
Morgan Stanley to Buy E-Trade for $13B - jbredeche
https://www.nytimes.com/2020/02/20/business/dealbook/morgan-stanley-etrade.html
======
omarhaneef
I rely on Matt Levine to explain, more clearly than I could, how brokerages
make money ("The Trades Will Be Free Now"):

[https://www.bloomberg.com/opinion/articles/2019-10-02/the-
tr...](https://www.bloomberg.com/opinion/articles/2019-10-02/the-trades-will-
be-free-now)

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...](https://www.bloomberg.com/opinion/articles/2020-01-29/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."

~~~
basch
this is a good explanation too, and from a local.

[https://www.kalzumeus.com/2019/6/26/how-brokerages-make-
mone...](https://www.kalzumeus.com/2019/6/26/how-brokerages-make-money/)

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.

~~~
murph-almighty
>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.

~~~
fossuser
Haven Money was an attempt at this (startup a friend/former coworker started
to tackle this), but they recently sold to credit karma.

[https://havenmoney.com/](https://havenmoney.com/)

It was a cool idea - basically they'd auto invest some portion into a total
market index, pick the best rates for things in your 401k, etc.

~~~
celticninja
And credit karma was itself acquired recently.

------
ethbro
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?

~~~
markvdb
There was a somewhat revealing interview by the people behind Flatex, a big
discount broker from Germany [0].

Dutch source, do use a translator [https://www.tijd.be/markten-
live/nieuws/algemeen/nieuwe-eige...](https://www.tijd.be/markten-
live/nieuws/algemeen/nieuwe-eigenaar-degiro-de-prijzen-voor-onlinebeleggen-
gaan-omhoog/10208604.html)

"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.' "

~~~
frockington1
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

~~~
StarDucks
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?

~~~
BurningFrog
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.

~~~
pas
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.)

[https://www.ecb.europa.eu/pub/pdf/scpwps/ecb.wp2283~2ccc0749...](https://www.ecb.europa.eu/pub/pdf/scpwps/ecb.wp2283~2ccc074964.en.pdf)

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.

~~~
BurningFrog
Yeah, but I'm worried about the underlying causes.

How did holding money become so worthless in the first place?

Can this really be natural, or is there massive central bank shenaningans
behind it? Clearly savers lose, but who benefits?

~~~
pas
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.

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mxschumacher
Good time to revisit patio11's excellent article on discount brokerages:

[https://www.kalzumeus.com/2019/6/26/how-brokerages-make-
mone...](https://www.kalzumeus.com/2019/6/26/how-brokerages-make-money/)

------
xxpor
As soon as everyone started going to $0 commissions overnight I feel like
consolidation was inevitable.

~~~
sixstringtheory
My thought as well. Also just got an email yesterday that my investments at
USAA are moving to Schwab.

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petilon
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...](https://content.etrade.com/etrade/estation/pdf/10118customeragreement.pdf)

Fidelity and Vanguard don't have such clauses. Hope Morgan Stanley fixes this.

~~~
jzwinck
Do you believe the usual insurance programmes will not help in the event of a
hack?

[https://us.etrade.com/l/f/asset-protection](https://us.etrade.com/l/f/asset-
protection)

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?

~~~
hedora
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.

------
cwwc
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.

------
thebiglebrewski
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...

~~~
frockington1
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

~~~
evanpw
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?

~~~
frockington1
Robinhood would ignore my limit and execute above it on buys

~~~
evanpw
Super illegal if true: [https://www.finra.org/contact-
finra/whistleblower](https://www.finra.org/contact-finra/whistleblower)

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dclusin
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?

------
OJFord
$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?

~~~
anthonypasq
if you counted Assets under Management, Blackrock would have a valuation of 7
trillion. That clearly isnt the case.

They dont actually own the assets

~~~
OJFord
I know that wouldn't be a normal inclusion for 'assets'; I was trying to
understand the massive discount.

~~~
Phillipharryt
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.

([https://www.brokerage-review.com/investing-firm/assets-
under...](https://www.brokerage-review.com/investing-firm/assets-under-
management/etrade-aum.aspx))

------
anonu
My prediction: JPM will make a bid for RobinHood.

~~~
tptacek
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.

~~~
anonu
Same reason Schwab bought td and Ms did this deal today... Expand out their
younger millennial base and sell them more products.

Jpm has Chase as it's retail platform. But it lags behind in trading features.

Why not?

~~~
tptacek
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.

Which of those dynamics exists for Robinhood?

