Author Topic: How does Wall Street make money?  (Read 2306 times)

RedmondStash

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How does Wall Street make money?
« on: October 15, 2016, 02:14:54 PM »
You can't time the stock market.

But people on Wall Street make big money, apparently by buying and selling specific stocks at specific times and capturing profits. Computer algorithms for buying and selling are so fast that getting a computer physically closer to the market provides significant advantages. So -- by timing the market.

How exactly do they make all that big money on Wall Street?

I'm not looking to emulate them; I'm honestly just curious. There's a disconnect between "you can't time the market" and "Wall Street is full of fat cats."

Spitfire

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Re: How does Wall Street make money?
« Reply #1 on: October 15, 2016, 02:39:02 PM »
Aren't the brokers and fund managers the ones getting rich by getting commissions and management fees whether they are winning or losing for their clients? 

MDM

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Re: How does Wall Street make money?
« Reply #2 on: October 15, 2016, 02:47:25 PM »
See Where Are the Customers' Yachts?: or A Good Hard Look at Wall Street.  Even without buying the book, scroll down to read the customers' reviews and you'll get the gist.

matchewed

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Re: How does Wall Street make money?
« Reply #3 on: October 15, 2016, 02:57:21 PM »
A) What is meant by "wall street" and what financial institutions are today are very different things and glosses over a whole hell of a lot of detail.

B) Most of the Wall Street money you are thinking of is probably in the giant Investment Banking Industry (Goldman Sachs and the like). I'm pretty sure they're doing things much more complicated than buying individual stocks at lows and selling at highs.

C) While Edward Jones and other less reputable financial institutions geared towards common investors certainly earn plenty of money people aren't screaming about them when the financial industry causes a collapse and CEO's walk away w/ bonuses for doing so. They scream about the guys in B.

You're confusing an awful lot of stuff here.

GrOW

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Re: How does Wall Street make money?
« Reply #4 on: October 15, 2016, 03:02:39 PM »
Fees.

When required, disclosed.
The rest, undisclosed.

nobodyspecial

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Re: How does Wall Street make money?
« Reply #5 on: October 15, 2016, 05:29:48 PM »
However both of these are zero sum games.
If two banks are busy high-frequency trading arbitrage between opportunities between themselves then there is no gain.

Its like writing "Million" on each bill in a monopoly game, it doesn't mean that your family games evening contributed $700Bn to the economy. 
« Last Edit: October 15, 2016, 05:31:53 PM by nobodyspecial »

chesebert

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Re: How does Wall Street make money?
« Reply #6 on: October 15, 2016, 05:52:16 PM »
Underwriting discount and fees for IBD.

Management fee and carry interest for PE/HF and other exempt funds

Fees (various), purchase discount and interest income for mez debts.

Fees only for MA advisors.







RedmondStash

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Re: How does Wall Street make money?
« Reply #7 on: October 15, 2016, 08:07:47 PM »
See Where Are the Customers' Yachts?: or A Good Hard Look at Wall Street.  Even without buying the book, scroll down to read the customers' reviews and you'll get the gist.

Interesting. I guess it really is more about fees than about profits based in actual trading. Which seems so very backward. It's such a scam that banks get richer and richer off fees that aren't making their clients rich.

Really glad we got out of our brokerage firm and started managing our own investments.

Thanks, folks.

MustacheAndaHalf

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Re: How does Wall Street make money?
« Reply #8 on: October 16, 2016, 03:00:17 AM »
There's a big variety of firms related to Wall Street and making money.  Since OP mentioned "timing the market", I assume OP meant the high-frequency trading (HFT) mentioned in books like "Flash Boys" and "Dark Pools."

Generally when someone "times the market", it means they react to news event and think they're first to take advantage.  But they're not - some HFT firm already took advantage before the story made national news.  And other HFT firms are also too late - some studies show the profit off an event goes to the first trade.

HFT firms aren't limited to a zero sum game.  If a buyer and seller are trying to find each other in the market, HFT firms are often standing between the two.  They give some liquidity, but often it's for meaningless amounts of time.  They profit off pushing prices slightly away from what the two parties would agree on together.  A second approach may or may not still be available: rewarding transaction volume.  HFT firms maneuver in ways that seem wrong, but have been allowed, and they take much of the rewards an exchange offers.

There's a lot of nuance to HFT that isn't covered by calling it a zero sum game, or saying it's just timing the market.  I'd encourage reading the popular book "Flash Boys" or more in depth and interesting "Dark Pools" to see some of the subtler things HFT does that hurt other market participants.  But also some context: it's much better to have HFT firms providing millisecond liquidity and eating up fractions of a cent than the very old approach of rounding every share price off to 1/8th or 1/16th of a dollar.