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(Yahoo)   E-Trade vigorously defends its right to bet against its customers trades   (finance.yahoo.com ) divider line
    More: Asinine, Financial Industry Regulatory Authority, broker-dealers, routing, Superior Court of California, customers, injunctions  
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2892 clicks; posted to Business » on 07 Aug 2013 at 5:28 AM (3 years ago)   |   Favorite    |   share:  Share on Twitter share via Email Share on Facebook   more»



24 Comments     (+0 »)
 
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2013-08-07 07:02:09 AM  
I don't agree with hedging morally but you lot can't even prosecute financial institutions that flagrantly flaunted the boundaries of what was and wasn't legal, leading to a world-wide decimation of personal wealth and financial security.

Good luck with that.
 
2013-08-07 07:27:05 AM  
Total dick:
www.randomwok.com
 
2013-08-07 07:59:26 AM  
Unethical, maybe, but not illegal. All stock brokers do it. So do 401k managers.
 
2013-08-07 08:22:27 AM  

Lost Thought 00: Unethical, maybe, but not illegal. All stock brokers do it. So do 401k managers.


Exactly.
 
2013-08-07 08:31:33 AM  

Lost Thought 00: Unethical, maybe, but not illegal. All stock brokers do it. So do 401k managers.


I have no idea if it's illegal or not, but lots of brokers do lots of illegal things, they just don't do them on a big enough scale to warrant prosecution, so that alone isn't really a good bar to set.

Also, it could be heavily dependent on HOW they're doing it. If there's no direct communication of the details between the two groups so that one can't screw the other on purpose, it's hard to see how this would be anything but morally ambiguous. If the two groups are collaborating in ways that could lead to them delaying trade executions or otherwise intentionally tripping up their customers so their own trades turn a bigger profit though....
 
2013-08-07 08:41:53 AM  

skozlaw: Lost Thought 00: Unethical, maybe, but not illegal. All stock brokers do it. So do 401k managers.

I have no idea if it's illegal or not, but lots of brokers do lots of illegal things, they just don't do them on a big enough scale to warrant prosecution, so that alone isn't really a good bar to set.


Unfortunately, that's the bar that has been set by our legal system when it comes to financial prosecutions. Hell, they have ceased prosecution of banks for directly funding terrorists because the government was afraid to upset the financial system. When the prosecutor has a 401k too, and if he wins his case he'll see his entire retirement savings evaporate, he will make damn sure he doesn't win.
 
2013-08-07 08:46:57 AM  
can somebody explain what they did in layman's terms
 
2013-08-07 08:49:46 AM  

snuff3r: I don't agree with hedging morally but you lot can't even prosecute financial institutions that flagrantly flaunted the boundaries of what was and wasn't legal, leading to a world-wide decimation of personal wealth and financial security.


All we have to do is change the law, and there's been a lot of suggestion that we do just that.
 
2013-08-07 08:52:07 AM  

ltdanman44: can somebody explain what they did in layman's terms


They'd see that a bunch of people put in orders to buy Home Depot stock. They'd delay those orders until they could buy a bunch of Home Depot stock themselves, then turn around and sell the stock to their customers at an inflated price, instead of the market rate when the order was initially placed at.
 
2013-08-07 09:23:30 AM  

Lost Thought 00: They'd see that a bunch of people put in orders to buy Home Depot stock. They'd delay those orders until they could buy a bunch of Home Depot stock themselves, then turn around and sell the stock to their customers at an inflated price, instead of the market rate when the order was initially placed at.


I've experienced that for decades through Schwab.  You put in an order at Market, and you find out you bought it at 2 cents more than the market price was when you put the order in.

Bastards.
 
2013-08-07 09:39:09 AM  

Lost Thought 00: ltdanman44: can somebody explain what they did in layman's terms

They'd see that a bunch of people put in orders to buy Home Depot stock. They'd delay those orders until they could buy a bunch of Home Depot stock themselves, then turn around and sell the stock to their customers at an inflated price, instead of the market rate when the order was initially placed at.


It doesn't lay that out in TFA, unless it has changed, and the headline doesn't imply that at all.

/Although based on the context of the article you seem to be right.
 
2013-08-07 10:14:59 AM  

midigod: Lost Thought 00: They'd see that a bunch of people put in orders to buy Home Depot stock. They'd delay those orders until they could buy a bunch of Home Depot stock themselves, then turn around and sell the stock to their customers at an inflated price, instead of the market rate when the order was initially placed at.

I've experienced that for decades through Schwab.  You put in an order at Market, and you find out you bought it at 2 cents more than the market price was when you put the order in.

Bastards.


This is why I only use limit orders.  If I'm willing to buy Stock X for $53.50, then that's what I'll pay.  If my brokerage does some shenanigans where they are able to buy it for $53.48 right before and make a small profit, then that's scummy, but I'm OK since I was willing to buy Stock X for $53.50 anyway.
 
2013-08-07 10:17:58 AM  

snuff3r: I don't agree with hedging morally but you lot can't even prosecute financial institutions that flagrantly flaunted the boundaries of what was and wasn't legal, leading to a world-wide decimation of personal wealth and financial security.

Good luck with that.


Just curious...why?  What's wrong with lowering your risk profile?  If I'm invested completely in US stock, what's wrong with me buying a few put options so that I'm protected against a major crash?
 
2013-08-07 11:39:03 AM  

Lost Thought 00: Unethical, maybe, but not illegal. All stock brokers do it. So do 401k managers.


In reality, if the 'average' person with a rudimentary understanding of BASIC statistics and algebra invested just a little 'mental elbow grease' picked their own stocks and bonds and held them for as long as was reasonable...the average 401k fund is not hard to beat at all....
 
2013-08-07 11:51:11 AM  
If you buy and hold to do covered calls then a 1% difference on the buy price won't really mean jack shiat in the course of your ownership. The shift from fractional pricing to hundredths pricing saved you more.
 
2013-08-07 12:01:35 PM  

Lost Thought 00: ltdanman44: can somebody explain what they did in layman's terms

They'd see that a bunch of people put in orders to buy Home Depot stock. They'd delay those orders until they could buy a bunch of Home Depot stock themselves, then turn around and sell the stock to their customers at an inflated price, instead of the market rate when the order was initially placed at.


and that is legal????????????
 
2013-08-07 01:18:44 PM  

ltdanman44: Lost Thought 00: ltdanman44: can somebody explain what they did in layman's terms

They'd see that a bunch of people put in orders to buy Home Depot stock. They'd delay those orders until they could buy a bunch of Home Depot stock themselves, then turn around and sell the stock to their customers at an inflated price, instead of the market rate when the order was initially placed at.

and that is legal????????????


To some degree, yes.  Stocks operate on a bid/ask principle.  The major market makers and clearinghouses have a bid (what they'll pay you to buy a stock, let's say 50.00) and an ask (what they'll sell the stock at, let's say 50.01).  Thier profit on the trade is the 0.01 they keep when they are able to buy from someone else at 50 and sell to you at 50.01.  This is normal and legal, and is the funamental principle under which exchanges and clearinghouses profit.

Now, the market moves all the time, and they are not always able to match up sellers and buyers immediately, so if you want to sell 1,000 shares of IBM, let's say, the trade might get cleared in several batches, so the price fluctuates (and so could the spread).  This is compounded by the fact that there are thousands of trades constantly competing to get filled, so there has to be rules about whose trades get filled and whose don't.  These rules are extremely complicated.  Generally though, brokers owe a duty of best execution, where for market orders they try to fill them at the lowest cost.  When the order is fulfilled by a related company, there can be questions as to whether best execution was achieved.  "Proving" best execution is basically imposible, so there are some safe harbor rules about best execution that if you can meet them, you have achieved best execution as far as the regulations are concerned.  If I put in my market order for sell 100, and you put in your market order for sell 100, and there is only one buy order for 100, whose order gets filled first?

Soome of this stems from people's misunderstanding about "market" orders.  A market order is the instruction, "Please buy or sell my stock at the best price you can get for it on the market, as soon as possible."  The actual price at which it is sold may be completely different than the market price when the order was placed.  In that situation, you need the best execution rules to prevent abuse.

I think many are confusing market orders with limit orders, which say "Please buy or sell my stock at no more than/less than $XX, even if it takes a while to find buyers/sellers at my price."  For those orders, bid/ask isn't relevant anymore, priority of trade execution (whose order gets filled first) is the only question.
 
2013-08-07 01:23:46 PM  

ltdanman44: Lost Thought 00: ltdanman44: can somebody explain what they did in layman's terms

They'd see that a bunch of people put in orders to buy Home Depot stock. They'd delay those orders until they could buy a bunch of Home Depot stock themselves, then turn around and sell the stock to their customers at an inflated price, instead of the market rate when the order was initially placed at.

and that is legal????????????


But note that situations as blatant as Lost Thought describes are illegal and called front-running.  The problem is the process is so complex it can be difficult to distinguish between legitimate market-making activities as clearing houses bundle trades, and front-running.  This gets even murkier when the other side fo the trade is an affilite clearinghouse, as in this case.  You better have some pretty high walls between the operations to make sure no information slips over.
 
2013-08-07 05:08:03 PM  

dragonfire77: Lost Thought 00: Unethical, maybe, but not illegal. All stock brokers do it. So do 401k managers.

In reality, if the 'average' person with a rudimentary understanding of BASIC statistics and algebra invested just a little 'mental elbow grease' picked their own stocks and bonds and held them for as long as was reasonable...the average 401k fund is not hard to beat at all....


This is very true. I would say one would also need some familiarity with it all, but once a person of reasonable intelligence has that experience, he could very likely build a portfolio that outperforms big managed funds. Largely because I am back in school, I haven't made a single trade this year, but my retail portfolio is still qzup over 30% ytd. My 401k has never come close to that. I don't even think my positions are high risk. I just follow a few blue chips and buy in when I deem the price to be good
 
2013-08-07 07:04:18 PM  

RumsfeldsReplacement: snuff3r: I don't agree with hedging morally but you lot can't even prosecute financial institutions that flagrantly flaunted the boundaries of what was and wasn't legal, leading to a world-wide decimation of personal wealth and financial security.

Good luck with that.

Just curious...why?  What's wrong with lowering your risk profile?  If I'm invested completely in US stock, what's wrong with me buying a few put options so that I'm protected against a major crash?


I'm not a broker, nor have interest in being one, but it seems to me that hedging is like betting on both black and red, and no matter what the result is you're coming out ahead, because there is no green, and the payout is more than 2x input.

The whole system appears rigged to funnel money away from suckers, I mean me.
 
2013-08-07 09:17:49 PM  
Separately, E*Trade said that a customer named John Scranton has filed a suit that seeks class-action status in the Superior Court of California alleging that E*Trade Securities failed to make good on promises involving options trades. He accused the firm of misrepresenting on its website that it would automatically exercise options that were profitable by 1 cent or more on their expiration date.
E*Trade said it "continue to defend itself vigorously" against Scranton's suit, which was filed on April 30, 2013.


I wonder how E*Trade intends to defend itself here?  If the options in question met the in-the-money criteria at expiration time and weren't automatically exercised by E*Trade, it would seem to be a pretty clear-cut case of misrepresentation.
 
2013-08-08 12:05:00 AM  

RumsfeldsReplacement: Just curious...why? What's wrong with lowering your risk profile? If I'm invested completely in US stock, what's wrong with me buying a few put options so that I'm protected against a major crash?


Far too much chance for abuse, as the last twenty years on Wall St have shown.  If you're allowed to bet against a company, whats to keep you from buying opinions and then intentionally tanking the company?  And there are plenty of other ways to hedge against a market crash which are safer for the economy.
 
2013-08-08 03:56:01 PM  
The phrase "dead money" comes to mind.

Or is it "Kobayashi Maru"?

Or is it "rent-seeking"?

Maybe "you can't get there from here"?

/laymen
 
2013-08-08 04:01:34 PM  

RumsfeldsReplacement: midigod: Lost Thought 00: They'd see that a bunch of people put in orders to buy Home Depot stock. They'd delay those orders until they could buy a bunch of Home Depot stock themselves, then turn around and sell the stock to their customers at an inflated price, instead of the market rate when the order was initially placed at.

I've experienced that for decades through Schwab.  You put in an order at Market, and you find out you bought it at 2 cents more than the market price was when you put the order in.

Bastards.

This is why I only use limit orders.  If I'm willing to buy Stock X for $53.50, then that's what I'll pay.  If my brokerage does some shenanigans where they are able to buy it for $53.48 right before and make a small profit, then that's scummy, but I'm OK since I was willing to buy Stock X for $53.50 anyway.


But you're already paying a fee for the trade, right? They're just extracting more from you?
 
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