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Comment by tsycho | Hacker News Reader

To play Devil’s Advocate: How is this different from being a market maker? I am presuming that if the customer actually made money, these guys would pay them from their own pocket.

Or alternately, assuming zero or low enough transaction costs, if these guys just took the opposite position of their customers for each trade (also known as hedging) in the market, then wouldn't the net positions be exactly the same?

Basically, the crime here seems "technical" or some sort of "you lied to me", it's not that people actually got different returns than what their trades entailed.

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If they are doing this without disclosure, they are adding counterparty risk without consent. Just because they didn't blow up does not mean they can't. It doesn't even have to be due to your trade but someone else's. There have been single trades that have blown up international banks. Rare, and probably irrelevant here, but a point for perspective.

It's this presumption that's wrong: "I am presuming that if the customer actually made money, these guys would pay them from their own pocket."

In a corporation, the owners enjoy limited liability, so should someone actually makes money, they can file for bankruptcy and never have to pay out.

You're right. It's not very different and I think this is perfectly legal if you register as an ATS and comply with Reg ATS. Reg ATS is not even all that onerous if you are already a broker dealer, but at a minimum it includes reporting trades correctly and telling your customers you may take the other side of their trades.

It is a "technical" crime. There are good reasons to regulate ATSs, and the brokers didn't follow those regulations. Instead of prosecuting the brokers here for an obscure crime like "operating an unregistered ATS", the SEC decided to prosecute them for fraud. Judges know what fraud is and as Matt Levine puts it in other articles, "every financial crime is also securities fraud".

> I am presuming that if the customer actually made money, these guys would pay them from their own pocket.

Set up a company, sell “shares” in Apple or whatever, and don’t actually buy the shares for your costumers. If Apple falls you make bank, and if Apple rises you declare bankruptcy. Either way the costumers loose.

That is the difference to market makers who actually buy the asserts, so the customers at worst just have a bunch of less valuable stocks not empty hands.

You're exactly right. In fact, retail brokerages are able to offer lower spreads than big professional investors get because their trading flow is so uninformed that there is reduced risk. A lot of the consumer facing trading companies get paid by larger institutions to send them their order flow.

Taxes would certainly play out differently.

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