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Comment by mbesto | Hacker News Reader

As always, good analysis by Matt Levine: (go down to "How much should an index fund cost?")

https://www.bloomberg.com/view/articles/2018-08-02/-metoo-is...

https://www.bloomberg.com/news/articles/2018-08-01/fidelity-...

>Again this dynamic is sort of terrible! In a perfect world you’d want clients and banks to develop relationships, to know and trust each other, to build mutually beneficial sequences of repeated interactions rather than just trying to gouge each other in atomistic arm’s-length trades.

Why this should be the case? Ideally, you want maximally impersonal bulk markets for buying and selling assets. Finance industry should have smaller and smaller profit margins. Only those relatively rare cases where someone can provide value over others the trend is reversed.

I think you'd want access to such a market, but still want your accounts and user interface to be with a brokerage that would tell you whether you're getting a good deal on trades. Of course this could be entirely automated.

Having a UI that clearly tells you what's going on and doesn't lie to you or use dark patterns seems pretty basic?

You can't get good and honest advice from someone whose advice is tied for them making trade with you with a extra markup.

That wasn't related to zero expense ratio index funds, but instead on the foreign exchange derivatives market. Matt's point is that the worst clients get the best pricing and the people you'd normally want to have as clients get the short end of the stick.

Yes. But the worst client is only worst because he is price aware.

The natural development in financial industry with increased automation is to make everyone the worst possible customer for the financial service provider and that's a good thing.

Sure, all he's saying that in a perfect world you could give the best price to people you like.

A recipe for cronyism.

Sustainable financial service/investment banking businesses are based on relationships, not razor thin margins and excessive leverage between parties.

It seems a bit on the opposite - that it's natural to like/prefer customers who are suckers and will gladly overpay you significantly for no good reason.

>the worst clients get the best pricing

That's how it always is, in every market. Fact of business. Your worst customers are the most price-sensitive and the least loyal - but you can't turn them into better customers by making them pay more in a tiered loyalty structure, that's not how it works. They'll go to a competitor.

Your best (meaning worth investing in) customers on the other hand, WILL pay more. That's not a bad thing. They're happy to do so.

There's got to be a way for trust to be financially advantageous.

It can be, but it needs to be for a service that offers some other value. The problem is that doesn’t scale — most customers don’t care.

>>Again this dynamic is sort of terrible! In a perfect world you’d want clients and banks to develop relationships, to know and trust each other, to build mutually beneficial sequences of repeated interactions rather than just trying to gouge each other in atomistic arm’s-length trades.

This loss of trust has been happening across the capitalist landscape. Consider job security in the 60s compared to now for another example. As a consumer/employee I personally feel the frustration that's at the root of this - many companies treat their employees and their customers like interchangeable cogs that should be optimized, not like people at all.

But it's clear that the same thing happens in the other direction as well. For all the complaints about the decreasing quality of air-travel, almost everyone I know chooses flights based on cost and time, not service. Walmart was able to drive mom & pop shops out of business because they could sell things cheaper, not because they offered a superior shopping experience.

Perhaps the post-WWII era was a unique aberration. Happening after automation was advanced enough to make things pretty cheap, but before management science had discovered that hyper-optimizing every input and process was a great way to compete on price. Or perhaps this is the result of stagnant wages forcing people to buy from companies they hate because money is tight.

Either way, it seems like relationships are becoming increasingly currency-driven and transactional - the human factor matters less and less in spending, investing, and career decisions.

> For all the complaints about the decreasing quality of air-travel, almost everyone I know chooses flights based on cost and time, not service.

Almost everyone I know does the opposite, but only to a limited degree. I think it's also more nuanced than equating "quality of air travel" with "service".

I think it's true that the vast majority of people don't actually care how well they're served. Many do, however, care about physical comfort (as evidenced by willingness to pay for coach-plus type seats) and convenience.

Convenience is, arguably, closely linked with time, which you mentioned being something people are paying for. However, time is at odds with cost in at least the sense that airlines are flying jets slower to reduce fuel consumption.

> Ideally, you want maximally impersonal bulk markets for buying and selling assets. Finance industry should have smaller and smaller profit margins.

Some people would consider a personal, friendly market more valuable than a maximally efficient one. Finance is a tool to help humans fulfill their values, not the other way around.

What is a 'friendly' market in contrast to an efficient one?

Do you a prefer a market where you get a worse price, but your broker smiles at you?

Yea, I do.

Just like I prefer selling my car on craigslist "priced to sell" to avoid haggling.

Or helping people move for free with no implication that I'm owed a favor later for it. Although I'm not sure we're still in "market world" at that point.

Hire a fee only advisor. This is a separate role from the funds.

Finance feels like something akin to my electric bill, not an emotional good like entertainment or food.

Are you thinking of funds that don't have money in corps causing social harm (carbon, tobacco, etc)? It's not clear to me what you have in mind here.

Matt Levine's articles should be read in a light, slightly irreverent tone.

There may be costs to making things impersonal. Repeated interactions provide more opportunities to reward cooperation and punish defection, so the equilibrium point of a repeated game is often better than the equilibrium of a one-off game.

Basically, it's sometimes more efficient to work with people you can trust. It's expensive to build protections that ensure people cannot betray you.

matt levine is a national treasure. he makes the most boring minutiae of finance fun to read and is consistently insightful. even if you're not into finance you should read him for general business culture

> You can lend out the fund’s stock to short sellers, and share some of the fees paid by the short sellers with the fund, while keeping some for yourself.

Wait a second. Lending is not a risk-free activity. These index funds are supposed to be low risk. What happens in a short squeeze situation?

Why do you say that index funds are supposed to be low risk? That's not really true; they in fact desire to have precisely the risk profile of whatever benchmark they target and seek minimal tracking error relative to that.

Anyway, loans are marked to market daily with collateral required. Details are here: https://personal.vanguard.com/pdf/ISGSL.pdf

It is absolutely a risk, but I think you err by saying index funds are supposed to be low risk.

Obviously I am talking about the risk inherent to the fund separate from the risk of what it's tracking, which is arbitrary. The inherent risk of the fund is absolutely supposed to be low.

Thanks for the link, but I think even with 102% collateral marked to market daily, short sellers could still default and cause the fund to lose gains. It would be a black swan event, but the losses would be much larger than the 3 basis points they claim to gain from lending. Missing a small number of up days in the market has a huge negative effect on returns.

I see what you mean. The only thing I would add is that they do credit analysis on who they are lending to, and it's basically just institutional investors not fly-by-night short-sellers.

Lenders make money on a short squeeze.

The only time you lose money is if you want to sell and can't because you've loaned out your shares. But with a large index fund, that's extremely unlikely: you can easily lend out a small portion of your shares all the time (say 5%) with virtually no chance that too many customers will want to cash out all at the same time.

Lenders only make money on a short squeeze if the shorts can cover. If they default, the lender loses shares. And if the lender is an index fund that is required to maintain a certain balance of shares then they will have to replace those lost shares, becoming a victim of the short squeeze themselves.

Nothing. That's the rate I've had for the last three years.

Granted, not in the US.

He sort of glossed over how valuable it is for Fidelity (or others) to get to control so many shares for voting purposes.

How much power have companies like vanguard exercised in this situation? I thought the problem with vanguard was that they didn't care about the outcome of individual companies and so would vote for maintaining the status quo.

He's written about index funds and voting before:

https://www.bloomberg.com/view/articles/2018-01-30/iss-tells...

https://www.bloomberg.com/view/articles/2015-07-22/index-fun...

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