I have never run or worked for a mutual fund, but I have heard that funds have way more restrictions over holding periods, leverage, and other constraints that individual investors do not have. Are there mutual funds that swing or day trade? Most individual traders can liquidate his/her entire account without really affecting the market. Large and medium sized mutual funds can't do that. Besides that, I would think it would be harder managing other people's money than one's own. There are pros and cons to both sides, but investors will start bailing out of a mutual fund that can't beat their benchmark. Are there many traders who run algorithmic trading strategies that are consistently profitable month after month with excellent Sharpe ratios?
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Zero Commissions At Firstrade
- Thread starter jeb9999
- Start date
I have never run or worked for a mutual fund, but I have heard that funds have way more restrictions over holding periods, leverage, and other constraints that individual investors do not have. Are there mutual funds that swing or day trade? Most individual traders can liquidate his/her entire account without really affecting the market. Large and medium sized mutual funds can't do that. Besides that, I would think it would be harder managing other people's money than one's own. There are pros and cons to both sides, but investors will start bailing out of a mutual fund that can't beat their benchmark. Are there many traders who run algorithmic trading strategies that are consistently profitable month after month with excellent Sharpe ratios?
OK, switch that to hedge funds if you're concerned about restrictions on trading style. And if the allegation is that "large brokers" are stealing the "strategy" of their most successful traders than your size argument would apply there as well, after all the post was talking JP Morgan.I have never run or worked for a mutual fund, but I have heard that funds have way more restrictions over holding periods, leverage, and other constraints that individual investors do not have. Are there mutual funds that swing or day trade? Most individual traders can liquidate his/her entire account without really affecting the market. Large and medium sized mutual funds can't do that. Besides that, I would think it would be harder managing other people's money than one's own. There are pros and cons to both sides, but investors will start bailing out of a mutual fund that can't beat their benchmark. Are there many traders who run algorithmic trading strategies that are consistently profitable month after month with excellent Sharpe ratios?
The point being that a room full of millions of monkeys randomly hitting buy and sell keys for random stocks will end up with monkeys that have a string of wins, month after month. Just like millions of accounts that at a brokerage. This idea is the very definition of data mining! The entire concept of JP Morgan copying the trades of some punter here on ET would be laughable if it wasn't such a perfect representation of the sad mix of ignorance and hubris that's pretty common among inexperienced investors.
There may very well be some traders with algorithmic trading strategies that are consistently profitable month after month with excellent Sharpe ratios. I may even be one of the people with that type of account. If JP Morgan wants to effectively let me front run their massive trades by copying my trades, please, please, please, do so! It would only make me significantly more profitable, in fact I could quite with the hard work and simply buy an random stock, wait for the massive volume of the copiers to drive the price up, and then sell it at a profit!
All Brokers (including IB) make a great deal of money outside of commissions. Here are a few ways they do this:
2) On HTB names they make a killing. Imagine a firm that has an aggregate 100K shares in long positions of a HTB name and 75K shares short. The firm would net off 75K of the shares (giving the long holders in most cases nothing) and charging these short positions the full rate. They would only have to truly borrow 25K to net their overall positions. This is a huge money maker (even at IB). For those who don't know, IB offers their long customers 50% of the borrow rate if the position has been purchased without any borrowing. So the reality is at least for me, I rarely get anything for my longs (see point 1) which is why I usually use conversions to get what is really owed to me. This is a big money maker for all firms because there are so many names with high borrow rates that are active.
explain this as it is not as I understand. If you do a quick search on 140% margin you'll see number of links to the rules including one from IB:
What are fully-paid and excess margin securities?
Fully-paid securities are securities in a customer’s account that have been completely paid for. Excess margin securities are securities that have not been completely paid for, but whose market value exceeds 140% of the customer’s margin debit balance.
Hence, if you are fully paid and not signed up for SYEP, IB (or any broker) can not lend out your shares.
Your points though are mostly all valid but also point to how IB is pretty much the fairest amongst them all with higher credit/debit spreads, splitting stock loan if shares are lent out, not selling flow and not having a prop desk.
It would only make me significantly more profitable, in fact I could quite with the hard work and simply buy an random stock, wait for the massive volume of the copiers to drive the price up, and then sell it at a profit!
Well, if you can establish a track record and gather a bunch of followers who will copy your trades...you might actually be able to get away with picking random stocks at that point. Recently, Apple became worth a lot more in a short amount of time after Buffet announced his large stake in the company. Actually, you don't even need to be good or right to influence the price of a stock. If you're a large bank and upgrade or downgrade a stock, the stock price will move in the direction of the recommendation. Despite the upgrade or downgrade revealing absolutely no fundamental information relating to the operations, strategy, or earnings of the company to the public that was not already known before the upgrade / downgrade, the stock price will move, usually significantly. So much for efficient market theory.
The point being that a room full of millions of monkeys randomly hitting buy and sell keys for random stocks will end up with monkeys that have a string of wins, month after month. Just like millions of accounts that at a brokerage.
I agree with your first statement, but if all the accounts at a brokerage are just monkeys randomly hitting buy and sell, then eventually, given enough time, all the accounts will all go broke after commissions and fees are extracted because those traders have no edge. But not all people do that and the broker could hire some smart people to figure out the statistical probability that any given trader has a real edge. The broker wouldn't necessarily have to throw all their money behind one trader, but would instead develop a model that allocates capital based on what their best traders are doing.
All Brokers (including IB) make a great deal of money outside of commissions. Here are a few ways they do this:
1) They segregate your longs and shorts so that your implied cr/dr rates are significantly worse than they advertise. For example if you typically have many long/short positions then your cr interest will basically always be zero. This is why brokers love traders like me. You can easily have hedged positions that equate your account value on both sides of the market (without much margin). I did a rough calculation last year and IB made about $25K off of me in this regard. This is the same with all brokers. So even if you have say $500 K in average (settled) cash for the month - you may not get any CR interest if you have short positions.
2) On HTB names they make a killing. Imagine a firm that has an aggregate 100K shares in long positions of a HTB name and 75K shares short. The firm would net off 75K of the shares (giving the long holders in most cases nothing) and charging these short positions the full rate. They would only have to truly borrow 25K to net their overall positions. This is a huge money maker (even at IB). For those who don't know, IB offers their long customers 50% of the borrow rate if the position has been purchased without any borrowing. So the reality is at least for me, I rarely get anything for my longs (see point 1) which is why I usually use conversions to get what is really owed to me. This is a big money maker for all firms because there are so many names with high borrow rates that are active.
3) Corporate actions: This is one that many don't talk about. In many cases non electing shareholders in mergers/offerings get screwed if they are unaware and miss deadlines. These missed deadlines can result in significant losses for investors. Many firms will take advantage of this by creating early deadlines for the corporate action. Typically the deadline for a CA may be say 5 pm EST but the broker will likely have an earlier one (say 1 PM). They may say this is to give them some time to process things but the reality is this allows them to see how many shares are "non-electing" and given these shares can result in significant losses for these accounts - they then can borrow them and short them in the market themselves and profit substantially. You will often see some crazy moves that don't make sense in the final few hours of trading prior to a election deadline (this can be why - electing shareholders can get different compensation then ones that don't elect). There is a short tender rule but this doesn't apply to shares that are shorted into the marketplace. In years past brokers use to short the actual tender (without having any shares) - this is illegal. So each broker has a certain percent of "dumb" customers that miss deadlines and they can borrow their shares and short them into the market. Again - another big money maker for these firms.
4) You also have about 60% of all orders (not IB) that are sold by brokers (payment for order flow) where the customer get fleeced a little but each time.
So, yes brokers make good money off of us. No question about it. Times are good for brokers - just look at their stock prices. Expect to see more and more firms lowering fees and I believe the firms that hide behind the "we deliver different goods" and don't lower fees will be left behind in this marketplace.
ELI5 please