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.
One consequence of increasing order internalization (because it's a good business, read the article) has been the remaining order flow on the public market is getting more toxic over time, which is part of the reason some (generally higher frequency) hedge fund strategies have done less and less well over the years.
Couldn't agree more on the quality and depth of the article.
I have only one (minor) issue with it. While it's true that the Citadels of the world have zero interest in using "a machine learning algorithm on your neighbor’s GM trades in their IRA to inform their thinking of the true value of GM as a business," I suspect there is value to them in being able to model and predict the aggregate behavior of a mass of retail investors, e.g., for use as an input to macro investing strategies. Retail investors have a reputation for being the last to join every party; there is value in knowing what they are doing in the aggregate.
You don’t need to be an internalizer to capture that, though. Just read the tape: the order for 3 shares that got the sub penny price improvement is the retail one.
(There’s a paper on this somewhere that I think I remember reading when doing level design for Starfighter.)
This is explained in the article. You can find it in the section "Payment for order flow"
> If you could somehow make markets without informed traders—if you were guaranteed that Goldman could never trade with you—your risk (of being run over) would be lower and you could, therefore, provider tighter spreads. There is a way to do this; it is to trade exclusively with retail traders. They can’t run over you; they don’t have the informational edge or the capital to do so.
Yep. If it isn't explicit enough: the reason you sell liquidity is that people pay for it, hopefully more than it costs you to provide.
You collect, approximately, half the spread less your losses to adverse selection and hope to cover the (pretty formidably high at this point) essentially fixed costs of operating in the market by taking that small margin and parallelizing it over an _extremely_ high number of trades.
Robinhood solves a collective action problem for its users. Unbeknownst to some people, they are unsophisticated and cheap to provide liquidity to: market makers can trade with them and reliably offload their positions, reducing the risk premium necessary to make market making profitable. Robinhood advertises in a fashion that enables self-selection of unsophisticated buyers. Once the platform is sufficiently large, they can auction off the liquidity business. By regulation, the users can never be worse off than they would have otherwise been, because liquidity providers must run their bid-ask spread within the larger market's spread.
So Robinhood earns the difference in risk premium between the larger market and that of its user base, minus operating costs and profits of the liquidity provider.
I suppose the question is: what is the mechanism by which that profit margin can be transferred to users?
>By regulation, the users can never be worse off than they would have otherwise been, because liquidity providers must run their bid-ask spread within the larger market's spread.
But TFA clearly demonstrates how they are. By removing retail investors the order flow to public market makers is much riskier. Those market makers will respond by increasing the spread to account for the increased risk. So yes, the retail investors get a price that is (very slightly) better than public price but the public price is dramatically worse than it otherwise would be. It's a net loss for the retail investor and public market maker while being a win for the internalized market makers.
I don't know enough - merely rephrasing a blog post here - but it sounds fair to say that this reduces the primary benefit of network effects of market activity, higher liquidity/lower spread, at the expense of the rest of the market.
Could we construct a reasonable scenario where the liquidity from segregated order flow would have displaced the core business of liquidity providers, because the volume is so large?
Market makers sell liquidity, and the spread is the price they sell it at, so they'd prefer to sell at a higher price (larger spread). The reason that spreads tighten is competition: there are a few wholesale market makers, and the brokerages send more of their orders to the MM willing to guarantee the smallest spread. In fact, there's been something of a price war for the last few years, and retail spreads have come way down.
Find a developer job at a trading firm and gradually move from being a developer to being quant developer and finally to a researcher position. Specifically, aim for systematic trading firms as the sort of work you'll be doing is not that far from what the actual researchers are doing. In discretionary trading businesses, chances are you'll be stuck with some boring back office stuff that is far removed from the actual money making. Furthermore, it's at systematic trading firms that a CS background could add the most value to begin with.
Ninja edit: the business is very much based on personal connections and trust. Unless you have a stellar CV, it's your personal network that will get you to places. People who have worked together and have come to trust each other will tend to run into each other. E.g. you work for a PM who then moves on to another place, chances are they'll ask you to join them.
Out of all the industries, trading is the one where you rely most on others not to sink your career through ineptitude or malice. Hence the extreme emphasis on trust. If you are a PM, it doesn't matter if it's one of your traders and not you directly who fucks up, ultimately you are solely responsible for the PNL. Hence PM's are extremely picky who they let in their circle, but then if you are in good graces, the world is your oyster.
If you are the researcher/trader, you want the PM to be good and support you, because they are the primary multiplier of your performance. The PM's job is to devise the overall strategy and get money for your team. The more money the PM can secure, the more you can play with.
This results in tight knit teams who tend to stick together through jobs. In case someone in your inner circle is starting a new venture, they'll by far prefer to fill in the positions among the most trusted connections before even thinking of looking outside.
Contrary to how it is often painted, finance rarely goes above undergraduate level stats. If you have a reasonable handle on that, you are already well set on becoming a quantitative researcher. If not, doing a couple of courses will give you a good grasp on most of what you are likely to encounter. If you like math, that's 50% of the battle won, because learning about the various methodologies will be an exciting discovery and not a slog.
The well kept secret of the industry is that complicated stuff rarely works, and if it does, people often don't exactly know why. Put differently, a good algorithm has obvious and intuitive failure cases. That is, it is (relatively) easy to reason under which market conditions will it work well and when it will not. Extremely complex blackboxes are tricky because it's not obvious when and why they stop working. They are also very easy to overfit. Every single additional parameter you add to a model is an additional degree that you are likely to overfit just because of survivorship bias.
It is for this reason that the absolute vast majority of systematic trading relies more on intimate market knowledge than very secret sauce and super complex ML strategies. Sure, many funds run some token ML crap (which is often quite vanilla, like gaussian processes or decision trees) with very minor impact on PNL, but this is purely for marketing reasons.
There is a small handful of companies who have the manpower, expertise and infrastructure to run more complicated models, but even there, the fundamental ideas tend to be relatively simple, and the complexity arises from the amount of data and market idiosyncrasies.
Unfortunately the best (only?) true way is by doing. I suppose prospecting is the best analogy I found. You study geology and gain some theoretical foundations so you understand the relationships and can analyze the results, but you have to go out in the terrain and get your hands dirty so to speak to get true intuition and understanding.
Also, doing it on your own is tricky. You have to constantly talk and mingle with others or you quickly lose insight into current developments. Having a group of people to bounce ideas off of is incredibly important. On your own, every single small topic is a potential rabbit hole that you can spend endless time researching. In a crowd, someone has already explored that rabbit hole most likely and can give you practical pointers. At risk of sounding like a marketing prospectus, there's real synergy in being part of a team. I dare say the age of lone wolf traders is gone. They've been arbitraged away. Successful people have teams behind them.
So I'd say the best way to gain market knowledge is to join a systematic trading shop (in almost any technical capacity) and once inside, you just talk with the others. People in systematic firms tend to have a solid academic approach and are usually more than happy to teach and enlighten anyone interested.
A recruiter can help you break into the industry. You can contact them directly or apply to jobs that they represent and they will contact you if they're interested. I'm not sure what the market is like these days for junior people, my guess is you need at least a few years of experience as a working programmer before a recruiter would be interested.
There are only a few big systematic funds. I think it's just Two Sigma, Jane Street, Citadel, Point 72/Cubist and AQR. Maybe a few others. You can apply to those yourself, but they're picky. Then you can look on LinkedIn for hedge funds looking for programmers, although it may not be obvious which are discretionary versus systematic.
Hedge funds are only in a few cities. About half are in NYC and Connecticut, then some are in Chicago, Boston, Houston and the Bay area. And maybe a few small ones elsewhere on the West coast, I'm not familiar with that area.
(I'm a quant at a trading firm) On the quant side, the somewhat unfortunate answer is "get a STEM PhD". My firm is always looking to hire quants who are also good (Python / C++) developers, but you'll probably not get past the initial resume screen without a PhD or other serious research experience.
In your experience, are quant firms bothered about whether the STEM PhD had anything to do with finance?
I'm considering trying to get into the field when I finish my Comp Sci PhD in a few months. I'm a little worried that my sole explicit financial qualification is that I really enjoyed a course on Black-Scholes towards the end of my undergraduate in Physics, although I probably would word that slightly differently on a CV.
Probably a preference for non-finance fields of study. Might be different at hedge funds doing longer-term trading, but at the short end, academic finance is very far from anything being done in practice.
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?
I think for usage like you describe, Robinhood is hard to beat considering you want to pick a single equity and buy/sell it. If the goal is to hold stock for a long period of time, what other brokerages offer on top of equities is their funds (some of which, I think, are also available to trade through Robinhood (?) but can also be traded for free on their own platforms).
The other thing you get with a typical brokerage that you don't get, as far as I know, with Robinhood is customer service.
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.
Free is hard to beat. Also keep in mind you could dump your excess cash elsewhere than the broker, right? As long as you're not margin trading, you don't need any cash buffer lying around.
If there's some savings account or bond that pays you a bit, you can stick your cash there.
Might be easier to access via IB, which seems to be a more complete offering, but I haven't actually checked what you can access there.
They do. Though note that VMMXX (Vanguard Prime Money Market) pays a bit more than VMFXX (Vanguard Federal Money Market.) VMFXX / Federal is their default settlement fund, so if you have large cash holdings it is still advantageous to put it into alternate funds.
Unrelated question: VMMXX has a higher yield (2.35% currently) compared to VMFXX (2.29%) but also has a higher expense ratio (0.16% vs 0.11%). Do these cancel each other out?
Not just margin trading as you also need cash available if you want to open a new position quickly since a new transfer/deposit takes a while to clear. This is not making a claim on whether trying to time the market is a good idea.
I appreciate Schwab's other retail banking services, and like having my traditional checking/savings accounts under one roof. Makes moving money in and out of my brokerage account fast and simple. They have free checks and ATM fee rebates. Paying $5 per trade doesn't hurt much when you're 1) buying/selling very infrequently and 2) moving several thousand dollars at a time when you do.
Robinhood doesn't have customer service. If you need any kind of service that isn't accessible through the app, you're pretty much out of luck. That's why I only use it for stock picking as a hobby, and not for retirement savings.
Also, you don't get paid interest on uninvested cash balances. Cash in my Schwab checking and brokerage accounts automatically earns interest. Vanguard sweeps cash balances into one of their money market funds. But Robinhood pays nothing, and pockets the money instead.
> But Robinhood pays nothing, and pockets the money instead.
Obviously nothing stops them from paying interest, but they did try that whole Federally insured deposits with interest stunt a while back before the commissioner stepped in to say 'na bro.'
- TOS (TD Ameritrade's ThinkOrSwim platform for those unfamiliar) has a much nicer platform but the commissions are so absurd that I just don't consider it.
- IB is cheap.
- IB is great for international exposure. I really don't think you do need another broker. What other broker is superior to IB in which markets?
- IB is amazing at handling multiple currencies. You can deposit and withdraw in any currency I've had need to care for and they're usually local accounts in the relevant country (e.g. USD in US, EU in EU, GBP in UK, CHF in Switzerland etc.). You can also easily and extremely cheaply convert between them.
- IB has an API you can use with low effort and zero cost. TDA does not.
In general, the top reason to pick IB is for it's customizability and it's super low commissions. TOS/TDA has some of the highest commissions in the industry at something like $7.95 per trade (before negotiating).
If you have less than $100k in your account then you must spend at least $10/mo on commissions. If you fail to spend $10/mo then they'll just charge you the difference as an activity fee.
i agree blindly selling iron condors / butterflies is asking for hurt. but i love options. the risk shape is perfectly predictable, and easy to become familiar.
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.
NPR has a podcasts that interviews founders and how they got started, how they made money (likely they didn't, at first) and how they continue to be better than everyone else. It's called How I Built This.
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?
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?
I don't feel quite as strongly as you, but I generally agree. I don't mind if the person is picture-in-picture-style in one of the corners, but I really would rather see something useful on the screen vs. just the person talking to me.
I feel the same way as the parent, and I would say I have a strong preference for Video. I wouldn't need crazy production value, even if you just did something Khan-Academy-style and wrote down terms and showed diagrams of how some of this works it would help me a lot. I found your article pretty interesting but also pretty overwhelming since I'm not fluent in this area.
My next preference would be something like base.cs (https://medium.com/basecs) where, similarly, you at least define terms and draw some diagrams. I find it much easier to follow this stuff when there's something to look at with relations etc.
While I love podcasts, I find learning anything like this pretty much impossible by listening to them. This is partially because it's harder for me to always follow the concepts just by listening, and partially because I'm usually only somewhat engaged (I'm exercising, or driving to work, etc.).
But, maybe I'm also not your target audience, because I have far too basic an understanding of this stuff, so take it with a grain of salt.
For those of us who don't have a strong preference - what sources would you recommend? I prefer reading but when it comes down to it, I'll take any form factor if the information is good.
There’s a similarish channel called Company Man. I treat it as purely entertainment, because I have no idea what the credentials of the dude are, but it’s fun.
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.
>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.
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.
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.
I don't quite follow what the challenge is to take your money elsewhere. If we're talking about post-tax investments, you can easily liquidate and buy in to whatever else you want.
You have it backwards. If you directly replicate an ETF by buying stocks directly, you can capture the loss as soon as one stock goes down (and buying a share of something equivalent to stay approximately indexed). In the ETF, you only get a tax loss if the whole ETF has gone down. If no stock goes down, you don't have to sell, same with an ETF. For tax efficiency, direct indexing is superior than an ETF. This means you have to keep injecting money into the fund to keep the portfolio properly allocated (ie, you must avoid selling stocks that have gone up).
What you're saying is correct. But you're misunderstanding what I'm saying above. Within the ETF, a fund manager can trade (if they use the creation and redeem mechanism correctly), and there is no tax consequence to the fund or the investor.
I am suggesting that that benefit is far superior than any tax harvesting if you are directly indexed, etc...
I believe you and the prior posters are using different meanings for the word equivalent.
Buying the same asset under a different name (say, packaged under a different ticker on another exchange) would be a wash share.
Buying a truly different underlying asset in the same sector/region which has 99.9% correlation with the original asset you held would not be a wash sale.
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?
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.
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.
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.
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.
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!
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.
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).
Thanks, Patrick! I realize your concern re: publicity and social dynamics, so I won't pry any further, but let's say, hypothetically, one ended up in that former group many years from now--how did you seek the financial advice you'd now give to your younger self?
I actually trade a lot with Interactive Brokers, both stocks and options, and their order execution is so good that I was able to do some risk-free arbitrage as late as earlier this year. Basically whatever/however can get filled, they will do as good of a job as anyone else, and basically providing direct access to exchanges and dark pools.
Besides that, they also offer several order execution/filling & accumulation algos provided by external firms, such as Jefferies, Fox River and CSFB, which will snipe or accumulate any order quantity available through dark pools, before market opens, after hours, etc.
And IB also provides several algos on their own, which will also tap dark pools, accumulate shares based on volatility, VWAP, and whatnot.
IB basically specializes in order execution to a level I haven't seen offered from any other brokers. And that's besides offering decent API and lowest commissions in the industry.
IB often also has hard-to-borrow shares available for shorting, which are much harder to find through other brokers.
Though one contender that I'd like to try and compare to IB, would be Lightspeed.
Patio11’s comment got me very curious and I’m not sure this quite explains it. If I’m selling millions of dollars worth of a tech stock, would IB give me a materially better price?
Not patio11, but I interpreted that comment of his as referring to this particular part of his blog post:
> A better reason for a technologist to be long a stock a lot of people want to short is because they have earned it through services and, for whatever reason, not sold it. If you own a material amount of stock in a publicly traded technology company, particularly a material amount of stock which is not widely available at the moment, you should probably devote non-zero effort to understanding whether you’re allowed to loan that stock out and, if so, whether your brokerage will pay you to do that.
In other words, if you own millions of dollars of stock in a company but you aren't allowed to sell it or just aren't going to, you may be able to make serious money "for free" just by lending out your shares to short sellers. If your brokerage will pay you to do that, as IB will.
Or maybe hedge against massive losses on it, if you are legally allowed to do that. If I remember correctly, this saved Mark Cuban from ruin, for instance.
If you're trying to sell GOOG, which trades a few billion worth every day, no.
If you're trying to sell TEAM (Atlassian), which trades a few hundred million, maybe.
If you're trying to sell something less liquid (which trades a few million of notional - price x volume - then you probably want to go with some kind of algo execution.
i.e., your order size as a percentage of notional traded matters.
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?
https://www.bogleheads.org/wiki/Main_Page is what you need if you're just joining the workforce. the details of how these large companies make their money is interesting, but tangential to your needs.
The book I buy all of my cousins joining the workforce is I Will Teach You To Be Rich, which has an unfortunate title, doesn't teach you much about brokerages and investment options, but has the core right advice about personal finance management.
1. You don't need fancy investment knowledge. In fact, you should actively avoid fancy knowledge until you have a firm grasp on the dead simple stuff.
2. Retirement investments should be: simple and boring. Once you have a solid financial plan in place that meets those criteria go ahead and gamble with whatever extra money you have if you wish.
Assuming you want to invest in equities (which can be a whole other discussion), the biggest mistake newbs make is waiting too long. Don't try to devote months to learning things, because even after doing that you won't know anything. Just sign up for an account somewhere (it's relatively painless) and start putting money into the appropriate Vanguard target retirement fund. You can always change your mind and reallocate later, but you can't go back and pick up on lost gains that you missed out on because you were too scared/intimidated/clueless to open a brokerage account. I have late-20s coworkers who have all substantially all of their assets in high-yield savings accounts (or worse) and it pains me to hear them say that, but hey, it's their money.
Think about whether your retirement has to be planned out, or if you can afford uncertainty. The latter allows you to plan to either get by in a small place and live with pretty much just the bare necessities, or, if lucky, end up not having to work anymore at 40 with a nice house payed in cash. Just decouple enough from localized risk. E.g., if you were in a smaller country with it's own currency, maybe try to avoid anything formally denominated in that currency, as it's not hedged against inflation and small countries tend to go to printing cash if they're broke. Only optimize for a good trade-off between risk-exposure and re-shuffling costs (in this case, brokerage commissions). The wider the spread, the less any localized event hits you. If you're spread on the world, GDP-weighted, you loose less than 30% if the complete north american region would collapse. International connections/dependencies between suppliers in industry affect this negatively, however.
Be careful about US and GB being rather overweight due to historic accumulation of financial institutions, which only really have an imaginary value not tied to any tangible assets. Thus market-cap weighting gives them a far bigger share of your assets than benefits you in hedging localized economic risk.
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.
> 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.
> 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.
It suggests that there are not enough people to make it worth the while of someone to be in that business. In that sense it is not like the market for horses (for specifically) transportation. For that your statement would be true. For stocks I would argue that you need a certain critical mass of customers to make it worthwhile to be a stock broker.
Let's use the travel agent example. There are people that would like to use a travel agent located at their local shopping center. Back in the day there were enough of those people that a agent could be busy and therefore afford the overhead of a business to service them. Now there are not enough people so the agent is not in business. However that is not because the travel agent does not provide value (what you are claiming for the stock broker). It's because there are not enough people that the agent can earn a living doing so.
So it's not the value in this case (although it might be in other cases or for other things).
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.
> 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.
Plenty of people use phones to scam money. I would not say calling up grandma and looting her account counts as 'providing value' so much as taking it.
It probably helps if free market types recall that trading fees were set by the exchanges themselves until 1975: https://www.investopedia.com/terms/m/mayday.asp. Competition in this space did not meaningfully exist.
The value they are selling isn't actually something like a better return. They are selling Trust and a Handshake. You aren't turning over your whole nest egg to the big impersonal forces of the market, you are turning it over to Tom, and our kids go to school together so he won't screw me, etc ...
This certainly isn't true. All that is true is that eventually they will fade away, not that it will instantly occur. The fact that these full-service brokers HAVE faded away suggests that perhaps they were not providing much value.
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.
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.
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?!
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.
> 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.
You can also restrict IP address access and lock down the server, but yes I also do not think disabling 2FA is a good idea.
> 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.
The reason it is done this way is to prevent needing to upgrade all clients when there is a "better" way to do stuff. To think that a $20B company does not have the resources to strip away the minimal windowing stuff for the gateway does not pass the smell test. There is a reason they do things this way and the main reason is that it enforces conscious decisionmaking on the part of the user:
1) Automating filling in login/password: need to decide how YOU are going to store the password securely
2) Disabling 2FA: need to decide how YOU are going to secure the server
In both cases, the point is to make sure there is a human involved in how accessing the account is going to occur. This protects both IB and the client.
So in my case, I decided I will leave 2FA enabled, restrict IP access to one of two IPs, and log in using 2FA once a week. Probably a global maximum in the tradeoff between convenience and security.
> 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 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?!
ib_insync works pretty well and though I have only ever used it seriously in a synchronous manner, the synchronous API is implemented on top of the asynchronous API. Check it out!
Have you tried Alpaca (https://alpaca.markets/)? As I understand their pitch they're an API based brokerage with free trades similar to Robinhood. Not my space / haven't tried them, be interesting to see if they meet your requirements.
Thanks I've seen but its only US stocks, I like IB for futures and options data, which is harder to find. The API is fine, just I have to run on my workstation.
> 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.
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.
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.
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.
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.
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...?
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.
I think that's more an "Ask them" question than an "Ask me" question but single data point: neither my tax advisors nor myself felt a lack of clarity with respect to the treatment of their IBSJ and IBLLC accounts, a distinction they are (appropriately) pedantic about with respect to Japan.
Opening an IB account as a US citizen living in Germany resulted in the IB account being domiciled in the UK - NOT what I was going after, because they then could not allow me to buy non-EU ETFs. I've heard that it used to be different, and that's why I opened an account with them, but they've changed policies within the past year.
Pro-tip for other American taxpayers living abroad: do NOT buy non-US-domiciled ETFs or other funds; PFIC will eat up most of any gains.
Schwab is reasonably-equipped for serving the US citizen expat market.
Right, but it’s a nasty Catch-22 for US taxpayers, which is anyone with US citizenship. Can’t buy non-EU ETFs because PRIIPs, would be stupid to buy EU ETFs because PFIC.
Right, not unclear on that, just unclear on whether IKBR domiciles the accounts in such a way that you'd trigger filing requirements, and how to know this when using the platform.
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.
If God is telling you when to buy and sell it is good advice. For the rest of us, buy low sell high correct but useless: you don't know what high and low are - unless of course you have supernatural sources of information. (there are other ways of getting this information, but they are illegal).
An IRA is one of the best retirement accounts you can have, so you should put focus on getting it maxed out. (However if you get a match in your 401k you are throwing away free money to not take it, in general the difference between 401k and IRA doesn't make much a difference)
This is just bad advice. You will most likely still pay brokerage fees and commissions which will eat away at your active trading.
Your IRA is supposed to be for retirement. Buy a broad-based passively managed, low-cost index fund. Reinvest divs. Make automatic purchases with automatic deposits. Close your eyes - and you will do phenomenally better than active trading.
So you are basically saying trading is a bad idea. Doesn't that mean that all these Discount- and Non-Discount Brokerages are basically just selling us bad ideas?
Yet it seems many people make their living by doing trading? Are they all just gamblers who will lose in the end?
Are brokerages like ETrade etc. basically selling and advertising something like cigarettes, bad for your (financial) health?
> So you are basically saying trading is a bad idea.
For most people, yes. Active management of your own stocks in an IRA is almost always a losing proposition. That is, most people who do it will end up worse than if they just parked the money in a boring ETF.
> Doesn't that mean that all these Discount- and Non-Discount Brokerages are basically just selling us bad ideas?
YES. Especially the ones that advertise technical analysis tools during network prime-time. Those that are knowledgeable in that kind of trading aren't using some E*Trade web-based chart widget. They have a Bloomberg terminal or similar.
> Yet it seems many people make their living by doing trading? Are they all just gamblers who will lose in the end?
Some will. Those that make a consistent living at it spend a large chunk of their day exclusively focused on that task. They're unlikely to be doing it inside their IRA, and they're certainly going to be more sophisticated than the layperson planning for their retirement. This is kind of a tautology. The market is a zero-sum game, except replace "zero" with the performance of the overall market. For every trader that beats the market, there is another trader that under-performs by the same amount.
The traders that are beating the market are more likely to be the hedge fund managers or other sophisticated investors. That leaves the average Joes and other retail investors on the other side of the line.
> Are brokerages like ETrade etc. basically selling and advertising something like cigarettes, bad for your (financial) health?
No, I think that's a little too far. Cigarettes are an almost unmitigated bad. Tools that help investors participate in the market with low friction are amoral. But to the extent that their advertising glorifies the pretty charts, I think it's pretty bad.
Yes. Trading is generally bad if you don't know what you're doing and you don't have the right tools. That applies to the vast majority of retail traders. My thoughts on this were formed over the 12 years that I was a wall street trader. If you're a retail guy, just buy and hold an index fund.
The beauty of the financial markets in the US is that they are so accessible. But so are cigarettes.
> 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"?
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.
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.
> If I sold then, I would have missed out on a tremendous amount of growth
But that was a singular point in time. It would be like the reverse of a jackpot, IF you sold EVERYTHING just at that singular point in time.
But if you did a little bit of trading without tax-consequences continually, maybe you could win on average?
I agree the system is probably rigged with all the high-frequency trading and such. But I wonder if the best strategy is always to stay put in index funds. And banks make money by trading don't they?
> But that was a singular point in time. It would be like the reverse of a jackpot, IF you sold EVERYTHING just at that singular point in time.
All decisions to buy or sell happen in singular points in time. If you were sitting in front of your IRA account in 2013, it definitely looks like a high point, right? How much of your IRA equities do you decide to sell?
And whatever that amount, when do you change your mind and jump back in the market? When the stocks are at a new high in 2014? or 2015? or 2016? (All higher levels than the previous).
> But if you did a little bit of trading without tax-consequences continually, maybe you could win on average?
Maybe. But probably not. The only information you have is hindsight. You can never know if you're selling on a high or buying on a low. The price can always go higher (after you sell), and the price can also always go lower (after you buy)
> And banks make money by trading don't they?
The article we're discussing here shows that they make their money in a lot of ways. Beating the market isn't one of them, though. And to the extent that banks do profit on stock speculation, they also have a different risk tolerance than you or me. They're not going to retire one day, and if they do lose everything, the government will bail them out.
You might be able to make a little more than an index fund. You might make less. But if you are going to invest you must choose what you invest in. Not changing your position ever is really just another bet, betting that your current index-fund is the best possible investment. But it might go up might go down. There is always risk in investing.
Think about a casino where your roulette-algorithm somehow gives 0.6 odds for red and 0.4 for black. Should you play? You might still lose everything because odds are just odds.
You might win eventually but probably not like "printing money". Your odds of winning would be better than odds of losing. But you might still lose.
If you have money to invest you have to make a choice where to invest it. If you don't make a choice that is one choice as well. Keeping it in your wallet is one investment-choice as well. If you can trade with no tax consequences it would seem to me that sometimes the choice of selling and buying should be a better choice than choosing to do nothing. No?
> 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?
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 ?
> 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?
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.
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?
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?
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.
My personal opinion is that Questrade is terrible. I have been getting one of their customers emails for years and notified them about it and nothing has been done by them. If you want to risk losing all your money, go with Questrade since if I was a scammer I could use this to get access to this person's account.
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.
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.
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.
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.
Depends what your needs are, I guess? I always kept my foreign stuff pretty separate from my US stuff. By keeping an address in the US (relatives) I mostly just used US services as anyone else would.
Many expats do not have a US address and can't reasonably pretend that they "reside" in the US. (the whole concept of "residence" is from the stone ages, but I digress)
> 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...
> 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.
>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.
> 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.
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.
You know we're talking about 0.2% pa, and even that is optional.
Investing in the stock market has never been cheaper. I've been investing for just over a decade and investing costs have easily more than halved in that time.
I've got a mid 90s Motley Fool book somewhere, that quotes 1% as a reasonable management charge just for a tracker.
My issue with this approach is that the more this gets encouraged for naive investors, the easier it becomes to shift risk away from the players who actually ought to be holding the bag. Sure, the brokerage fees themselves might not be outrageous, but what ought to be outrageous to you is the long-term consequences of empowering opaque profit-driven actors who carry perverse incentives by definition. How about the aftermath of the 2008 crisis: $850 billion getting shifted out of American pension funds into the pockets of hedge fund managers?
"the easier it becomes to shift risk away from the players who actually ought to be holding the bag"
That has nothing to do with fees.
"$850 billion getting shifted out of American pension funds into the pockets of hedge fund managers"
That has nothing to do with fees either. Further what's the current score card? As stocks have been on a 10 year bull run, and hedge funds have been relatively underperforming.
> 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.
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?
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.
This goes to the definition of causality. Ultimately you can never "prove" causality, even with the best designed experiment. You are allowed to make causal claims for non-RCT data. Lookup Bradford Hill criteria, just to start.
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.
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...
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?
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...
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.
I agree, this is a very good article.
One consequence of increasing order internalization (because it's a good business, read the article) has been the remaining order flow on the public market is getting more toxic over time, which is part of the reason some (generally higher frequency) hedge fund strategies have done less and less well over the years.
Couldn't agree more on the quality and depth of the article.
I have only one (minor) issue with it. While it's true that the Citadels of the world have zero interest in using "a machine learning algorithm on your neighbor’s GM trades in their IRA to inform their thinking of the true value of GM as a business," I suspect there is value to them in being able to model and predict the aggregate behavior of a mass of retail investors, e.g., for use as an input to macro investing strategies. Retail investors have a reputation for being the last to join every party; there is value in knowing what they are doing in the aggregate.
You don’t need to be an internalizer to capture that, though. Just read the tape: the order for 3 shares that got the sub penny price improvement is the retail one.
(There’s a paper on this somewhere that I think I remember reading when doing level design for Starfighter.)
Good point. Maybe. I don't know if it's possible to discern retail trades in a mass of trades so accurately.
Do internalized orders show up on "the tape"? I would think not.
Yes, they do, though it doesn't list the specific internalizer. It looks the same as any dark-pool trade.
Is this because of some sort of SEC requirement? Otherwise I can't think of any reason why trading companies would bother reporting it.
Yes, virtually all trades have to be reported.
"tighter spread" is a description of the benefit for the retail buyer/seller. Can you elaborate on the benefits to the buyer of order flows?
This is explained in the article. You can find it in the section "Payment for order flow"
> If you could somehow make markets without informed traders—if you were guaranteed that Goldman could never trade with you—your risk (of being run over) would be lower and you could, therefore, provider tighter spreads. There is a way to do this; it is to trade exclusively with retail traders. They can’t run over you; they don’t have the informational edge or the capital to do so.
Yep. If it isn't explicit enough: the reason you sell liquidity is that people pay for it, hopefully more than it costs you to provide.
You collect, approximately, half the spread less your losses to adverse selection and hope to cover the (pretty formidably high at this point) essentially fixed costs of operating in the market by taking that small margin and parallelizing it over an _extremely_ high number of trades.
Let me see if I can rephrase.
Robinhood solves a collective action problem for its users. Unbeknownst to some people, they are unsophisticated and cheap to provide liquidity to: market makers can trade with them and reliably offload their positions, reducing the risk premium necessary to make market making profitable. Robinhood advertises in a fashion that enables self-selection of unsophisticated buyers. Once the platform is sufficiently large, they can auction off the liquidity business. By regulation, the users can never be worse off than they would have otherwise been, because liquidity providers must run their bid-ask spread within the larger market's spread.
So Robinhood earns the difference in risk premium between the larger market and that of its user base, minus operating costs and profits of the liquidity provider.
I suppose the question is: what is the mechanism by which that profit margin can be transferred to users?
>By regulation, the users can never be worse off than they would have otherwise been, because liquidity providers must run their bid-ask spread within the larger market's spread.
But TFA clearly demonstrates how they are. By removing retail investors the order flow to public market makers is much riskier. Those market makers will respond by increasing the spread to account for the increased risk. So yes, the retail investors get a price that is (very slightly) better than public price but the public price is dramatically worse than it otherwise would be. It's a net loss for the retail investor and public market maker while being a win for the internalized market makers.
I don't know enough - merely rephrasing a blog post here - but it sounds fair to say that this reduces the primary benefit of network effects of market activity, higher liquidity/lower spread, at the expense of the rest of the market.
Could we construct a reasonable scenario where the liquidity from segregated order flow would have displaced the core business of liquidity providers, because the volume is so large?
Is selling more liquidity at a tighter spread that much more advantageous than participating in some amount x fewer trades with a looser spread?
In other words, I don't understand if or why it is the case that HFTs would like to, in general, offer tighter spreads than looser ones.
Edit: is it just that volume decreases super linearly in relation to the price of liquidity?
Market makers sell liquidity, and the spread is the price they sell it at, so they'd prefer to sell at a higher price (larger spread). The reason that spreads tighten is competition: there are a few wholesale market makers, and the brokerages send more of their orders to the MM willing to guarantee the smallest spread. In fact, there's been something of a price war for the last few years, and retail spreads have come way down.
what do you do now if you dont mind me asking?
how can one as a developer get into that field? I dream of front office positions at those places but the reality seems grim
Find a developer job at a trading firm and gradually move from being a developer to being quant developer and finally to a researcher position. Specifically, aim for systematic trading firms as the sort of work you'll be doing is not that far from what the actual researchers are doing. In discretionary trading businesses, chances are you'll be stuck with some boring back office stuff that is far removed from the actual money making. Furthermore, it's at systematic trading firms that a CS background could add the most value to begin with.
Ninja edit: the business is very much based on personal connections and trust. Unless you have a stellar CV, it's your personal network that will get you to places. People who have worked together and have come to trust each other will tend to run into each other. E.g. you work for a PM who then moves on to another place, chances are they'll ask you to join them.
Out of all the industries, trading is the one where you rely most on others not to sink your career through ineptitude or malice. Hence the extreme emphasis on trust. If you are a PM, it doesn't matter if it's one of your traders and not you directly who fucks up, ultimately you are solely responsible for the PNL. Hence PM's are extremely picky who they let in their circle, but then if you are in good graces, the world is your oyster.
If you are the researcher/trader, you want the PM to be good and support you, because they are the primary multiplier of your performance. The PM's job is to devise the overall strategy and get money for your team. The more money the PM can secure, the more you can play with.
This results in tight knit teams who tend to stick together through jobs. In case someone in your inner circle is starting a new venture, they'll by far prefer to fill in the positions among the most trusted connections before even thinking of looking outside.
Thanks for the in depth answer, i truly do appreciate it.
What should I begin studying to put myself in that position in finance?
Contrary to how it is often painted, finance rarely goes above undergraduate level stats. If you have a reasonable handle on that, you are already well set on becoming a quantitative researcher. If not, doing a couple of courses will give you a good grasp on most of what you are likely to encounter. If you like math, that's 50% of the battle won, because learning about the various methodologies will be an exciting discovery and not a slog.
The well kept secret of the industry is that complicated stuff rarely works, and if it does, people often don't exactly know why. Put differently, a good algorithm has obvious and intuitive failure cases. That is, it is (relatively) easy to reason under which market conditions will it work well and when it will not. Extremely complex blackboxes are tricky because it's not obvious when and why they stop working. They are also very easy to overfit. Every single additional parameter you add to a model is an additional degree that you are likely to overfit just because of survivorship bias.
It is for this reason that the absolute vast majority of systematic trading relies more on intimate market knowledge than very secret sauce and super complex ML strategies. Sure, many funds run some token ML crap (which is often quite vanilla, like gaussian processes or decision trees) with very minor impact on PNL, but this is purely for marketing reasons.
There is a small handful of companies who have the manpower, expertise and infrastructure to run more complicated models, but even there, the fundamental ideas tend to be relatively simple, and the complexity arises from the amount of data and market idiosyncrasies.
> It is for this reason that the absolute vast majority of systematic trading relies more on intimate market knowledge
Aside from reading books about market segments and biographies of companies, what are some things you can do to gain "intimate market knowledge"?
Unfortunately the best (only?) true way is by doing. I suppose prospecting is the best analogy I found. You study geology and gain some theoretical foundations so you understand the relationships and can analyze the results, but you have to go out in the terrain and get your hands dirty so to speak to get true intuition and understanding.
Also, doing it on your own is tricky. You have to constantly talk and mingle with others or you quickly lose insight into current developments. Having a group of people to bounce ideas off of is incredibly important. On your own, every single small topic is a potential rabbit hole that you can spend endless time researching. In a crowd, someone has already explored that rabbit hole most likely and can give you practical pointers. At risk of sounding like a marketing prospectus, there's real synergy in being part of a team. I dare say the age of lone wolf traders is gone. They've been arbitraged away. Successful people have teams behind them.
So I'd say the best way to gain market knowledge is to join a systematic trading shop (in almost any technical capacity) and once inside, you just talk with the others. People in systematic firms tend to have a solid academic approach and are usually more than happy to teach and enlighten anyone interested.
That just brings us back to the beginning which is how can one break into a systematic trading shop?
What other name do they go by? Like what should I google if im looking for one in my city?
Is there no way for me to get a leg up on gaining that "intimate market knowledge" no insider books or reading/newsletters?
A recruiter can help you break into the industry. You can contact them directly or apply to jobs that they represent and they will contact you if they're interested. I'm not sure what the market is like these days for junior people, my guess is you need at least a few years of experience as a working programmer before a recruiter would be interested.
There are only a few big systematic funds. I think it's just Two Sigma, Jane Street, Citadel, Point 72/Cubist and AQR. Maybe a few others. You can apply to those yourself, but they're picky. Then you can look on LinkedIn for hedge funds looking for programmers, although it may not be obvious which are discretionary versus systematic.
Hedge funds are only in a few cities. About half are in NYC and Connecticut, then some are in Chicago, Boston, Houston and the Bay area. And maybe a few small ones elsewhere on the West coast, I'm not familiar with that area.
(I'm a quant at a trading firm) On the quant side, the somewhat unfortunate answer is "get a STEM PhD". My firm is always looking to hire quants who are also good (Python / C++) developers, but you'll probably not get past the initial resume screen without a PhD or other serious research experience.
In your experience, are quant firms bothered about whether the STEM PhD had anything to do with finance?
I'm considering trying to get into the field when I finish my Comp Sci PhD in a few months. I'm a little worried that my sole explicit financial qualification is that I really enjoyed a course on Black-Scholes towards the end of my undergraduate in Physics, although I probably would word that slightly differently on a CV.
Probably a preference for non-finance fields of study. Might be different at hedge funds doing longer-term trading, but at the short end, academic finance is very far from anything being done in practice.
Ah, that's great to know. Thanks for taking the time to reply!
that's a pretty low bar (know python and have a STEM phd)
Is this sarcasm? Getting a PhD takes many folks well into their 30's. It's not a "low bar" by any means.
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?
I think for usage like you describe, Robinhood is hard to beat considering you want to pick a single equity and buy/sell it. If the goal is to hold stock for a long period of time, what other brokerages offer on top of equities is their funds (some of which, I think, are also available to trade through Robinhood (?) but can also be traded for free on their own platforms).
The other thing you get with a typical brokerage that you don't get, as far as I know, with Robinhood is customer service.
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.
Tesla stock costs under 2% a year to borrow from IB to short it. (source: short TSLA, IB customer)
TFA says a gain of 7bp. I wouldn’t call that “substantial” in any sense of the word.
> 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.
Free is hard to beat. Also keep in mind you could dump your excess cash elsewhere than the broker, right? As long as you're not margin trading, you don't need any cash buffer lying around.
If there's some savings account or bond that pays you a bit, you can stick your cash there.
Might be easier to access via IB, which seems to be a more complete offering, but I haven't actually checked what you can access there.
You could always buy a ultra-short-term bond ETF within the account if you're planning to float a non-negligible amount of cash.
That was going to be my next question: what kind of fund should the "cash" go into?
Money market funds would likely be appropriate (I believe Vanguard actually does this for you, rather than keeping cash lying around).
They do. Though note that VMMXX (Vanguard Prime Money Market) pays a bit more than VMFXX (Vanguard Federal Money Market.) VMFXX / Federal is their default settlement fund, so if you have large cash holdings it is still advantageous to put it into alternate funds.
Unrelated question: VMMXX has a higher yield (2.35% currently) compared to VMFXX (2.29%) but also has a higher expense ratio (0.16% vs 0.11%). Do these cancel each other out?
No, the yields are net of expenses so VMMXX is still slightly higher performing.
Not just margin trading as you also need cash available if you want to open a new position quickly since a new transfer/deposit takes a while to clear. This is not making a claim on whether trying to time the market is a good idea.
I appreciate Schwab's other retail banking services, and like having my traditional checking/savings accounts under one roof. Makes moving money in and out of my brokerage account fast and simple. They have free checks and ATM fee rebates. Paying $5 per trade doesn't hurt much when you're 1) buying/selling very infrequently and 2) moving several thousand dollars at a time when you do.
Robinhood doesn't have customer service. If you need any kind of service that isn't accessible through the app, you're pretty much out of luck. That's why I only use it for stock picking as a hobby, and not for retirement savings.
Also, you don't get paid interest on uninvested cash balances. Cash in my Schwab checking and brokerage accounts automatically earns interest. Vanguard sweeps cash balances into one of their money market funds. But Robinhood pays nothing, and pockets the money instead.
> But Robinhood pays nothing, and pockets the money instead.
Obviously nothing stops them from paying interest, but they did try that whole Federally insured deposits with interest stunt a while back before the commissioner stepped in to say 'na bro.'
What makes IB better then TOS?
IB is more international. But in the end you will need at least 3-4 Brokers for a decent international exposure.
For me:
- TOS (TD Ameritrade's ThinkOrSwim platform for those unfamiliar) has a much nicer platform but the commissions are so absurd that I just don't consider it.
- IB is cheap.
- IB is great for international exposure. I really don't think you do need another broker. What other broker is superior to IB in which markets?
- IB is amazing at handling multiple currencies. You can deposit and withdraw in any currency I've had need to care for and they're usually local accounts in the relevant country (e.g. USD in US, EU in EU, GBP in UK, CHF in Switzerland etc.). You can also easily and extremely cheaply convert between them.
- IB has an API you can use with low effort and zero cost. TDA does not.
In general, the top reason to pick IB is for it's customizability and it's super low commissions. TOS/TDA has some of the highest commissions in the industry at something like $7.95 per trade (before negotiating).
IB's commission structure is great if you trade frequently, but not for the average "sock money away in index ETFs for retirement" kind of investor.
How so? Assuming you're buying say $3k of SPY each month, you'll pay $1/month. Why is that not great?
If you have less than $100k in your account then you must spend at least $10/mo on commissions. If you fail to spend $10/mo then they'll just charge you the difference as an activity fee.
That's true but I suspect most retirement accounts are worth the $100k.
i agree blindly selling iron condors / butterflies is asking for hurt. but i love options. the risk shape is perfectly predictable, and easy to become familiar.
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.
NPR has a podcasts that interviews founders and how they got started, how they made money (likely they didn't, at first) and how they continue to be better than everyone else. It's called How I Built This.
https://www.npr.org/podcasts/510313/how-i-built-this
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?
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?
People like people. It's that simple. We are social animals.
I don't feel quite as strongly as you, but I generally agree. I don't mind if the person is picture-in-picture-style in one of the corners, but I really would rather see something useful on the screen vs. just the person talking to me.
I feel the same way as the parent, and I would say I have a strong preference for Video. I wouldn't need crazy production value, even if you just did something Khan-Academy-style and wrote down terms and showed diagrams of how some of this works it would help me a lot. I found your article pretty interesting but also pretty overwhelming since I'm not fluent in this area.
My next preference would be something like base.cs (https://medium.com/basecs) where, similarly, you at least define terms and draw some diagrams. I find it much easier to follow this stuff when there's something to look at with relations etc.
While I love podcasts, I find learning anything like this pretty much impossible by listening to them. This is partially because it's harder for me to always follow the concepts just by listening, and partially because I'm usually only somewhat engaged (I'm exercising, or driving to work, etc.).
But, maybe I'm also not your target audience, because I have far too basic an understanding of this stuff, so take it with a grain of salt.
I have a strong preference that if you were to do this, you keep it on your blog.
I think a "thick" book is much better than videos:
1) easier to produce high quality content in written form
2) easier/faster to digest the information
Patrick, please write this book :) - happy to provide feedback and read drafts along the way.
For those of us who don't have a strong preference - what sources would you recommend? I prefer reading but when it comes down to it, I'll take any form factor if the information is good.
As much as I would like the coffee table version, I don't know that the long form and fairly technical nature is suited to that style.
Strong preference for writing.
There’s a similarish channel called Company Man. I treat it as purely entertainment, because I have no idea what the credentials of the dude are, but it’s fun.
and a slightly different channel called valuetainment which discusses mistakes/successes of companies https://www.youtube.com/user/patrickbetdavid
Their more recent stuff isn't as good as their old stuff: for example, why GoPro is failing https://www.youtube.com/watch?v=l4fHeiqtGOA
I was going to suggest Company Man too.
Here's a good book on different profitability models if that does it for you.
https://sivers.org/book/ArtOfProfitability
video is good for doing demos. blog with pictures would be better for this imo
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.
>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.
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.
Is it possible to transfer your holdings from within a robo advisor to a service like Vanguard?
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.
I don't quite follow what the challenge is to take your money elsewhere. If we're talking about post-tax investments, you can easily liquidate and buy in to whatever else you want.
If you liquidate, you have to pay capital gains taxes.
Your ETF fund manager can buy and sell within an ETF structure, tax free. This beats any high turnover tax loss strategy.
You have it backwards. If you directly replicate an ETF by buying stocks directly, you can capture the loss as soon as one stock goes down (and buying a share of something equivalent to stay approximately indexed). In the ETF, you only get a tax loss if the whole ETF has gone down. If no stock goes down, you don't have to sell, same with an ETF. For tax efficiency, direct indexing is superior than an ETF. This means you have to keep injecting money into the fund to keep the portfolio properly allocated (ie, you must avoid selling stocks that have gone up).
What you're saying is correct. But you're misunderstanding what I'm saying above. Within the ETF, a fund manager can trade (if they use the creation and redeem mechanism correctly), and there is no tax consequence to the fund or the investor.
I am suggesting that that benefit is far superior than any tax harvesting if you are directly indexed, etc...
> buying a share of something equivalent
Wouldn't that be a wash sale, and thus fraud to claim the loss as a tax deduction?
I believe you and the prior posters are using different meanings for the word equivalent.
Buying the same asset under a different name (say, packaged under a different ticker on another exchange) would be a wash share.
Buying a truly different underlying asset in the same sector/region which has 99.9% correlation with the original asset you held would not be a wash sale.
> 99.9% correlation
I think that's either an exaggeration or exceedingly rare.
What ETFs do this?
How do you do tax optimization, loss harvesting, etc, with an ETF?
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?
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
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."
Fixed, thanks. (The joys of doing final editing past midnight.)
That threw me off right from the start, but I did follow down the rest of the way and enjoyed the knowledge transfer.
Good question
On the one hand I would prefer to be given $100.
On the other, a 226% interest rate is very attractive.
Can I have the $100 invested at 226%?
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
[2] https://www.newyorkfed.org/markets/treasury-repo-reference-r...
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.
I wonder about Firstrade, they just went free
Matt Levine on Robinhood and payment for order flow:
https://www.bloomberg.com/opinion/articles/2018-10-16/carl-i...
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.
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...) 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.
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!
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.
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....
Thanks, Patrick! I realize your concern re: publicity and social dynamics, so I won't pry any further, but let's say, hypothetically, one ended up in that former group many years from now--how did you seek the financial advice you'd now give to your younger self?
I actually trade a lot with Interactive Brokers, both stocks and options, and their order execution is so good that I was able to do some risk-free arbitrage as late as earlier this year. Basically whatever/however can get filled, they will do as good of a job as anyone else, and basically providing direct access to exchanges and dark pools. Besides that, they also offer several order execution/filling & accumulation algos provided by external firms, such as Jefferies, Fox River and CSFB, which will snipe or accumulate any order quantity available through dark pools, before market opens, after hours, etc. And IB also provides several algos on their own, which will also tap dark pools, accumulate shares based on volatility, VWAP, and whatnot. IB basically specializes in order execution to a level I haven't seen offered from any other brokers. And that's besides offering decent API and lowest commissions in the industry. IB often also has hard-to-borrow shares available for shorting, which are much harder to find through other brokers. Though one contender that I'd like to try and compare to IB, would be Lightspeed.
patio11, if you're reading this, I'd also like to know the answer to that question, and I don't already know.
It's been a while since I've used IB, but they are one of the few retail front ends that offer algorithmic execution.
i.e., instead of showing 1000 shares to the market, it might parcel it out in small chunks to hide your footprint.
Although this typically isn't relevant for most orders, if you are trading something thin, it could be helpful.
Patio11’s comment got me very curious and I’m not sure this quite explains it. If I’m selling millions of dollars worth of a tech stock, would IB give me a materially better price?
Not patio11, but I interpreted that comment of his as referring to this particular part of his blog post:
> A better reason for a technologist to be long a stock a lot of people want to short is because they have earned it through services and, for whatever reason, not sold it. If you own a material amount of stock in a publicly traded technology company, particularly a material amount of stock which is not widely available at the moment, you should probably devote non-zero effort to understanding whether you’re allowed to loan that stock out and, if so, whether your brokerage will pay you to do that.
In other words, if you own millions of dollars of stock in a company but you aren't allowed to sell it or just aren't going to, you may be able to make serious money "for free" just by lending out your shares to short sellers. If your brokerage will pay you to do that, as IB will.
Or maybe hedge against massive losses on it, if you are legally allowed to do that. If I remember correctly, this saved Mark Cuban from ruin, for instance.
Probably also a good idea, although I don't think patio11 said IB is better than other platforms for options.
If you're trying to sell GOOG, which trades a few billion worth every day, no.
If you're trying to sell TEAM (Atlassian), which trades a few hundred million, maybe.
If you're trying to sell something less liquid (which trades a few million of notional - price x volume - then you probably want to go with some kind of algo execution.
i.e., your order size as a percentage of notional traded matters.
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?
Read "A Random Walk Down Wall Street"
https://www.amazon.com/Random-Walk-Down-Wall-Street/dp/13240...
I wish I had read it already at your age :)
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.bogleheads.org/wiki/Main_Page is what you need if you're just joining the workforce. the details of how these large companies make their money is interesting, but tangential to your needs.
When you have cash to invest in stocks/bonds/etc, just put your money in an appropriate Vanguard fund and don’t think too hard.
The book I buy all of my cousins joining the workforce is I Will Teach You To Be Rich, which has an unfortunate title, doesn't teach you much about brokerages and investment options, but has the core right advice about personal finance management.
1. You don't need fancy investment knowledge. In fact, you should actively avoid fancy knowledge until you have a firm grasp on the dead simple stuff.
2. Retirement investments should be: simple and boring. Once you have a solid financial plan in place that meets those criteria go ahead and gamble with whatever extra money you have if you wish.
3. Read this book cover to cover. It is very boring and very useful. After that read whatever else. https://www.amazon.com/Personal-Finance-Dummies-Eric-Tyson-e...
Assuming you want to invest in equities (which can be a whole other discussion), the biggest mistake newbs make is waiting too long. Don't try to devote months to learning things, because even after doing that you won't know anything. Just sign up for an account somewhere (it's relatively painless) and start putting money into the appropriate Vanguard target retirement fund. You can always change your mind and reallocate later, but you can't go back and pick up on lost gains that you missed out on because you were too scared/intimidated/clueless to open a brokerage account. I have late-20s coworkers who have all substantially all of their assets in high-yield savings accounts (or worse) and it pains me to hear them say that, but hey, it's their money.
Think about whether your retirement has to be planned out, or if you can afford uncertainty. The latter allows you to plan to either get by in a small place and live with pretty much just the bare necessities, or, if lucky, end up not having to work anymore at 40 with a nice house payed in cash. Just decouple enough from localized risk. E.g., if you were in a smaller country with it's own currency, maybe try to avoid anything formally denominated in that currency, as it's not hedged against inflation and small countries tend to go to printing cash if they're broke. Only optimize for a good trade-off between risk-exposure and re-shuffling costs (in this case, brokerage commissions). The wider the spread, the less any localized event hits you. If you're spread on the world, GDP-weighted, you loose less than 30% if the complete north american region would collapse. International connections/dependencies between suppliers in industry affect this negatively, however.
Be careful about US and GB being rather overweight due to historic accumulation of financial institutions, which only really have an imaginary value not tied to any tangible assets. Thus market-cap weighting gives them a far bigger share of your assets than benefits you in hedging localized economic risk.
https://training.kalzumeus.com/newsletters/archive/investing...
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.
> 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.
> 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.
It suggests that there are not enough people to make it worth the while of someone to be in that business. In that sense it is not like the market for horses (for specifically) transportation. For that your statement would be true. For stocks I would argue that you need a certain critical mass of customers to make it worthwhile to be a stock broker.
Let's use the travel agent example. There are people that would like to use a travel agent located at their local shopping center. Back in the day there were enough of those people that a agent could be busy and therefore afford the overhead of a business to service them. Now there are not enough people so the agent is not in business. However that is not because the travel agent does not provide value (what you are claiming for the stock broker). It's because there are not enough people that the agent can earn a living doing so.
So it's not the value in this case (although it might be in other cases or for other things).
I would change that to not providing enough value. If good advice saves you $70 was it worth $700?
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.
> 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.
Plenty of people use phones to scam money. I would not say calling up grandma and looting her account counts as 'providing value' so much as taking it.
It probably helps if free market types recall that trading fees were set by the exchanges themselves until 1975: https://www.investopedia.com/terms/m/mayday.asp. Competition in this space did not meaningfully exist.
> Competition in this space did not meaningfully exist.
Sorta. I think direct reinvestment of dividends and direct purchase of shares from the corporate treasury were more common.
Some companies still run them. I know I bought and sold GE shares with cheques to/from their share agent.
The value they are selling isn't actually something like a better return. They are selling Trust and a Handshake. You aren't turning over your whole nest egg to the big impersonal forces of the market, you are turning it over to Tom, and our kids go to school together so he won't screw me, etc ...
>If that were the case they would not exist
This certainly isn't true. All that is true is that eventually they will fade away, not that it will instantly occur. The fact that these full-service brokers HAVE faded away suggests that perhaps they were not providing much value.
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.
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.
> 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?!
> 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
> 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
> 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.
> 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
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.
> 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.
You can also restrict IP address access and lock down the server, but yes I also do not think disabling 2FA is a good idea.
> 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.
The reason it is done this way is to prevent needing to upgrade all clients when there is a "better" way to do stuff. To think that a $20B company does not have the resources to strip away the minimal windowing stuff for the gateway does not pass the smell test. There is a reason they do things this way and the main reason is that it enforces conscious decisionmaking on the part of the user:
In both cases, the point is to make sure there is a human involved in how accessing the account is going to occur. This protects both IB and the client.So in my case, I decided I will leave 2FA enabled, restrict IP access to one of two IPs, and log in using 2FA once a week. Probably a global maximum in the tradeoff between convenience and security.
> 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 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?!
ib_insync works pretty well and though I have only ever used it seriously in a synchronous manner, the synchronous API is implemented on top of the asynchronous API. Check it out!
Just an update: I realize I use async ib_insync all the time haha.
Have you tried Alpaca (https://alpaca.markets/)? As I understand their pitch they're an API based brokerage with free trades similar to Robinhood. Not my space / haven't tried them, be interesting to see if they meet your requirements.
Thanks I've seen but its only US stocks, I like IB for futures and options data, which is harder to find. The API is fine, just I have to run on my workstation.
Have you looked into Tradier? (I have not tried them myself)
https://documentation.tradier.com/brokerage-api/trading/plac...
> 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.
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.
This is one of the many reasons why I love Vanguard. They default by putting all of your brokerage account money into their money market fund.
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.
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.
Then all the liquidity would aggregate within the last millisecond of that 10 minute interval
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.
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...?
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.
There's a link to https://training.kalzumeus.com/newsletters/archive/investing... which discusses this: Vanguard is one of the two Right Answers(TM).
My experience with roboadvisors is that the pretty user interfaces encouraged me to save more. Your mileage may vary.
Also unclear to me...
I think that's more an "Ask them" question than an "Ask me" question but single data point: neither my tax advisors nor myself felt a lack of clarity with respect to the treatment of their IBSJ and IBLLC accounts, a distinction they are (appropriately) pedantic about with respect to Japan.
Opening an IB account as a US citizen living in Germany resulted in the IB account being domiciled in the UK - NOT what I was going after, because they then could not allow me to buy non-EU ETFs. I've heard that it used to be different, and that's why I opened an account with them, but they've changed policies within the past year.
Pro-tip for other American taxpayers living abroad: do NOT buy non-US-domiciled ETFs or other funds; PFIC will eat up most of any gains.
Schwab is reasonably-equipped for serving the US citizen expat market.
> because they then could not allow me to buy non-EU ETFs
That's going to apply to everyone. It's due to new EU regulations requiring documentation (PRIIPs) for retail EU residents.
Right, but it’s a nasty Catch-22 for US taxpayers, which is anyone with US citizenship. Can’t buy non-EU ETFs because PRIIPs, would be stupid to buy EU ETFs because PFIC.
fbar is pretty trivial to file yourself, takes 20 minutes. https://www.fincen.gov/report-foreign-bank-and-financial-acc...
Right, not unclear on that, just unclear on whether IKBR domiciles the accounts in such a way that you'd trigger filing requirements, and how to know this when using the platform.
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.
If God is telling you when to buy and sell it is good advice. For the rest of us, buy low sell high correct but useless: you don't know what high and low are - unless of course you have supernatural sources of information. (there are other ways of getting this information, but they are illegal).
An IRA is one of the best retirement accounts you can have, so you should put focus on getting it maxed out. (However if you get a match in your 401k you are throwing away free money to not take it, in general the difference between 401k and IRA doesn't make much a difference)
Actually, even God couldn't beat dollar-cost averaging[1].
[1]: https://ofdollarsanddata.com/even-god-couldnt-beat-dollar-co...
> trade within your IRA
This is just bad advice. You will most likely still pay brokerage fees and commissions which will eat away at your active trading.
Your IRA is supposed to be for retirement. Buy a broad-based passively managed, low-cost index fund. Reinvest divs. Make automatic purchases with automatic deposits. Close your eyes - and you will do phenomenally better than active trading.
So you are basically saying trading is a bad idea. Doesn't that mean that all these Discount- and Non-Discount Brokerages are basically just selling us bad ideas?
Yet it seems many people make their living by doing trading? Are they all just gamblers who will lose in the end?
Are brokerages like ETrade etc. basically selling and advertising something like cigarettes, bad for your (financial) health?
> So you are basically saying trading is a bad idea.
For most people, yes. Active management of your own stocks in an IRA is almost always a losing proposition. That is, most people who do it will end up worse than if they just parked the money in a boring ETF.
> Doesn't that mean that all these Discount- and Non-Discount Brokerages are basically just selling us bad ideas?
YES. Especially the ones that advertise technical analysis tools during network prime-time. Those that are knowledgeable in that kind of trading aren't using some E*Trade web-based chart widget. They have a Bloomberg terminal or similar.
> Yet it seems many people make their living by doing trading? Are they all just gamblers who will lose in the end?
Some will. Those that make a consistent living at it spend a large chunk of their day exclusively focused on that task. They're unlikely to be doing it inside their IRA, and they're certainly going to be more sophisticated than the layperson planning for their retirement. This is kind of a tautology. The market is a zero-sum game, except replace "zero" with the performance of the overall market. For every trader that beats the market, there is another trader that under-performs by the same amount.
The traders that are beating the market are more likely to be the hedge fund managers or other sophisticated investors. That leaves the average Joes and other retail investors on the other side of the line.
> Are brokerages like ETrade etc. basically selling and advertising something like cigarettes, bad for your (financial) health?
No, I think that's a little too far. Cigarettes are an almost unmitigated bad. Tools that help investors participate in the market with low friction are amoral. But to the extent that their advertising glorifies the pretty charts, I think it's pretty bad.
I've heard it said the best way for the average Joe to make a small fortune trading is to start with a large fortune.
Yes. Trading is generally bad if you don't know what you're doing and you don't have the right tools. That applies to the vast majority of retail traders. My thoughts on this were formed over the 12 years that I was a wall street trader. If you're a retail guy, just buy and hold an index fund.
The beauty of the financial markets in the US is that they are so accessible. But so are cigarettes.
> 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"?
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.
>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?
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.
Right. I was thinking about something like that. If you were doing that trading within your IRA, no tax consequences.
> If I sold then, I would have missed out on a tremendous amount of growth
But that was a singular point in time. It would be like the reverse of a jackpot, IF you sold EVERYTHING just at that singular point in time.
But if you did a little bit of trading without tax-consequences continually, maybe you could win on average?
I agree the system is probably rigged with all the high-frequency trading and such. But I wonder if the best strategy is always to stay put in index funds. And banks make money by trading don't they?
> But that was a singular point in time. It would be like the reverse of a jackpot, IF you sold EVERYTHING just at that singular point in time.
All decisions to buy or sell happen in singular points in time. If you were sitting in front of your IRA account in 2013, it definitely looks like a high point, right? How much of your IRA equities do you decide to sell?
And whatever that amount, when do you change your mind and jump back in the market? When the stocks are at a new high in 2014? or 2015? or 2016? (All higher levels than the previous).
> But if you did a little bit of trading without tax-consequences continually, maybe you could win on average?
Maybe. But probably not. The only information you have is hindsight. You can never know if you're selling on a high or buying on a low. The price can always go higher (after you sell), and the price can also always go lower (after you buy)
> And banks make money by trading don't they?
The article we're discussing here shows that they make their money in a lot of ways. Beating the market isn't one of them, though. And to the extent that banks do profit on stock speculation, they also have a different risk tolerance than you or me. They're not going to retire one day, and if they do lose everything, the government will bail them out.
>
>Buy low and sell high. After selling keep the cash around until things go down again and it's time to buy.
If someone could actually do this consistently, then who cares about tax consequences? You can print money.
You might be able to make a little more than an index fund. You might make less. But if you are going to invest you must choose what you invest in. Not changing your position ever is really just another bet, betting that your current index-fund is the best possible investment. But it might go up might go down. There is always risk in investing.
Think about a casino where your roulette-algorithm somehow gives 0.6 odds for red and 0.4 for black. Should you play? You might still lose everything because odds are just odds. You might win eventually but probably not like "printing money". Your odds of winning would be better than odds of losing. But you might still lose.
If you have money to invest you have to make a choice where to invest it. If you don't make a choice that is one choice as well. Keeping it in your wallet is one investment-choice as well. If you can trade with no tax consequences it would seem to me that sometimes the choice of selling and buying should be a better choice than choosing to do nothing. No?
> 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?
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 ?
> 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?
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.
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?
>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?
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.
My personal opinion is that Questrade is terrible. I have been getting one of their customers emails for years and notified them about it and nothing has been done by them. If you want to risk losing all your money, go with Questrade since if I was a scammer I could use this to get access to this person's account.
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.
Not exactly what you are looking for - but a pretty good organization/advocacy group if you live abroad
https://www.americansabroad.org/
Schwab definitely has branches in a few countries and caters to expats. https://international.schwab.com/public/international/us_inv...
interactivebrokers is set up globally as well.
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.
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.
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.
Depends what your needs are, I guess? I always kept my foreign stuff pretty separate from my US stuff. By keeping an address in the US (relatives) I mostly just used US services as anyone else would.
Many expats do not have a US address and can't reasonably pretend that they "reside" in the US. (the whole concept of "residence" is from the stone ages, but I digress)
Had to look up internalizer (was a bit unclear): https://jwg-it.eu/defining-systematic-internaliser-under-mif... but otherwise a good read.
@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.
The annual reports and division.
> 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...
> 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.
>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.
> 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.
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.
You know we're talking about 0.2% pa, and even that is optional.
Investing in the stock market has never been cheaper. I've been investing for just over a decade and investing costs have easily more than halved in that time.
I've got a mid 90s Motley Fool book somewhere, that quotes 1% as a reasonable management charge just for a tracker.
My issue with this approach is that the more this gets encouraged for naive investors, the easier it becomes to shift risk away from the players who actually ought to be holding the bag. Sure, the brokerage fees themselves might not be outrageous, but what ought to be outrageous to you is the long-term consequences of empowering opaque profit-driven actors who carry perverse incentives by definition. How about the aftermath of the 2008 crisis: $850 billion getting shifted out of American pension funds into the pockets of hedge fund managers?
"the easier it becomes to shift risk away from the players who actually ought to be holding the bag"
That has nothing to do with fees.
"$850 billion getting shifted out of American pension funds into the pockets of hedge fund managers"
That has nothing to do with fees either. Further what's the current score card? As stocks have been on a 10 year bull run, and hedge funds have been relatively underperforming.
You're right, the issue really has nothing to do with fees and I stand corrected.
> 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.
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?
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.
> 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.
This goes to the definition of causality. Ultimately you can never "prove" causality, even with the best designed experiment. You are allowed to make causal claims for non-RCT data. Lookup Bradford Hill criteria, just to start.
tell that to the relatively large amounts of polonium-210 found in cigarette smoke
@patio11 The numbers for interactive brokers appear to add up to >100%
Where would DEGIRO in Europe sit is this classification of brokerages?
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"?
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.
*Google is listed on Nasdaq not NYSE
Its primary is NASDAQ. But Google certainly trades on NYSE.
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...
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?
It is literally the cash sitting in your account uninvested
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...