I would think that large brokers could make money simply by identifying who their most successful traders are -- the traders who have a consistent track record of making money. And then simply copying their trades. A small broker might not have enough money to invest to make this model work, but I could see this working for a large bank like Bank of America or JP Morgan. Not sure if that's legal to do though.
Find out all of the ways they are making money from your account. Do they sell your order flow like Robinhood, etc?
Thanks for making my point. We don't make public policy based on vague unarticulated senses of unease. Using the above "logic" we should just as well ban the takeover of a company by anyone with an A in their last name because gosh, "I don't know what they're going to do with my sensitive and private information". Should we put restrictions on a Chinese company buying a company which develops classified defense technology? Absolutely, based on a plausible path I could paint of how that could be detrimental to U.S. interests. There may very well be a similar plausible scenario for a broker, but you aren't doing a good job of articulating it beyond an emotional appeal to "private" and "sensitive".
Or you could do exactly the same thing by buying the mutual funds that had the best recent performance. Hint, that's not actually a winning strategy, past performance not reflecting future results and all that.
As a consumer, I have a right to be concerned about where my private and sensitive information is going to end up, least of all in the hands of any foreign governments that don't have a lot of transparency or any regards to the rights and well-being of their own citizens. From an ideological point of view, it should at least consider it as in a democratic country, I would think its own citizens' private information is just as important as classified defense technology. From an USA interest point of view, the entire country USA is made up of its own people. You guard against any foreign powers from knowing about USA's secrets and yet you are fine with any foreign powers getting unfettered access to the most private information of its own people that really defines how USA is and using the information to their own advantage? If the US government is smart, it would start thinking about putting restrictions or at least scrutinize on foreign power's takeover of USA financial securities firm which requires its clients to disclose the most private information.
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.
Wow!! What an eye-opener! I was aware of 1) and 2) but I never knew about 3) that brokers can borrow against their own customers to short to their advantage. No wonder IB pays such generous rates for borrowing your shares. I would think that's against their fiduciary duties of brokers to their clients, no? And also a conflict of interest? I mean I understand discount brokers like IB owes less fiduciary duties to their clients that they are not obligated to remind their clients and etc. regarding their shares in MA situation but profiting from clients' mistakes? That shouldn't be allowed. I mean if they weren't allowed to short the actual tender, they shouldn't be allowed to sell into the marketplace at all regardless whether they have the actual shares or not because that's all at the expense of their clients.
Anyone can short shares in the marketplace in these corporate actions. The key to making money is to make sure you borrow the shares from someone who is an non electing shareholder (ie someone who misses the deadline). Who better knows who the non-electing shareholders are? (and how many shares) I've been able to do this at times. You can try yourself. Short shares of a partial tender offer. It may work. It all depends on who you borrowed shares from. It all depends on how many shares missed the deadline etc. It isn't just the result of a mistake. Sometimes large investors choose not to tender shares at higher prices because of tax consequences etc. For example, Warren Buffett would not tender shares of KO if he could sell a portion 10% higher in a tender offer. If you could borrow his shares - then you would be golden. Also, borrow prices tend to go higher for obvious reasons. This happens in many corp actions. Rights offerings, takeovers, tender offers etc Sometimes it involves withholding taxes (ie non electing shareholders have money withheld in some foreign mergers) and the option markets are adjusted based on non electing shares. The NXP/QCOM merger if it had gone through would have been very profitable for many And I'm not saying certain brokers do this - just that it is done.
That is interesting. I never knew that. How can I borrow directly from someone who's non-electing? How do I know that shareholder is non-electing? And this is why I feel brokers shouldn't be allowed to do this. Them possessing the knowledge of who the non-electing shareholders are and how many shares is allowing them to have unfair advantage over regular investors, almost like those forex brokers running the SL of their traders because they know what those traders were doing.