In 1977 when broker income became strictly commissioned based, the downfall of the brokerage business began to fall. Before 1977 brokers were respected. One needed to be over 30 years old, and was trained over two years and was salaried. When brokers were salaried, ethics were higher in that a broker built his business on a more stable and professional premise. Soon, when strictly commissioned based, firms began to hire youg people in mass. They would hire 10 to keep one. The training period went from 2 years to 6 months on a straight commission. Also brokers were basically formed to sell the in house product of firms. Next comes Charles Schwab, and cuts the fat commission rates. What cost $200 before, was now $39. Next comes competition to Schwab, what was $39, begins to cost $19.95. Nexts comes Direct Access, which removes the market making divisions of the discount brokerage firms. This removes the market maker spread, and high per order add ons. Next comes the LLCs, which have now made it possible to transact at 20 cents per 100 shares. Now comes Paulson who was CEO of a fine company which used to enjoy the previous fatter margins, who is also highly connected to the brokerage industry which in every facet of the brokerage cannot compete with the costs of the supposed rogue LLC firms whose innovations have driven down transaction costs to a level whereby it is virtually impossible for larger firms to create sizable revenues. The rogue LLCs have made no friends who used to pull billions in revenue from this section of the brokerage business. Now, they want it back to some degree. They want to eliminate a sector of the business with whom they cannot compete. And unfortunately , they have the deep pockets and the political clout to move as they please. Thus until , the LLC sector has better political and legal representation, the groups that want to keep this sector of the business will pressure to get this business back. ...................................................................................... Now look at today..... The brokerage community paid out over $49 billion to its employees in bonuses which highly depended on the valuation of the third tier level of assets in January of 2008. Several weeks later, most of the assets in this category were deemed valueless after bonuses were paid. Now bonuses are being nationalized by the US Treasury which is headed by an individual who help create and market these instruments, who in turn has miilions in his own bank account in paid bonuses due to their promotion. The LLCs and SubLLCs perhaps account for 10 to 20% of the every day volume, and because of efficiency, have established businesses which allow for professional individual trading. Efficiency has been established at 20 cents per hundred shares, with the ability to trade with $10 per $1. Without the LLCs, the next best rates average $5 to $10 per order....and one would have the ability to trade with $4 per $1. That is of course unless you are a large brokerage firm , which basically can trade with any leverage it wishes, and if it gets into financial difficulties, such as a trade that was established at 30 to 1, or more....going in the wrong direction....they will be deemed too big to fail ....and will be backed by the US who is headed by a previous big brokerage CEO....
.interactive brokers is retail and has as good a commish as any prop house if you take liquidity. they charge .005 a share all in and no sec fee. so if ones throwing markets on naz thats like sub .002 when you into account the .003 ecn fee an the sec fee. also the prop world is a very very small part of trading in total accounts. yes as far as total # of trades its big but as far as % of total commission generated in the industry its non existent.bottom line 90% of prop traders wouldn't be trading 1/50th there vol if they were with the amtd's are etrades so i wouldn't really say they're stealing the vol. but yes the big retail guys are saying wait they need to abide by the rules
Excellent Commentary ......................................................................................... Absolutely.... most firms in retail want $5 to $10 or more per order, knowing full well that the average order is around 400 shares. IB led efficiency in the retail side by establishing .005 with a $1 minimum. Thus the most efficient approach in retail, one would pay $2 for the average order.... Of course, the leader in retail would be a firm like Genesis which has a very low per order charge, which in turn does not sell order flow.... One could order 2000 shares for a $1.50...or .00075 per share.... In retail, one cannot buy more than $4 worth of stock with a $1. The list goes on and on... ................................................................................................ Big brokerage firms can get basically unlimited leverage, because they can even count phony assets as being real. Increased leverage means an increase in returns if the trade goes right. What has basically happened in the brokerage industry....is that the houses have leveraged better than 30 to 1 with largely phony assets.....and the trade has gone bad.... LLCs were formed to allow for those that so desire to chase higher returns, and are betting their own money. It is their money and their decision. These people are not selling drugs. They want to take on more risk for more money. The people that sign up for LLCs know these are not retail accounts.... The point being is that the brokerage industry is not very happy about the public having access to efficiency with which they cannot compete. Both low costs and leverage are very important to a professional trader who is independent and does not want to work for anyone other than himself. Big brother brokerage does not like the LLC SubLLC network and would like to see it gone....
another excellent post libertad! The sub-llc model is a target to the big gureillas in the securities industry. Brokerages hate them because they offer better cost and comparable service. Hedge funds hate them because they have to pay premiun prices for securities that prop traders detect that are under acclumination. These chieftans of the securities world have an extremely powerful phalanx of lobyists and attornies to undermine entities that they deem as a threat.
Good posts, libertad. I've been fearing the big houses would seize the opportunity to shift the blame from themselves onto their competition. The big companies want at least four things, eliminate the competition, so they can charge higher commissions, get a lifetime guarantee of government bailouts (because they are too big to fail), they get to keep their unlimited leverage (because they know what they are doing-not!).
Legitimate prop firms are not a problem. The problem began when so-called prop firms (actaully an LLC) did not return traders money and hyped them with unrealiistic dreams to pony up huge amounts of money for training. Now regulators needed to jump in and protect the public. The only way is to close down this model, which has begun and have all these firms be licensed. If you read the complaint against TUCO (attached) there is little to no difference between TUCO and the rest of the firms using the LLC model. The clock is ticking for all of them.
Excellent Commentary .............................................................................. Obviously there are bad apples in every barrel.... Every barrel.... This is not a SubLLC LLC issue.... A SubLLC can either be a good, well run business, just as can an LLC....just as can a big brokerage firm.... Man.....the list goes on and on..... If a business is run poorly...they lose their business. True in any business.