a better feature set.
Robinhood has terrible order execution. I switched to TDA after getting sick of limit orders executing nowhere near my limit price. Market orders were abysmal as well
Limit orders can only execute at the limit price or better. Are you saying that you were getting better prices than you expected, or am I completely misreading this?
Stop orders execute a market trade when the price hits a limit.
So, there’s a heuristic around when “the market price hits the limit”.
If you execute too late, it might not execute at all. Too close to the limit, and it might cross back over. Also, stop orders are usually done to limit losses, so adding delay increases exposure to loss.
I wonder if the movement to zero transaction fees will facilitate the development and greater adoption of software written to implement passive investment strategies like indexing. Fees for funds that do passive strategies like indexing are already incredibly low, but there's no reason they can't be zero.
It ought to be pretty straightforward to implement this with some sanely written software connecting to your brokerage of choice. You may lose out on revenue streams like securities lending, but it's probably not that much anyway. Anyone have any experience with this?
$13B is a more than 96% discount on the stated $360B asset value, what am I missing? Unless it means (or is including) assets held for clients in nominee accounts?
Correct. They bought the business and future cash flows but the AUM are not included in the valuation beyond the extent to their contribution to cash flow.
Sorry, I'm still confused, you're saying the $360B 'assets' figure is assets under management? Seems an odd way of describing it, so I didn't even think of it at first, but I can't see how else 'assets' would be so much larger than the valuation.
Company valuation only depends on future cash flows. If an asset is able to produce future cash flows, or can be sold to create cash flows, then this can be accounted for in valuation. In this article their mention of assets is actually assets under management (Link at end of comment). Assets under management still only factor in valuation based on their ability to generate future cash flows, as E-Trade have no claim to those assets. These cash flows have been taken into account, and then used to evaluate a $13 billion price tag. Elsewhere in the thread you can see how money is made from assets under management.
Why? What edge does RobinHood have that JPM needs? Would they just be buying the meme-stock customer base? The "free trade" feature is a marketing decision, not a technological breakthrough.
Ameritrade and Schwab are almost the same age and have similar customer bases. Schwab has superior economies of scale and can make more money per customer than Ameritrade. Schwab's move to no-fee trading put Ameritrade in distress (Ameritrade was more dependent on commissions than Schwab), which created the buying opportunity.
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/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."