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Don't Steal Money from Day Traders Before They Lose It

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Re: Don't Steal Money from Day Traders Before They Lose It

#11

Post by thaumasiotes »

mewse wrote: post #9
akanet wrote: post #8

This is so interesting - one wonders if this is strictly immoral. I propose this thought experiment: What if there was a version of this fraudulent brokerage that conducted this behavior in the open? Let's say their policy is something like, "You trade for real under favorable commissions and margins. If we decide via internal algorithms that you are liable to lose money, we will instead pocket your trade and credit…

That's basically taking a short position on whatever the customer thinks they're buying, right? Whenever the customer wants to sell their position, you'd have to pay them whatever the value was at that time, whether the position had gone up or down. Big risk, unless you're confident that the customers are going to reliably make terrible trades, on balance. It might still be fraud maybe if you claimed to be performing…

There are laws against naked shorting, even when you've personally determined that the stock will tank as evidenced by the fact that an idiot is buying it.

There are arguments that naked shorting should be allowed, but it isn't allowed right now.

Re: Don't Steal Money from Day Traders Before They Lose It

#12

Post by abakker »

thaumasiotes wrote: post #2

I think the subtitle is much more informative: > Boiler room guys knew customers were going to lose their money, so they allegedly spent it themselves. But it was also illegally long.

you just gotta love Matt Levine headlines, though. The title is as much a play on his constant "laws of insider trading" running gags and part of his daily newsletter.

Re: Don't Steal Money from Day Traders Before They Lose It

#13

Post by nostrademons »

akanet wrote: post #8

This is so interesting - one wonders if this is strictly immoral. I propose this thought experiment: What if there was a version of this fraudulent brokerage that conducted this behavior in the open? Let's say their policy is something like, "You trade for real under favorable commissions and margins. If we decide via internal algorithms that you are liable to lose money, we will instead pocket your trade and credit…

Isn't this basically describing a counterparty? If they decide via internal algorithms that you are liable to lose money, they will pocket your trade and...well, not credit you 10% of the money you lost.

I guess it's sorta like the brokerage having a right of first refusal on all your trades - they have the option to take the other side of the trade first in exchange for a 10% premium. If it's clearly disclosed, I don't think it would be illegal, but it's also not a particularly new concept.

Re: Don't Steal Money from Day Traders Before They Lose It

#14

Post by Danieru »

This is notable because in the United States the form of leverage common else where, a contract for difference, is banned. Outside America it is much easier to run these kinds of bucket shops. The key is offering leverage, Kelly's formula suggests that stocks should be traded with a rather narrow band of leverage, under two in most cases. Yet these shops always offer leverage ratios more similar to forex. You would be hard pressed to convince me that ten times leverage should ever be used with equities.

Meanwhile forex markets are even worse. Leverages there in the past were over a hundred. Which explains why there is so much money to advertise forex. Shady online ad markets are filled with ads offering high leverage online only forex accounts. One can be fairly sure those shady forex accounts are nothing more than bucket shops.

In general leverage is a mistake for most investors. Yet the appeal of hitting high returns with low investment (retail investors using leverage tend to measure return with no relation to risk), mean far too many retail investors are playing with options than is safe.

Re: Don't Steal Money from Day Traders Before They Lose It

#15

Post by brisance »

akanet wrote: post #8

This is so interesting - one wonders if this is strictly immoral. I propose this thought experiment: What if there was a version of this fraudulent brokerage that conducted this behavior in the open? Let's say their policy is something like, "You trade for real under favorable commissions and margins. If we decide via internal algorithms that you are liable to lose money, we will instead pocket your trade and credit…

This is market making and is done in currency markets. Your broker/dealer might be the other party taking the other side of the trade. The argument over there is that as long as you trade major currencies, the market depth and liquidity will ensure narrower bid-ask spreads and that you will not get too raw of a deal.

This is different because it seems the account holders were tricked into believing they were buying/selling securities, which are highly regulated activities.

Re: Don't Steal Money from Day Traders Before They Lose It

#18

Post by dannyw »

brisance wrote: post #15
akanet wrote: post #8

This is so interesting - one wonders if this is strictly immoral. I propose this thought experiment: What if there was a version of this fraudulent brokerage that conducted this behavior in the open? Let's say their policy is something like, "You trade for real under favorable commissions and margins. If we decide via internal algorithms that you are liable to lose money, we will instead pocket your trade and credit…

This is market making and is done in currency markets. Your broker/dealer might be the other party taking the other side of the trade. The argument over there is that as long as you trade major currencies, the market depth and liquidity will ensure narrower bid-ask spreads and that you will not get too raw of a deal. This is different because it seems the account holders were tricked into believing they were buying/s…

The argument that the market depth and liquidity will ensure narrower bid-ask spreads make no sense. Bucket shops not executing trades don't narrow bid-ask spreads.

Unless you mean, the broker/dealer generally offers fairly competitive spreads and so 10 pips isn't too big of a deal.

Re: Don't Steal Money from Day Traders Before They Lose It

#19

Post by bunderbunder »

brisance wrote: post #16

How did the SEC discover this… did someone submit an order and it did not show up on the exchanges?

Well, for starters, they were operating as an unregistered broker. [1] So I'm guessing that they were already in trouble for that, first, and the rest was turned up in the course of investigating and prosecuting that case.

[1]: https://www.sec.gov/litigation/litreleases/2017/lr23830.htm

Re: Don't Steal Money from Day Traders Before They Lose It

#20

Post by sullyj3 »

akanet wrote: post #8

This is so interesting - one wonders if this is strictly immoral. I propose this thought experiment: What if there was a version of this fraudulent brokerage that conducted this behavior in the open? Let's say their policy is something like, "You trade for real under favorable commissions and margins. If we decide via internal algorithms that you are liable to lose money, we will instead pocket your trade and credit…

No, because it doesn't involve deception.
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