
How Discount Brokerages Make Money - charlieirish
https://www.kalzumeus.com/2019/6/26/how-brokerages-make-money/
======
lordnacho
Ex options MM / hedge fund manager / HFT guy here.

This is a really good article.

The net interest thing has a parallel in the HF world. CTAs, a type of hedge
fund, used to do substantially the same thing. The margin requirement for
holding a load of futures is quite low, but the customers of the fund have put
cash into the fund. So back when interest rates were higher, a fair bit of a
CTA's returns would be interest on the cash.

He's right about Robinhood. From the HFT side, the problem is if you're in the
"real" institutional market, someone will run you over occasionally. With
retail, that never happens, and the spread you can offer is thus tighter.
There's no front running to it, just the ease of non toxic flow. So RH is
trying to put forward zero comms as a way to get some deposits.

He's also right about options. It's tempting to think that you can just sell
some options to collect premium, or do a combination of some sort (iron
condors, butterflies, etc) to save yourself from wasting money. But keep in
mind the costs when you're doing this, and the fact that you are simply paying
up to squish some risk into an unfamiliar shape. It also has a gambling-like
tendency to create occasional wins to keep you interested.

As for investment advice for retail people, if you are a coder there doesn't
seem to be any reason to use anyone other than IB. They are the cheapest, and
if you can code you can use their APIs to trade whatever it is you want. I'm
not saying anyone can make a great trading strategy, but you can certainly
manage some passive investments with barely any fees. Or just take advantage
of RH and do it free I suppose.

~~~
skellera
If someone only uses Robinhood for normal stock trading (no options, crypto,
etc), is it better than using other discount brokerages that charge fees or
are there reasons the other ones are better?

~~~
hervature
As alluded to in his final point, with IB, you can loan your stocks for people
to short. This can yield you a substantial revenue stream for stocks with high
short interest like TSLA. IB splits it 50/50 (fact check me on this) whereas I
assume RH doesn’t even give you the option and uses it for their revenue
stream.

~~~
teej
TFA says a gain of 7bp. I wouldn’t call that “substantial” in any sense of the
word.

~~~
thedufer
> This can yield you a substantial revenue stream _for stocks with high short
> interest_

(emphasis mine)

7bp is an average. The article also points out that the yield occasionally
goes as high as 100% per year.

------
bcp2384
I honestly think there's an opportunity to create a YouTube channel that
literally does nothing more than explain how X makes money, whether it's a VC
firm, a Subway franchise, a toothpaste manufacturer, etc.

As someone with an entrepreneurial tick but not someone who's gone all in it
would be so helpful to have edu videos that just explained the basic business
model of XYZ.

~~~
patio11
Do you have a strong preference versus learning this from videos versus other
potential form factors, like a podcast or e.g. glossy coffee-table book or
less-glossy "this essay times N" book?

~~~
bradleyjg
It’s clear that there are lots of people that disagree with me but I have a
terrible loathing for the YouTube video where someone looks at the camera and
talks at you.

Are other people getting a lot out of facial expressions or something?

~~~
55555
People like people. It's that simple. We are social animals.

------
anonu
Wow - first time I see some decent writing on the stock broker business, HFT,
internalization. Good article...

What I would add to the article:

> Roboadvisors are a bad business below scale.

I would say that roboadvisors are just a bad business. Theyve been around for
a decade+ and we haven't really seen any large robos created from the concept.
I think this is because ETFs effectively capture or can capture what Robos do.
And we will continue trending towards that. In that way, you can encapsulate
the benefits of Robo (div reinvestment, tax gains, target date strategies)
within an ETF without having to move your money out of your current brokerage
account.

Also note that roboadvisors cant just do "robo". Today they are branching off
into a dozen different services - so they look more and more like the
traditional platforms.

> And then there’s Robinhood, which is a discount brokerage whose marketing
> and product decisions probably do not assist their users in achieving
> successful outcomes.

Yes - Robinhood is a gambling platform. Shameful IMHO but creates a field day
for the owners and for internalizers/HFT folks.

~~~
alasdair_
>I think this is because ETFs effectively capture or can capture what Robos do

I think the one "real" source of alpha that a robo offers the everyday user is
automated tax loss harvesting, which is a pain in the ass to do otherwise.

~~~
harryh
Two important notes about tax loss harvesting:

1) For any given dollar you put into a robo-advisor any tax lost harvesting
gains to be made based on that dollar will generally happen in the first 1-3
years. After that gains will generally approach zero. However, the fees you
pay the robo-advisor will last as long as you keep your money there.

2) Once you make the decision to use a robo-advisor which purchases hundreds
of stocks on your behalf, there is a lot of lock in. Automation becomes
essentially required to continue to maintain the account.

You do have the option of selling everything and going back to an ETF based
approach but at that point you'll incur capital gains completely negating any
positive impact you got up from by loss harvesting.

These points were not clear to me when I began using one of the popular robo-
advisors some years ago. I kind of wish they had been.

~~~
eric-hu
Is it possible to transfer your holdings from within a robo advisor to a
service like Vanguard?

~~~
harryh
I think it probably is, but then you have to manage those holdings manually
going forward which can be a real challenge when you own so many different
securities.

------
throaway2234
Almost all of the discussion around payment for order flow is inaccurate. To
highlight the worst,

1\. Retail order flow is toxic like all other flow and trading against it
blindly leads to material losses. Retail is particularly well informed with
respect to news and major market events. "Retail investors destroy value when
trading" is a fun quote and repeated assertion of the article, but is not true
of any retail order flow I've seen (and I have seen all of it).

2\. Wholesalers make surprisingly little money from the flow being uninformed.
Most of the P&L is a result of (a) fee arbitrage (some strategies that aren't
possible on public markets become possible with an internalizer because there
are less market access fees), (b) queue priority (internalizing a market order
allows the market maker to effectively rest at the inside without quoting
there), and (c) strategies for executing special order types that cannot be
traded against on exchanges (stops, for example).

3\. Robinhood earns more for order flow because their order flow is less toxic
(less informed) than other brokerages. It has nothing to do with options.

4\. Retail order flow data is incredibly valuable since it's needed to build
pricing and trading models. Citadel Securities, in fact, does run models (and
machine learning models) against retail trade data and would not be profitable
without it.

Finally, if wholesalers are good for retail investors is an open question that
won't be answered by this blog piece. A simple thought exercise: if I'm a
retail investor with the most aggressive limit order in the market and a
market maker internalizes a retail market order on the opposing side -- is the
result net good, or net bad for the two retail participants?

------
jmb12686
Having worked in the industry (at a defunct brokerage with well known
commercials featuring the owner/CEO in a purple helicopter), I would say this
is a fairly accurate description of the industry's economics. Just like most
topics in the financial world, the general public is left in the dark
regarding the specifics...articles like this help shed a small light.

*Updated spelling

------
npongratz
Possible correction to the essay: I believe in this hypothetical you were
actually supposed to be giving me one hundred dollars:

> "Suppose I were to give you a dollar... You’d earn $2.26 in net interest in
> a year."

~~~
patio11
Fixed, thanks. (The joys of doing final editing past midnight.)

------
twic
_Suppose I were to give you $100, in return for your promise to give it back
when I wanted it and pay me 0.27% annualized interest in the meanwhile.
Suppose you invested this in a virtually riskless bond, perhaps a mortgage-
backed security with government backing, offering 2.53% annualized interest.
You’d earn $2.26 in net interest in a year._

You would also bear the risk of me wanting my money back before the security
matures, at a time when its price is less than you paid for it.

A better example would be if you invested it by lending on an overnight inter-
bank market, which is virtually risk-free, but gives you the option to stop
lending at any time. You could make something like 2.38% in fed funds [1] or
GC repo [2], so the argument still stands.

[1]
[https://apps.newyorkfed.org/markets/autorates/fed%20funds](https://apps.newyorkfed.org/markets/autorates/fed%20funds)

[2] [https://www.newyorkfed.org/markets/treasury-repo-
reference-r...](https://www.newyorkfed.org/markets/treasury-repo-reference-
rates)

------
beezle
Not sure what his point of including IB in there was? They are very up front
about pretty much everything. Not sure you can find better than benchmark-50bp
on cash balances and for accounts with larger balances they have a program in
place to get you a little bit better.

Also, its really on the account holder to manage their cash balances. Most
brokers allow you to do t-bills at auction for no charge, durations are as
short as 4 weeks. You can also (at higher risk) usually find a floating rate
fund they handle for no commission, FLOT or FLRN or simiilar.

~~~
homero
I wonder about Firstrade, they just went free

------
twic
Matt Levine on Robinhood and payment for order flow:

[https://www.bloomberg.com/opinion/articles/2018-10-16/carl-i...](https://www.bloomberg.com/opinion/articles/2018-10-16/carl-
icahn-wants-to-fight-dell-again)

~~~
navigatesol
Yes, Levine does a great job conveying why both parties to the order flow sale
benefit (and those outside it lose).

I'm glad patio11 wrote this article, too, because sometimes this community
is...ignorant to the world if finance.

------
anonu
The shareholder letter from IB CEO Thomas Petterfly regarding the risks of HFT
is quite interesting. (Page 14
[https://investors.interactivebrokers.com/download/2018-IBG-A...](https://investors.interactivebrokers.com/download/2018-IBG-
AR.pdf)) and copied partially below:

Trading against HFTs and institutions taking liquidity is generally not
profitable, at least in the short run. As a consequence, market participants
are reluctant to place limit orders and the NBBO (the National Best Bid or
Offer, or the highest limit order to buy and the lowest limit order to sell)
becomes wider.

HFTs are obligated to fill the orders they buy inside the NBBO to the extent
of the size displayed. The wider the NBBO becomes, the more discretion an HFT
has as to the price at which it fills the order and, therefore, the more
profit it makes and the more it can then afford to pay for these orders.

The more HFTs pay for retail orders, the more brokers will sell their orders
to HFTs and, consequently, even fewer orders will trade at the exchanges in a
competitive market. Also, the more payment the brokers receive for their
customers' orders, the more they can discount the commissions they charge
their customers. Hence the newly emerging zero commission brokers. However,
the customer is likely to lose more on the execution price than she saves on
the commission.

This is a self-reinforcing feedback loop in which wider markets cause even
wider markets, increasing payment for orders, moving more volume off the
exchanges. Indeed, while in 2008 26.6% of the listed stock volume traded off
the exchanges, by 2018 36.3% of the volume traded off exchange.

What is the predictable consequence?

Liquidity vanishes.

Momentum traders drive the markets to more extreme highs and extreme lows in
shorter periods of time.

Investors holding margin accounts become less able to liquidate, adding to the
price swings.

This is a disaster waiting to happen.

While all of us in the trading and investment community have in one way or
another adapted, and would prefer to let things continue along the status quo,
we cannot pretend that all is well the way it is.

We must implement structural changes to the markets before it is too late.

------
whitepoplar
patio11, if you're reading this, any chance you can comment further on
Interactive Brokers? I've used them, along with Schwab, Fidelity, and Merrill
Edge. From what I've read, IB used to have better execution than the rest, but
now it seems like Schwab and Fidelity, at least, have caught up.

Is there any <grinning because I know this and the rest don't> reason why a
savvy user would prefer to use IB in 2019 over the others? I know they have
ultra-low margin interest rates, a linked debit card, and a share lending
program, but am I missing anything? Are there particular tax-avoidance
techniques one can use with IB's building blocks? I'd love to know more!

~~~
patio11
I think that my answer here is pretty nuanced, and it is that most people I
talk to should over the majority of their lives be using something like
Wealthfront or a Vanguard target date retirement fund, but I _also_ talk to
folks who have quirky life circumstances as a function of how the technology
industry works, and those folks would potentially benefit materially from IB.

Here's about as much as I can say publicly before I start getting worried
about social dynamics: if you will, at some point in the next 20 years, own
millions of dollars of stock as a function of your employment, you should be
radically more interested in Interactive Brokers than a similarly situated
technologist who does not have some of the needs implied by that.

~~~
fossuser
Why Wealthfront over FZROX and FNILX?

I switched from Wealthfront to these Fidelity index funds since they're free
and seem to do basically the same thing (also convenient to just have
everything in one place and Fidelity is where my 401k is anyway).

Wealthfront also added a 'risk-parity' fund which was opt-out that does not
follow the same low risk index funds idea (and caused me to trust them less)
[https://www.pragcap.com/wealthfronts-risk-parity-fund-raw-
de...](https://www.pragcap.com/wealthfronts-risk-parity-fund-raw-deal/).

------
sg0
I really like this article, although I don't fully understand most of the
parts, mainly because I don't know much about brokerage and investment. But, I
am joining the workforce soon, and it behooves me to have some grasp on these
topics. Any non-Michael Lewis type book(s) you fine people would want to
recommend?

~~~
mrich
Read "A Random Walk Down Wall Street"

[https://www.amazon.com/Random-Walk-Down-Wall-
Street/dp/13240...](https://www.amazon.com/Random-Walk-Down-Wall-
Street/dp/1324002182/ref=sr_1_1?crid=3JVL6R5DA0AR2&keywords=random+walk+down+wallstreet&qid=1561493764&s=gateway&sprefix=random+walk+down+wall%2Caps%2C288&sr=8-1)

I wish I had read it already at your age :)

~~~
mooreds
Second this. Really drives home what the average person should be doing in the
markets.

I also like "Are you a stock or a bond".

[https://www.amazon.com/Are-You-Stock-Bond-
Financial/dp/01331...](https://www.amazon.com/Are-You-Stock-Bond-
Financial/dp/0133115291)

------
kasey_junk
I’d love to see the same treatment on discount auto insurers and large
apartment realty groups and basically every other business that is actually
about float.

------
gist
> A discount brokerage is not a full-service brokerage, which used to charge
> several hundred 1970s dollars to place a single stock trade and which used
> to call you to convince you of the desirability of paying them several
> hundred dollars to place a single stock trade.

The implication (by the choice of words here) 'call you to convince you of the
desirability of paying them several hundred dollars to place a single stock
trade' implies incorrectly that retail brokers were not in some way able to
earn that money by providing value. If that were the case they would not exist
and money would flow elsewhere. That is if in the end the client did not feel
they were getting value.

Not everything out there is better DIY or even close to that. Some people
actually don't want to search for hours figuring out the best place to travel
or which airline flight to take or city to go to. They'd rather pay a travel
agent or someone else to do that for them. Just because the masses do not have
money to pay for advice does not mean that that advice is not of clear value
to someone else who is situation differently financially.

This is actually a problem in the computer business. People (en masse) free
advice at no charge what others used to get paid to do. Some people actually
just want a solution to a problem. They are not interested in doing it
themselves, following tutorials or having to depend on some person being nice
and not charging them for a solution.

~~~
jdminhbg
> The implication (by the choice of words here) 'call you to convince you of
> the desirability of paying them several hundred dollars to place a single
> stock trade' implies incorrectly that retail brokers were not in some way
> able to earn that money by providing value. If that were the case they would
> not exist and money would flow elsewhere.

The market doesn't correct itself overnight. In fact the market share of
retail brokers has plummeted since the invention of index funds and now
discount brokerages, suggesting that they were not providing that value.

~~~
bluGill
I would change that to not providing enough value. If good advice saves you
$70 was it worth $700?

~~~
jdminhbg
That's basically where I'm going with "not providing that value." Much like if
I charge you $20 for a McDonald's cheeseburger, you're not getting _nothing_
in return, but you're not getting $20 of value.

------
rb808
I love IB but their API sucks, you have to run TWS or the gateway with manual
2 factor login. Anyone managed to improve on that? I'd like to get account and
market data from code running on the cloud.

~~~
cheez
You can disable 2FA if you like. However, if you set TWS to restart
automatically, you only need to log in once a week which is what I have
settled on. Very easy to run on the cloud as there are a bunch of container
scripts online though I use a dedicated server.

IB's API doesn't suck, it's very low level. It's asynchronous and works in
multiple languages. There are a few good R and Python wrappers that you may
want to check out.

~~~
Galanwe
> You can disable 2FA if you like.

Sure, good idea, let's disable 2FA on your life savings account, just because
you can't have 2 logins from different locations, or two different users.

> IB's API doesn't suck, it's very low level.

IB's "API" sucks hard, and it's not low level at all.

First, it's not a real API between you and IB's servers. It's actually an API
between your software and the IB heavy, graphical, client that you installed
(the API gateway just being a lightweight client). You have to start a
listening local socket on the heavy client, and send your messages to it.

Which means the basis of IB automation starts with automating the start of a
heavy graphical client, login with GUI input boxes, and keep the graphical
client up (note that running this client will disconnect you from everywhere
else, you now cannot use the IB phone app for instance).

Second, it's not a real API, it basically just allows you to send messages to
the client that emulates GUI actions you would have done with your mouse. Is
that what you call "low level" ?! For instance, if you want to retrieve your
executions > 2 days, you have to open a specific window on TWS and _THEN_ make
your API call to the client. This is INSANE.

Hell, even the documentation of their various API itself is a joke. You can
find gems such as:

> gateway may sometimes need to be restarted intraday. The possibility of
> avoiding intraday restarts so that gateway can typically remain running all
> day is under review.

> It's asynchronous

It's asynchronous in the _worst_ possible way. Basically you send messages to
the heavy client, asynchronously, and you have a single stream of replies all
tangled together with no means to know from which request they originate,
which is why all wrapper implementations just _force_ you to make synchronous
API calls: so that they can match the replies to the requests.

> There are a few good R and Python wrappers

There are only some half-baked, unfinished, tutorial-driven libraries that do
synchronous request-reply for 50% of the protocol. The official library being
an automatically-generated python binding of the Java SDK. Not my definition
of "good".

Did you actually ever used these APIs in real-life?!

~~~
throwaway9d0291
> just because you can't have 2 logins from different locations, or two
> different users.

You can, you just have to pay for market data for both of them:
[https://ibkr.info/article/1004](https://ibkr.info/article/1004)

> First, it's not a real API between you and IB's servers.

Well it is a "real API", it's just not the one you want.

You can have the one you want but it's expensive:
[https://www.interactivebrokers.com/en/index.php?f=4988](https://www.interactivebrokers.com/en/index.php?f=4988)

> the API gateway just being a lightweight client

You talk a lot about the "heavy graphical client", seemingly ignoring the
Gateway, which is the canonical way to access the API.

> Did you actually ever used these APIs in real-life?!

Not the other user but FWIW, yes, I have. They work fine.

~~~
Galanwe
> Well it is a "real API", it's just not the one you want. You can have the
> one you want but it's expensive:
> [https://www.interactivebrokers.com/en/index.php?f=4988](https://www.interactivebrokers.com/en/index.php?f=4988)

The FIX API is different. It's just an order entry / RTD API. i.e. it's just
used to send orders, and mainly targeted to companies which already use FIX
e.g. because they already have other brokers. You cannot do things like
retrieve your previous orders, positions, contract information, historical
market data, historical funding, etc. Everything that you basically need to
manage your portfolio.

> You talk a lot about the "heavy graphical client", seemingly ignoring the
> Gateway, which is the canonical way to access the API.

The IB gateway _is_ a graphical client too, that's part of the problem. Even
though they stripped most of the windows from it, you still have to run a X
server, automate the filling of input boxes for logging/password, etc, etc.

------
ForHackernews
> you should be monomanically focused on the interest spread between cash
> balances in brokerage accounts and high-interest bank accounts or money
> market funds. That is the cost that does not call itself a cost.

If you're keeping a large cash balance sitting uninvested in your brokerage
account, sorry but that's on you.

~~~
mherdeg
Lately I have had a couple of reasons to keep cash in or near a brokerage
account (brokerages offered signup bonuses for transferring assets, and
affiliated banks offered mortgage relationship rates based on total balances
in brokerage accounts).

I've been buying one of VMMXX, VUSXX, or VMFXX and have been pretty happy with
the results; the returns are comparable to a savings account, I'm not sure
they're beating the current Wealthfront 2.51% cash account offer.

------
simonebrunozzi
Patrick is brilliant, as always. This piece is particularly brilliant, and I
wish he will elaborate more on it in the future:

> Some people get mad about the financial industry for taking advantage of
> customers. I find it hard to get mad about a deal between willing
> counterparties, but if you think that Wall Street is soaking the US middle
> class, you should be monomanically focused on the interest spread between
> cash balances in brokerage accounts and high-interest bank accounts or money
> market funds. That is the cost that does not call itself a cost.

------
ralph84
Somewhat tangential, but I hope someday we can move more towards having stocks
trade regularly but not on microsecond timescales. All of the fragmented
liquidity being exploited by HFT is not a net economic gain. The exchanges
already have an auction process to set opening and closing prices. Just run
the same auction process every 10 minutes allowing liquidity to pool.

~~~
0b01
Then all the liquidity would aggregate within the last millisecond of that 10
minute interval

------
skyraider
How do you use Wealthfront if living abroad? Their FAQ states that they
require a permanent US residential address.

Also unclear to me whether Interactive Brokers transparently moves funds to
brokerage accounts domiciled in your new jurisdiction, triggering FATCA filing
requirements, and if they do a good job of making these clear to customers.

~~~
davidw
People living abroad who are US citizens will often use an address they're
associated with - parents or other close relatives. That's what I did for
years. I think there are services you can use too.

In turn, I'm curious why he bothers with Wealth Front rather than just parking
it all in a few Vanguard funds. That cash account looks pretty attractive, but
other than that...?

~~~
patio11
I am a huge fan of Vanguard, but Vanguard Japan has strong compliance concerns
about providing services to Americans and Vanguard US has strong compliance
concerns about providing services to people living in Japan, so I cannot
conveniently consume Vanguard services directly.

------
galaxyLogic
Here's some good advice I wish I had earlier. At least I think this is good
advice. Tell me if I'm wrong.

You need to maximize your IRA. Why? Because you can trade within your IRA
without tax-consequences. Buy low and sell high. After selling keep the cash
around until things go down again and it's time to buy.

~~~
function_seven
> _Buy low and sell high. After selling keep the cash around until things go
> down again and it 's time to buy._

And what do you do when things never go down (below your selling price)? Stay
in cash for the rest of your life? The S&P in 2013 was at an all-time high. If
I sold then, I would have missed out on a tremendous amount of growth. Today
the index is about _double_ the 2013 level (which was itself an all-time
high).

So now that I've missed all this growth, what should I consider "buying low"?

~~~
hinkley
Up until about the time of Jobs' death there was a very clear market timing
window on AAPL at every major product announcement.

The stock would always run up in the day before the event. If the announcement
was good, it would run up more after the event, but either way things would
calm down after a few more days, because there was no way that price was
sustainable.

So every year you could make an extra 5% above the normal trend line for the
stock by profit taking and buying back in immediately. The short term capital
gains taxes would have eaten into that pretty hard.

~~~
navigatesol
> _Up until about the time of Jobs ' death there was a very clear market
> timing window on AAPL at every major product announcement._

Jobs leaving Apple was an even _better_ window.

It's easy to point to stuff in history and say it was an obvious opportunity.
Let's hear your predictions: what are you buying? Selling?

~~~
hinkley
Yes but the discussion was about how some things work in retirement accounts
that don’t work elsewhere.

Having to pay short term capital gains taxes every time you want to take
profits in a stock that sawtoothing upward is an example of that. Possibly
_the_ example.

To answer your question, I haven’t had anything that good since. I’ve fallen
back to passive pretty much.

------
runeks
> Suppose I were to give you $100, in return for your promise to give it back
> when I wanted it and pay me 0.27% annualized interest in the meanwhile.
> Suppose you invested this in a virtually riskless bond, perhaps a mortgage-
> backed security with government backing, offering 2.53% annualized interest.
> You’d earn $2.26 in net interest in a year.

How would you rectify the duration mismatch between the on-demand deposit (of
$100) with the multi-year mortgage-backed security?

For example, if the rate of interest increases, my $100 — that you invested in
bonds — will now be worth less than $100 (since the price of the bond has
fallen). How will you be able to honor my withdrawal when you’re insolvent?

------
lifeisstillgood
Just dropping this thought off : patio11 just got himself and this article a
nice write up on Matt Levine's Bloomberg newsletter (its v good too)

But what I realised is that patio11 must have spent many days researching this
and writing it up, then published it and it frankly it looks like "real"
journalism.

in fact it is, real journalism

But it's not packaged like it. So for all the talk about death of newspapers
etc, it is possible for someone who is not a journalist, and not paid like
one, to do the work - maybe we will see citizen journalism ?

------
cosmotron
> Brokerage customers keep ~10% of their assets in cash. The 200 basis point
> spread between cash in brokerage accounts and money market funds or insured
> bank accounts [...] is equivalent to a 20 bps asset management fee across
> the portfolio.

Could someone break this down a bit more? I'm trying to grok the point, but
don't have the intuition. Where is the "200 basis point spread" coming from?
Why is it equivalent to a 20 bps management fee?

~~~
Iburinoc
The "200 basis point spread" comes from the difference between the very low or
non-existent interest paid on the cash in brokerage accounts and the rates the
brokerage can earn by lending that money out basically risk-free. If you keep
10% of your assets in cash, a 200 bp interest spread becomes effectively a 20
bp management fee on your assets.

------
spoonie
I use a discount brokerage in Canada called Questrade. I keep as little cash
as possible in my account (contributions and dividends get used within a few
days to buy more ETFs), and my portfolio is entirely ETFs. If I also pay no
commissions when issuing buy orders, how does the brokerage make money from
me? Apart from the fees for order placement, is there interest earned for
short-sellers borrowing ETFs?

~~~
navigatesol
> _how does the brokerage make money from me?_

Interest on any balance. Commission on sell orders, bonds, GICs, options, MFs.
Order flow. Currency exchange. ECN fees when you buy in odd lots.

I mean, if you're _really_ diligent and restrictive in your usage, you can
avoid your broker "making money off you". But as long as fees are transparent
and fair, what's the problem with them making some money providing a service
you like?

~~~
spoonie
No problem at all! :) Just curious about the sources of revenue from me as a
customer if I don’t hold cash, don’t issue sell orders, and buy only ETFs.

------
jwr
I would be very interested to know which online brokerages cater to US expats
— @patio11 seems to have experience with this.

In general, any advice and pointers about brokerages/banks/insurance for US
expats from an actual expat would be immensely valuable. The googlable stuff
is mostly fluff and SEO crap.

~~~
rb808
Schwab definitely has branches in a few countries and caters to expats.
[https://international.schwab.com/public/international/us_inv...](https://international.schwab.com/public/international/us_investing/us_expat_essentials)

interactivebrokers is set up globally as well.

~~~
MandieD
IB was willing to take me, a US citizen residing in Germany, but the account
was opened with their UK branch and falls under EU rules (no non-EU ETFs, for
example).

As a US citizen, you do not want any non-US-domiciled ETFs; PFIC is a
nightmare.

Schwab, on the other hand, opened a US-based account for me even though I was
quite open about my German address and tax residency, and I can buy regular
US-domiciled, low-cost index-tracking ETFs, which frankly is the only thing a
non-enthusiast like me should be touching with their retirement money.

~~~
jwr
Interesting! It's these little tidbits of information that are so valuable.

ETFs are the only thing I was interested in. And I didn't know that PFICs were
a problem at all. I also wasn't aware of the restrictions that International
Brokers place on some accounts.

This sort of information is really difficult to get.

~~~
MandieD
I strongly considered DIY indexing - with IB's low US market transaction
costs, even 10k EUR gets an ok sampling of the top S&P 500 issues; get up to
40k and you’re surprisingly close. It would be a long while before this method
had you buy even one share of AMZN or GOOG due to their enormous share prices,
but eventually you would.

However, I’m much happier picking a few funds off Schwab's list and not trying
to keep up with exactly which stocks to buy some small number of share of next
month.

------
mwerty
Had to look up internalizer (was a bit unclear): [https://jwg-it.eu/defining-
systematic-internaliser-under-mif...](https://jwg-it.eu/defining-systematic-
internaliser-under-mifid-ii) but otherwise a good read.

------
acct33571
@patio11 - where did the 10% cash number come from for assets held in
brokerage accounts? That seems very high, but I guess I have no clue.

~~~
patio11
The annual reports and division.

------
ex3xu
> Some people get mad about the financial industry for taking advantage of
> customers. I find it hard to get mad about a deal between willing
> counterparties, but if you think that Wall Street is soaking the US middle
> class, you should be monomanically focused on the interest spread between
> cash balances in brokerage accounts and high-interest bank accounts or money
> market funds. That is the cost that does not call itself a cost.

I'm grateful for this insight provided by the article. As someone interested
in the takes on inequality presented by thinkers like Piketty, Stiglitz and
McChesney, I think it's important to consider the fact that ultimately, the
public good will remain hamstrung by the fact that those with the greatest
know-how to create returns on investment are also those with the greatest
profit-driven motivations. The middle class gets to choose between getting
fleeced by brokerage fees, getting fleeced by the low rates of return offered
by the banks, or getting fleeced by your own ignorance and lack of access to
the infrastructure to generate market returns in the adversarial world of
modern finance.

UBI and higher taxes I don't think can solve this problem, because as more and
more of the market's growth is captured (extracted?) by the monoliths of
private sector, who in a globalized world are not beholden to any one nation
(just look at the effect of Brexit on Britain's financial sector), individual
governments no longer really have the jurisdiction and leverage to capture
enough of the market's return.

In the past I have been quick to blame stuff like the repeal of Glass-Steagall
and other bipartisan deregulation efforts, as well as the dangerous
assumptions of competence behind stuff like Black-Scholes and the Harry
Markowitz approach, but ultimately I can't see any way around the fact that
the profit motive just seems to be the greatest available driver of financial
competence. What can even be done beyond impotently hoping for Gates
Foundation-style philanthropy? Maybe the Chinese are actually ahead of the
game with their State capitalism approach, and moving forward we should just
all turn our governments into fintech companies with a side hustle of
providing public infrastructure and services to the citizenry...

~~~
sigstoat
> The middle class gets to choose between getting fleeced by brokerage fees,
> getting fleeced by the low rates of return offered by the banks, or getting
> fleeced by your own ignorance and lack of access to the infrastructure to
> generate market returns in the adversarial world of modern finance.

1\. the retirement funds you should be putting your money in won't require
brokerage fees.

2\. don't leave your money with banks.

3a. your own ignorance is definitely a problem

3b. VTI, SPY, VOO, etc is all the infrastructure you need.

~~~
ex3xu
>1\. the retirement funds you should be putting your money in won't require
brokerage fees.

Ah, okay so there's another choice of waiting for retirement funds and
pensions to get looted by bank and insurance bailouts in the next financial
crisis.

> 2\. don't leave your money with banks.

This is kind of missing the point -- I'm saying that by the time the finance
world is done "allocating resources", there's not enough left over for the
working middle class to put in the bank in the first place. This reflects in
statistics that more than half of Americans have less than $1000 in the bank
at all.

> 3a. your own ignorance is definitely a problem

I was using ignorance in a tongue-in-cheek way of saying that exploitation of
asymmetries in information ought to be considered inherently unjust in the
same way that insider trading should be theoretically illegal, instead of, you
know, the foundational philosophy of HFT.

> 3b. VTI, SPY, VOO, etc is all the infrastructure you need.

Leaving aside the fact that all ETFs have fees and expenses, one of the
primary criticism of these offerings is that they enhance losses for naive
owners. ETFs now consist of a sizeable chunk of U.S. invested assets, and
every sharp market drawdown that happens runs the risk of inducing more
selling. But in the same way that nobody looked at the garbage packaged inside
CDOs before 2008, no naive investor is going to be able to watch the Net Asset
Value of the underlying securities of their ETF investments, and so people
will continue liquidating at prices that will lead to deep underperformance
for smaller players.

But let's just keep inflating the myth that ETFs are the savior of the middle
class, because God forbid that institutional investors actually be required to
have any skin in the game for themselves. Keep inflating it right up until the
point where Bregman's bubble gets proven right and taxpayers get left holding
the bag for the Great Recession 2.0.

~~~
tome
> exploitation of asymmetries in information ought to be considered inherently
> unjust in the same way that insider trading should be theoretically illegal

This is actually a feature, not a bug. I could spend weeks, months or years
learning enough to determine whether a stock is worth $100, or I could just
sell it now for $99 to someone who already has.

~~~
ex3xu
Sure, if you axiomatically accept the Efficient Market Hypothesis as a feature
of modern markets that isn't going to blow up the global economy, which I
would if it hadn't already come close to doing that already. Facilitating
price discovery on the assumption of no arbitrage is great until everyone buys
the same secretly-dog-shit security and the resulting market correction
martingales the whole thing.

I think at the very least we can say that there is a limit to the fairness of
an exchange between willing counterparties when one party is exploiting an
asymmetry in information to profit off the other party. $99 versus $100 is one
thing, $100 versus $0 is another.

------
Scoundreller
> since “retail investors destroy value when trading” is about as citation-
> needed as “smoking causes lung cancer” at this point

I mean, it could be a confounding variable that’s causing cancer in smokers.
We haven’t exactly run randomized control trials in humans to clearly show
causation.

The correlation sure is strong though.

~~~
hcknwscommenter
Huh? Sure, randomized control trials in humans have not been performed. But,
there is no debate about whether smoking causes cancer. From cell-based and
animal models to retrospective epidemiological studies, the data are clear.
Smoking causes cancer. Do we need randomized controlled trials to "prove"
cutting someone's head off causes death?

~~~
Scoundreller
I’d go with cancer is correlated with smoking.

But yes, I expect some rigour that avoids confounding variables by design to
say “causes”.

Great theories have been destroyed before.

We should account for what degree other characteristics about smokers causes
cancer (e.g. socioeconomics or other factors leading to addictions).

You can still blink after your head’s chopped off. Debatable if you’re
immediately dead or not.

~~~
woadwarrior01
> I’d go with cancer is correlated with smoking.

Judea Pearl‘s book on causal inference, “The book of why” spends a couple of
chapters on the fascinating story of how the causal connection between smoking
and cancer was finally established.

------
randomuser22
@patio11 The numbers for interactive brokers appear to add up to >100%

------
johnflan
Where would DEGIRO in Europe sit is this classification of brokerages?

------
quenstionsasked
Anyone knows what is meant by:

"(Again, hate to belabor a point, but Wealthfront charges 25 bps all-in (on
top of the underlying ETFs) and every customer knows it"?

~~~
tempestn
Wealthfront charges 25 basis points, or 0.25%, of the value of your portfolio
annually for their robo-advisor service. You also pay the fees for any ETFs or
mutual funds held in your account, just as you would if you held them at a
discount brokerage instead of a robo-advisor.

------
sillypuddy
*Google is listed on Nasdaq not NYSE

~~~
eej71
Its primary is NASDAQ. But Google certainly trades on NYSE.

~~~
anonu
Within the US you can only be "listed" on 1 exchange. That listing exchange is
considered the "primary" exchange.

Trades can occur anywhere: on-exchange, off-exchange, ATSs, over-the-counter
OTC, etc...

But it gets more complicated when you go global as you can have cross-
listings, as is common with Canadian stocks in the US. POT (Potash) for
example is listed on TSX and cross-listed on NYSE... and can also trade on any
other US exchange...

------
bubblewrap
Sorry I have troubles understanding.

I gather the main money maker is "net interest" \- but wouldn't that only
apply if the Discount Broker sold me an investment (promising me x% in
returns, while they make x+y% by reinvesting my money)? I thought that is
exactly what Discount Brokers are not doing, I thought they only help me buy
other people's investment vehicles?

Or is it just the cash I have sitting at the Discount Broker, to be ready to
trade, that produces the gains for the Broker (average 10% according to the
article)?

Or do the DBs usually offer "savings accounts" with interest x on your money,
and all the other stuff (cheap stock trades and so on) are supposedly only the
advertising, luring in customers so that you can send them offers?

"high-interest bank accounts" \- where can I get such a one, or do they only
exist for very rich entities, or only in the US?

~~~
bryan_w
It is literally the cash sitting in your account uninvested

------
syn0byte
I am absolutely _winning_ by my generations standards. I own a home and have
little doubt, no student loans, and health insurance that my doctor envies. I
can only read articles like this wistfully imagining having some sort of
"disposable income" for investments.

The best long term familial/genetic survival strategy for a large and growing
segment of the population is social and economic collapse. Factor that into
your investment plans. I _wish_ I could...

