The Dark Underbelly of Wall Street
When I met Mike Carr in 2008, he encouraged me to apply my military skills to the stock market.
Not long after, I started my first job in finance as a trader at a registered investment advisor. One where Mike happened to be an instrumental strategist and portfolio manager.
It was fun. We often traded half a million shares or more in a day. Not many people get to do that.
But it was also eye-opening…
In my tenure there, I got an inside look at some of Wall Street’s shady practices.
Our firm managed over $200 million. I had less than 0.1% of that amount in my personal account. Way less than 0.1%.
But I also paid a lot less in commissions. This was before the free commissions traders enjoy today. Back then, trades cost about $3 flat, no matter how many shares I traded.
The firm, however, paid $0.03 a share. On the days we traded half a million shares, this added up to $15,000 or more. And these commissions ate into our clients’ returns.
This didn’t sit right with me. So I approached Mike, and asked him why commissions were so high in the first place…
After all, larger firms typically pay less than a penny per share.
Mike said because our firm was small, most brokers actually wanted $0.05 a share. A friend of his had put a good word in to get us the lower price.
That was one of my first lessons on Wall Street… A $200 million firm is too small for big brokers to talk to.
The problem was our firm was just trying to make money for clients. Brokers didn’t see any “growth potential.” They’d rather make better deals with large firms that can expand past trading.
Big brokers want firms with an investment banking division. That could lead to a merger.
Or they want to serve as an adviser. That might help activist investors achieve their goals.
In short, big brokers want big accounts. And a firm with no plan to be a cash cow for Wall Street simply wasn’t a priority.
After learning all this, I understood why commissions were so high. I still didn’t like it — but it couldn’t be changed.
Then, a few weeks later, Mike told me to mark the day’s trades as “step outs.”
I’d seen that block on the order screen, but never used it. I was excited… Had we finally found a secret order type that could save our investors some money?
Why I Left Wall Street
Quite the opposite, in fact.
See, “step out” trades assign part of the commission to another firm. These trades cost $0.05 a share.
Our broker kept $0.03, and the other $0.02 went to a different broker. That broker worked with a firm that did research for us. We paid for the research with step outs once a month.
Again, I didn’t like it. But it was the way things were done.
I wondered why investors weren’t mad about all this. I asked Mike why everyone agreed to all these fees.
He told me that investors never saw the costs. Brokers report trades after commissions, so investors only saw net proceeds on sales.
And even with all the hidden costs, our clients made money. They had no reason to question our practices.
To be clear, this all bothered Mike, too. And after two years as partner at the firm, Mike left for a career in financial publishing. I was glad when he suggested I do the same.
Chalk it up to our military backgrounds, but Mike and I have a strict moral code. We’d rather help everyday traders make money than play Wall Street’s dirty games.
That’s why Mike recently decided to bring back the strategy he used to manage $200 million, returning 48% to his clients in the two years after the financial crisis.
Only this time, it’s available at a ridiculously low, completely transparent price.
Keep an eye out for tomorrow’s edition of True Options Masters. Mike will be sharing all the details with you there.
Regards,Amber Hestla Senior Analyst, True Options Masters