Morgan Stanley to Buy E-Trade for $13B
I rely on Matt Levine to explain, more clearly than I could, how brokerages make money (&quot;The Trades Will Be Free Now&quot;):<p><a href="https:&#x2F;&#x2F;www.bloomberg.com&#x2F;opinion&#x2F;articles&#x2F;2019-10-02&#x2F;the-trades-will-be-free-now" rel="nofollow">https:&#x2F;&#x2F;www.bloomberg.com&#x2F;opinion&#x2F;articles&#x2F;2019-10-02&#x2F;the-tr...</a><p>Let me highlight a key passage:<p>&quot;Even this understates the change, because the actual way that stock brokers work today is that you keep some cash in your brokerage account to fund potential trades, and the broker earns interest on that cash and pays you less than it earns, and all the trading stuff is almost irrelevant. ... Commissions are way down there; in 2018, they represented a bit less than 7% of Schwab’s net revenue.&quot;<p>I don&#x27;t think this is about consolidation in the brokerage space because of zero fees. I think this is about investment banks getting into the retail space (see Goldman&#x27;s Apple card).<p>Once again, I rely on Matt Levine to explain it (&quot;Goldman Has Some Boring Plans&quot;):<p><a href="https:&#x2F;&#x2F;www.bloomberg.com&#x2F;opinion&#x2F;articles&#x2F;2020-01-29&#x2F;goldman-has-some-boring-plans" rel="nofollow">https:&#x2F;&#x2F;www.bloomberg.com&#x2F;opinion&#x2F;articles&#x2F;2020-01-29&#x2F;goldma...</a><p>The whole thing is worth a read, but here is one key paragraph:<p>&quot;One way to interpret this is that Goldman has embarked on a quest to be boring. This interpretation seems plainly correct. The old Goldman approach—making a lot of money on lumpy investment-banking fees, risky balance-sheet-intensive trading, and both-lumpy-and-risky principal investing—is disfavored in modern banking. It is disfavored by regulation (the Volcker Rule, capital requirements) and by market conditions, but it is also particularly disfavored by Goldman’s own investors, who want reliable recurring revenues.&quot;<p>Edit: I should add this interpretation is also the one offered by the author of the NY times article, although the author also claims that slashed fees played a role:<p>&quot;It continues Morgan Stanley’s strategy of increasingly focusing on asset management rather than investment banking and high-stakes trading, betting on steady fees over bigger paydays and bigger risks.&quot;