Zero is the new normal [Commissions that is]
These are interesting times we live in! Unless you are a
hermit living in a cave on a mountaintop [with no Wi-Fi] you
must be aware of the recent announcements by several major
Brokerages that they are reducing their commissions for
online trades to Zero. I believe this trend was started by
Robinhood a year or two ago. The latest development was
started by Interactive Brokers, then Charles Schwab
announced zero commissions which was quickly matched by TD
Ameritrade. Last week Fidelity joined the party. Bank of
America/Merrill has had a program for its customers for
several years where based on combined account value they can
qualify for a number of free trades per month.
These developments raise the question if there is no
commission how are these brokerages going to make money. It
turns out that a major source of their profits comes from
the cash balance in a clients account that they sweep to a
near zero interest paying account that they can lend at a
much higher interest rate. For Schwab in 2019 comisssions
represented 6.8% of their revenue stream and Net Interest
represented 61.8% based on a slide from one of their
presentations. "According to their site, Robinhood makes
money from "interest from customer cash and stocks, much
like a bank collects interest on cash deposits" as well as
"rebates from market makers and trading venues." The key
word there is stocks where your broker can loan the stock
they are holding for you to someone to sell short and
collect a fee for the service.
To copy from the commercial "What's in your wallet"? How
does your brokerage make money? Let the discussion begin!
hermit living in a cave on a mountaintop [with no Wi-Fi] you
must be aware of the recent announcements by several major
Brokerages that they are reducing their commissions for
online trades to Zero. I believe this trend was started by
Robinhood a year or two ago. The latest development was
started by Interactive Brokers, then Charles Schwab
announced zero commissions which was quickly matched by TD
Ameritrade. Last week Fidelity joined the party. Bank of
America/Merrill has had a program for its customers for
several years where based on combined account value they can
qualify for a number of free trades per month.
These developments raise the question if there is no
commission how are these brokerages going to make money. It
turns out that a major source of their profits comes from
the cash balance in a clients account that they sweep to a
near zero interest paying account that they can lend at a
much higher interest rate. For Schwab in 2019 comisssions
represented 6.8% of their revenue stream and Net Interest
represented 61.8% based on a slide from one of their
presentations. "According to their site, Robinhood makes
money from "interest from customer cash and stocks, much
like a bank collects interest on cash deposits" as well as
"rebates from market makers and trading venues." The key
word there is stocks where your broker can loan the stock
they are holding for you to someone to sell short and
collect a fee for the service.
To copy from the commercial "What's in your wallet"? How
does your brokerage make money? Let the discussion begin!
Thanks for sharing this. One of our members is already asking why we don’t do this. Can’t wait for comments.
Sent from my iPhone
> On Oct 15, 2019, at 8:19 AM, Leonard E. Douglass via bivio.com <user*20291800001@bivio.com> wrote:
>
> These are interesting times we live in! Unless you are a
> hermit living in a cave on a mountaintop [with no Wi-Fi] you
> must be aware of the recent announcements by several major
> Brokerages that they are reducing their commissions for
> online trades to Zero. I believe this trend was started by
> Robinhood a year or two ago. The latest development was
> started by Interactive Brokers, then Charles Schwab
> announced zero commissions which was quickly matched by TD
> Ameritrade. Last week Fidelity joined the party. Bank of
> America/Merrill has had a program for its customers for
> several years where based on combined account value they can
> qualify for a number of free trades per month.
>
> These developments raise the question if there is no
> commission how are these brokerages going to make money. It
> turns out that a major source of their profits comes from
> the cash balance in a clients account that they sweep to a
> near zero interest paying account that they can lend at a
> much higher interest rate. For Schwab in 2019 comisssions
> represented 6.8% of their revenue stream and Net Interest
> represented 61.8% based on a slide from one of their
> presentations. "According to their site, Robinhood makes
> money from "interest from customer cash and stocks, much
> like a bank collects interest on cash deposits" as well as
> "rebates from market makers and trading venues." The key
> word there is stocks where your broker can loan the stock
> they are holding for you to someone to sell short and
> collect a fee for the service.
>
> To copy from the commercial "What's in your wallet"? How
> does your brokerage make money? Let the discussion begin!
Sent from my iPhone
> On Oct 15, 2019, at 8:19 AM, Leonard E. Douglass via bivio.com <user*20291800001@bivio.com> wrote:
>
> These are interesting times we live in! Unless you are a
> hermit living in a cave on a mountaintop [with no Wi-Fi] you
> must be aware of the recent announcements by several major
> Brokerages that they are reducing their commissions for
> online trades to Zero. I believe this trend was started by
> Robinhood a year or two ago. The latest development was
> started by Interactive Brokers, then Charles Schwab
> announced zero commissions which was quickly matched by TD
> Ameritrade. Last week Fidelity joined the party. Bank of
> America/Merrill has had a program for its customers for
> several years where based on combined account value they can
> qualify for a number of free trades per month.
>
> These developments raise the question if there is no
> commission how are these brokerages going to make money. It
> turns out that a major source of their profits comes from
> the cash balance in a clients account that they sweep to a
> near zero interest paying account that they can lend at a
> much higher interest rate. For Schwab in 2019 comisssions
> represented 6.8% of their revenue stream and Net Interest
> represented 61.8% based on a slide from one of their
> presentations. "According to their site, Robinhood makes
> money from "interest from customer cash and stocks, much
> like a bank collects interest on cash deposits" as well as
> "rebates from market makers and trading venues." The key
> word there is stocks where your broker can loan the stock
> they are holding for you to someone to sell short and
> collect a fee for the service.
>
> To copy from the commercial "What's in your wallet"? How
> does your brokerage make money? Let the discussion begin!
Book entry stocks could be a problem in an cloud-based multi-level
tangled web of ownership. What happens when everything tries to unwind
at the same moment in time.
On 10/15/2019 11:19 AM, Leonard E. Douglass via bivio.com wrote:
> These are interesting times we live in! Unless you are a
> hermit living in a cave on a mountaintop [with no Wi-Fi] you
> must be aware of the recent announcements by several major
> Brokerages that they are reducing their commissions for
> online trades to Zero. I believe this trend was started by
> Robinhood a year or two ago. The latest development was
> started by Interactive Brokers, then Charles Schwab
> announced zero commissions which was quickly matched by TD
> Ameritrade. Last week Fidelity joined the party. Bank of
> America/Merrill has had a program for its customers for
> several years where based on combined account value they can
> qualify for a number of free trades per month.
>
> These developments raise the question if there is no
> commission how are these brokerages going to make money. It
> turns out that a major source of their profits comes from
> the cash balance in a clients account that they sweep to a
> near zero interest paying account that they can lend at a
> much higher interest rate. For Schwab in 2019 comisssions
> represented 6.8% of their revenue stream and Net Interest
> represented 61.8% based on a slide from one of their
> presentations. "According to their site, Robinhood makes
> money from "interest from customer cash and stocks, much
> like a bank collects interest on cash deposits" as well as
> "rebates from market makers and trading venues." The key
> word there is stocks where your broker can loan the stock
> they are holding for you to someone to sell short and
> collect a fee for the service.
>
> To copy from the commercial "What's in your wallet"? How
> does your brokerage make money? Let the discussion begin!
tangled web of ownership. What happens when everything tries to unwind
at the same moment in time.
On 10/15/2019 11:19 AM, Leonard E. Douglass via bivio.com wrote:
> These are interesting times we live in! Unless you are a
> hermit living in a cave on a mountaintop [with no Wi-Fi] you
> must be aware of the recent announcements by several major
> Brokerages that they are reducing their commissions for
> online trades to Zero. I believe this trend was started by
> Robinhood a year or two ago. The latest development was
> started by Interactive Brokers, then Charles Schwab
> announced zero commissions which was quickly matched by TD
> Ameritrade. Last week Fidelity joined the party. Bank of
> America/Merrill has had a program for its customers for
> several years where based on combined account value they can
> qualify for a number of free trades per month.
>
> These developments raise the question if there is no
> commission how are these brokerages going to make money. It
> turns out that a major source of their profits comes from
> the cash balance in a clients account that they sweep to a
> near zero interest paying account that they can lend at a
> much higher interest rate. For Schwab in 2019 comisssions
> represented 6.8% of their revenue stream and Net Interest
> represented 61.8% based on a slide from one of their
> presentations. "According to their site, Robinhood makes
> money from "interest from customer cash and stocks, much
> like a bank collects interest on cash deposits" as well as
> "rebates from market makers and trading venues." The key
> word there is stocks where your broker can loan the stock
> they are holding for you to someone to sell short and
> collect a fee for the service.
>
> To copy from the commercial "What's in your wallet"? How
> does your brokerage make money? Let the discussion begin!
I am not sure I understand your point, pretty much
everything is book entry now.
"An investor who purchases a stock can still request through
his broker that a stock certificate be issued in his name
and mailed out to him, but companies are no longer required
by law to issue paper stock certificates, and many opt to
have book entry form shares only. Brokers may also charge
high fees for issuing paper stock certificates. Stocks held
in a brokerage account are registered in the broker's name
(street name), and the broker shows them as owned by
particular clients. Keeping stocks in the brokerage account,
registered in street name, is now standard practice. Again,
evidence of ownership exists in book entry form only."
everything is book entry now.
"An investor who purchases a stock can still request through
his broker that a stock certificate be issued in his name
and mailed out to him, but companies are no longer required
by law to issue paper stock certificates, and many opt to
have book entry form shares only. Brokers may also charge
high fees for issuing paper stock certificates. Stocks held
in a brokerage account are registered in the broker's name
(street name), and the broker shows them as owned by
particular clients. Keeping stocks in the brokerage account,
registered in street name, is now standard practice. Again,
evidence of ownership exists in book entry form only."
Len - Securities lending is a big business that all brokerages have been in for a long time. But these are for sizable transactions, typically 10,000 share multiples, started by a hedge fund wanting to short a stock. So a club typically does not have enough shares to lend.
Lending securities has been a major revenue source for pensions and brokerages. While the pensions own the stock brokerages are lending shares held in street name - and that is how your club securities are probably held. So even if you do have enough shares to lend, the brokerage may already be lending them since they are in street name.
Mark Eckman
The key
...The key word there is stocks where your broker can loan the stock
they are holding for you to someone to sell short and
collect a fee for the service... How does your brokerage make money?
Mark Eckman
Mark I don't disagree, I was trying to raise the awareness that brokerages make money in several different ways beyond the commission charged for a transaction. I suspect the majority of the commission went to the salesman [broker] back in the old days when you had to deal with a human instead of entering the transaction on the internet yourself. The 800 pound gorilla in the room is the income the brokerages generate from the cash balance in the sweep account. One source estimates that the average account cash balance is around 10% of the account value.
From: club_cafe@bivio.com <club_cafe@bivio.com> On Behalf Of Mark Eckman via bivio.com
Sent: Wednesday, October 16, 2019 10:29 AM
To: club_cafe@bivio.com
Subject: Re: [club_cafe] Zero is the new normal [Commissions that is]
Len - Securities lending is a big business that all brokerages have been in for a long time. But these are for sizable transactions, typically 10,000 share multiples, started by a hedge fund wanting to short a stock. So a club typically does not have enough shares to lend.
Lending securities has been a major revenue source for pensions and brokerages. While the pensions own the stock brokerages are lending shares held in street name - and that is how your club securities are probably held. So even if you do have enough shares to lend, the brokerage may already be lending them since they are in street name.
Mark Eckman
The key
...The key word there is stocks where your broker can loan the stock
they are holding for you to someone to sell short and
collect a fee for the service... How does your brokerage make money?
--
Mark Eckman
|
In the interest of full disclosure I have accounts at
Fidelity, Merrill Edge, and TD Ameritrade [Scottrade legacy]
all now with zero commissions. Since Laurie brought up
Fidelity I have attached a link to a Press Release Fidelity
put out in August comparing the Sweep Accounts interest rate
of their competitors with theirs.
https://www.fidelity.com/bin-public/060_www_fidelity_com/documents/press-release/fidelity-breaks-status-quo-080719.pdf
My takeaway is that if your broker is paying a pittance on
the cash in your account you are leaving money on the table.
You either need to not maintain a significant cash balance
in your account, or you need to find another broker.
Another plus for Fidelity is they don't process your orders
thru a market maker that pays them a commission for the
business.
Fidelity, Merrill Edge, and TD Ameritrade [Scottrade legacy]
all now with zero commissions. Since Laurie brought up
Fidelity I have attached a link to a Press Release Fidelity
put out in August comparing the Sweep Accounts interest rate
of their competitors with theirs.
https://www.fidelity.com/bin-public/060_www_fidelity_com/documents/press-release/fidelity-breaks-status-quo-080719.pdf
My takeaway is that if your broker is paying a pittance on
the cash in your account you are leaving money on the table.
You either need to not maintain a significant cash balance
in your account, or you need to find another broker.
Another plus for Fidelity is they don't process your orders
thru a market maker that pays them a commission for the
business.