I saw this article in the NRO and it made a lot of sense. It made even more sense after I spoke with a person yesterday that does work for foundations and high net worth individuals. We were talking about the financial industry and how backwards it is.
Finance today, banking, trusts, trading, and to a certain extent insurance is all vertical silos. The repeal of Glass Steagall and more importantly the enactment of SEC Regulation NMS gave institutions the ability to erect artificial border fences. They can vigorously protect fiefdoms.
By protecting those fiefdoms, they make a lot of money. For example, try and get a clean, quick transparent corporate bond option quote. It doesn't exist.
Virtually every time you trade a stock or a bond on the SEC side of the market you are giving up edge to your broker in some way. The Citadel's of the world didn't get rich by being awesome risk taking traders. They got rich by leeching off and trading against retail order flow they purchased from discount brokers.
Now they will do anything to protect that business. Same goes for trusts. If you are a high net worth individual, or you are the beneficiary of a trust, try having a hand in allocating your own assets.
The trust companies try to erect walls around the various parts of their operations and are not client focused.
The financial industry for all its innovation still hasn't innovated it's several tiered distribution system. They trade faster-but the trades go into about 90-100 different dark pools run by individual dark pool operators for their personal fun and profit-not the customers. You have low commissions with discount brokers, but your order flow is sold to institutional trading desks that arbitrage your order against the various dark pools to make a couple of cents of easy money on it.
What's a couple of cents among friends? Well, the NYSE does less than 30% of the entire volume in the stocks listed on the exchange. That couple of cents translates into billions into risk free profit. But because of regulatory structure, not just anyone can break into the club.
I write about this topic occasionally at my pointsandfigures.com blog, but Sal Arnuk writes about it daily at this blog.
The players also make sure there is a revolving door between Wall Street, K Street, the SEC and the DOJ-to ensure that regulations stay slanted in their favor.
Eventually technology will bust this up. But it's going to take a revamp of the government regulatory system before it can happen. The financial industry is deliberately opaque. They don't want you to understand it because they don't want technology tinkerers messing with the distribution system. Someday, it will have to change.
