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Morgan Stanley to Buy E-Trade for $13B

nytimes.com

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Re: Morgan Stanley to Buy E-Trade for $13B

#91

Post by anonu »

frockington1 wrote: post #15
omarhaneef wrote: post #10

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... 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…

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

Merrill was more of a bail out during the GFC than some brilliant deal making.

Re: Morgan Stanley to Buy E-Trade for $13B

#92

Post by patio11 »

rwmj wrote: post #67
lordnacho wrote: post #50

Earlier quoted context omitted.

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 lar…

I'm confused how this is valuable. If the retail traders are wrong, then why do you want that information?

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.

Re: Morgan Stanley to Buy E-Trade for $13B

#93

Post by tptacek »

patio11 wrote: post #92
rwmj wrote: post #67

Earlier quoted context omitted.

I'm confused how this is valuable. If the retail traders are wrong, then why do you want that information?

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; y…

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.

Re: Morgan Stanley to Buy E-Trade for $13B

#95

Post by nytesky »

basch wrote: post #52
ghaff wrote: post #51

Earlier quoted context omitted.

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 s…

Fidelity having IRA, HSA, and a 2% cash back Visa (Citi and Paypal are Mastercard for 2%) is a really attractive bundle.

Why do you value Visa over MC?

Re: Morgan Stanley to Buy E-Trade for $13B

#96

Post by anonu »

tptacek wrote: post #94
anonu wrote: post #89

My prediction: JPM will make a bid for RobinHood.

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.

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?

Re: Morgan Stanley to Buy E-Trade for $13B

#97

Post by hcknwscommenter »

lordnacho wrote: post #50
hcknwscommenter wrote: post #41

Earlier quoted context omitted.

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 lar…

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.

Re: Morgan Stanley to Buy E-Trade for $13B

#98

Post by tptacek »

anonu wrote: post #96
tptacek wrote: post #94

Earlier quoted context omitted.

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.

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?

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?

Re: Morgan Stanley to Buy E-Trade for $13B

#99

Post by hcknwscommenter »

sseveran wrote: post #45
hcknwscommenter wrote: post #41

Earlier quoted context omitted.

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.

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.

Re: Morgan Stanley to Buy E-Trade for $13B

#100

Post by dntbnmpls »

omarhaneef wrote: post #10

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... 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…

> 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.

From wall street to tech to even telcoms...

https://news.ycombinator.com/item?id=22375269

everybody is positioning themselves for the data goldrush. Even nations and regional blocs like the EU are doing so.

Whether data has intrinsic valuable or not, who really knows. But those with money and power have decided it has value and we are off to the races.

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