Launch HN: Double (YC W24) – Index Investing with 0% Expense Ratios • Hacker News Board

Re: Launch HN: Double (YC W24) – Index Investing with 0% Expense Ratios

#411

Post by loeg » Wed, Dec 11, 2024, 4:32 PM UTC

wrsh07 wrote: post #399

lldb wrote: post #255

Earlier quoted context omitted.

It is not a win. In a recent study, Robinhood with Citadel has the worst price improvement (execution quality) of any brokerage on the market. I’ve personally observed this - Robinhood might “improve” by 1/10 of a cent from NBBO while Fidelity is frequently closer to the mid.

This is just noting that different brokers give different performance That doesn't really have anything to do with pfof (TD Ameritrade gives better execution and receives pfof) https://news.ycombinator.com/item?id=42378516

Presumably a market maker would pay (PFOF) slightly more to deliver slightly worse execution (keeping the spread).

Re: Launch HN: Double (YC W24) – Index Investing with 0% Expense Ratios

#412

Post by dlubarov » Wed, Dec 11, 2024, 6:05 PM UTC

darkerside wrote: post #390

dlubarov wrote: post #376

Earlier quoted context omitted.

Wouldn't fees generally be more significant if holding over a significant time period? Like VOO's 17 bps would mean ~2% over 30 years. Not sure what the weighted average spread of broad index funds looks like, but I would have thought it's far lower. I guess rebalancing also creates an ongoing spread-based cost, but it seems like that should be far more minor, at least for broad index funds with low-single-digit turn…

There's also time value of money. Paying upfront like this means that money can't be invested (by you), and you lose out on the money plus the return.

Wouldn't that be for fixed-dollar fees? I think here all the costs we're talking about are percentages.

I.e. ignoring taxes, the amount I theoretically expect to exit with should look like

    entry_cost * (return_rate * fee_rate)^T * exit_cost

Where return_rate might look like ~1.1, fee_rate might look like 0.9983 (17 bps), and entry_cost and exit_cost might look like half_spread/price (under some assumptions...).

So I think this comes down to whether T is large enough for that exponentiation to dominate the half-spreads.

Re: Launch HN: Double (YC W24) – Index Investing with 0% Expense Ratios

#413

Post by jkulubya » Wed, Dec 11, 2024, 6:29 PM UTC

slt2021 wrote: post #276

jkulubya wrote: post #162

Earlier quoted context omitted.

A naked short on their own account would be illegal. A time-bound naked short to fulfill their role as market maker would be acceptable. But even then, all trades are either eventually settled at some time t, or fail to settle, e.g. if the seller is not good for the shares. Any of these 2 events happening is reported outside of a single broker-dealer, i.e. public info. And to settle a trade, you will need the actual…

they kick the can down the road every day, until the market price returns to what they desire and only then they send order to a lit market. also heavy usage of synthetic shares and derivatives to hide naked shorts

Sure, but the problem isn’t that Citadel is expecting that the price will drop. The claim was that Citadel can take a short position without other parties in the market knowing, and finding out only from their annual financials.

That’s not true, because, amongst other reasons, everything you’ve listed (synthetic shares/derivatives/kicking the can down the road) can be seen by others in the market.

(Naked) Short all you want, there’s nothing wrong morally with betting in that direction. But it will be picked up.

Re: Launch HN: Double (YC W24) – Index Investing with 0% Expense Ratios

#414

Post by ddulaney » Wed, Dec 11, 2024, 7:03 PM UTC

thanksgiving wrote: post #391

ddulaney wrote: post #7

Earlier quoted context omitted.

Presumably a combination of a flat-rate fee ($1/user/month) and payment for order flow. PFOF is a big moneymaker for Robinhood, but you get paid the more your users trade so people doing buy-and-hold index funds probably earn you less that way. If you can keep expenses super low maybe this can work. But my sense is that costs are pretty flat regardless of how many users you have, so this probably needs to get pretty…

PFOF is so incredibly dirty that I can't believe it is legal. If you could explain it to all the voters without putting them to sleep, I am convinced most people would not support it. It may be legal but it is definitely unethical. That being said I can't see how else OP can payback YC without doing these shady things. At a dollar per user per month, even if every adult in the US joined, YC will probably shut down OP…

I’m not sure what the objections to PFOF are. Do you think you get worse execution than the public market?

If so, it’s easy to prove: compare the price you got to the public markets price at that time. I don’t think you’ll see a worse price.

You should be insulted that somebody is willing to pay for the privilege of trading with you. You can reasonably object to the amount of PFOF vs. price improvement. But it’s not unethical to say “we want your business so much we’ll pay for it”.

Re: Launch HN: Double (YC W24) – Index Investing with 0% Expense Ratios

#415

Post by dmurray » Wed, Dec 11, 2024, 9:29 PM UTC

fisherjeff wrote: post #406

dmurray wrote: post #383

Earlier quoted context omitted.

I'd also like to know that! I have some ideas, from less shady to more: - Payment for order flow - Interest on sweep accounts - Upsell to more profitable products (first party ads) - Payment for order flow, but structure your orders so the spread is really attractive to market makers (unfortunately you might be doing this unintentionally) - Third party ads - Sell your customers' data There's also the possibility of n…

I’d think some combination of all of the above, but would love to know how valuable the order flow is from an indexer – it’s gotta be worth way less than from, e.g., Robinhood right?

I'm not sure that's true.

The market-wide spread for SPY is smaller than the implied spread from all the 500+ components. If you request your market maker for individual prices on the components (or 470 of the components plus 30 stocks substituted for tax loss harvesting purposes), they have an obligation under NMS to quote at least as tight as the individual components, but that could still be wider than they would on the index.

If you have a perfectly competitive market, you can go to all the market makers, and their spread will approach what they would have quoted on SPY. But if it's not perfectly competitive, and you ask your preferred market maker to quote a wider price and split the difference (via a cash payment to you) versus what she would have quoted on SPY, you can both make a few pennies for every share traded.

Re: Launch HN: Double (YC W24) – Index Investing with 0% Expense Ratios

#416

Post by didibus » Wed, Dec 11, 2024, 9:52 PM UTC

JoshTriplett wrote: post #374

You're coming into a market where most providers make much more money, and you're undercutting and selling for $1/month. $1/month is below even most cheap B2C services, and many customers are likely to want a product like this to manage a large number of assets. With what other product, service, arbitrage, float, or other mechanism do you intend to make more substantial amounts of money? Knowing what this is would he…

My first thought as well. I feel there's a catch I'm not seeing, someone tells me I'm going to get ETF returns for only 12$ a year, no year over year percentage cost of any of it? Seems like this can only work up to a point where their subsidized investment last.

So I need to know how do they plan to sustain that, and will it come at my expense?

Re: Launch HN: Double (YC W24) – Index Investing with 0% Expense Ratios

#417

Post by late2part » Wed, Dec 11, 2024, 11:04 PM UTC

fairestvalue wrote: post #339

Ummm, have y'all thought about spread costs? If you look at the spread of any of these ETF's mentioned (spread = ask px - bid px), you will notice that the spread is much smaller than if you were to sum up the spreads of each component stock. That's possible because of a mature ecosystem of ETF market makers and arbitrageurs (like Jane Street). If you buy all of the stocks individually, as it sounds like y'all's solu…

What value does "Ummm" provide in your response?

Re: Launch HN: Double (YC W24) – Index Investing with 0% Expense Ratios

#418

Post by sdwr » Wed, Dec 11, 2024, 11:07 PM UTC

rjrdi38dbbdb wrote: post #377

WiSaGaN wrote: post #366

Earlier quoted context omitted.

So you are saying HFT will avoid your market order in this case, while HFT will provide better price when they are the sole counter party in separate liquidity pool? HFT will always maximize profit. To have multiple venues you are just paying HFT as middle man to transfer liquidity from one to another, where you can trade directly with each other if everyone is on one venue, e.g. one centralized limit order book. Tra…

> So you are saying HFT will avoid your market order in this case, while HFT will provide better price when they are the sole counter party in separate liquidity pool? Yes, absolutely. The best feeds (tightest spreads) are only given to specific clients who are requested to trade exclusively with them. If they detect you splitting your orders up between venues, they'll worsen your feed. The feed they'll send to publi…

Ahh, this is the comment that cleared it up for me.

MM takes on risk, can offer tighter spread when not exploited (ex. HFT arbitrage)

Could theoretically take advantage by manipulating prices

But is already operating within the bounds of the existing public spread

Re: Launch HN: Double (YC W24) – Index Investing with 0% Expense Ratios

#419

Post by Marsymars » Wed, Dec 11, 2024, 11:29 PM UTC

throwaway2037 wrote: post #387

elil17 wrote: post #118

I do think this is a great model for someone who wants to hold the S&P 500 (which many people do). However, educated index investors typically hold a total market index fund. Double’s US small cap offering is severely under diversified and there is no international offering. 10 bps is absolutely worth it to get broader diversification and international exposure.

> However, educated index investors typically hold a total market index fund. Has this outperformed the S&P 500 index in the last 30 years? I doubt it. Also: what percentage of profits from S&P 500 are int'l? Much more than people think. It is already int'l.

> Has this outperformed the S&P 500 index in the last 30 years?

This isn’t a particular argument in favour of the S&P 500. Of course some subsets of a total market fund have outperformed the total market over whatever arbitrary time period you want to pick. In the exact same way, various subsets of the S&P 500 have outperformed the S&P 500 over the past 30 years.

Re: Launch HN: Double (YC W24) – Index Investing with 0% Expense Ratios

#420

Post by nolanhergert89 » Thu, Dec 12, 2024, 4:28 AM UTC

I suggest you take inspiration from your competitor's documentation on the topic.

The only potential upside for me is the benefit of tax-loss-harvesting, since I do my own investing and stay in standard ETF index funds. I thought TLH was only relevant for the $3K limit for income deductions, but after reading Frec's great pages [1] [2], I see that it makes a lot of sense when you have a large capital gain in your future like a house or a diversifying stock sale that you want to accumulate losses for. They also answer a number of topics mentioned in the comments here and others not mentioned.

There's a good chance I will end up investing with you, but only with new income. It's not worth liquidating my current capital gains! I can also ensure I don't have cross-account wash sales by keeping my other assets strictly in ETFs or just don't sell anything.

I too hope that you will last long enough to make money in the other ways you are planning. Good luck!

[1] https://frec.com/tax-loss-harvesting [2] https://frec.com/resources/blog/direct-indexing-handbook