Brokerage Companies

Happy Labor Day!!! I hope you have enjoyed the day. This newsletter will be shorter than normal and covers my unfavorable opinion of brokerage companies. I know of some great people who are brokers, it is the brokerage game that has me concerned.

In finance, a broker is someone who simply fills buy or sell orders on behalf of clients and only makes money when a trade is executed either a buy or a sell. The broker and brokerage company makes money on the trade regardless of whether you do. I get concerned when a financial entity exists to create hype to increase the number of trades and invent new ways to trade and do it in a manner that potential buyers do not fully understand the trade or the consequence of the trade.

You might remember that during the stock market crash of 1987, the New York Stock Exchange reached a record volume exceeding 500 million shares in a day. Now, each day the typical volume on the NYSE is about 1.5 billion shares with numbers in the range of 1 to 2 billion shares. Earlier this year, the volume traded on Bank of America stock and Citigroup stock alone in a single day approached 1.5 billion shares.

Each year Wall Street gives out bonuses to their top people, with a $1 million dollar bonus being commonplace. How do these companies get this money? It is from getting people to trade often regardless of whether the stock market is going up or down.

Let’s do a quick math exercise. If 1/10 of a cent, $0.001, is made on each share of stock that gets paid out as a bonus and 500 billion shares are traded in a year, the amount of bonus paid out is $500 million. Obviously this number is low, since we hear about a person who is demanding to get paid his $100 million bonus from last year from a company that got taxpayer money to stay in business.

TV shows like Mad Money and Fast Money are funded by a Brokerage company that tells the listener to buy or sell with a very short term perspective like what you should do tomorrow. Some names of these Brokerage companies include the name trade such as: Scottrade, Ameritrade, Gorilla Trade.

It is okay to use a broker or have an account at a Brokerage company, just don’t get sucked into the hype. Follow the longer term trends of the market rather than the day to day mood swings.