This is so interesting - one wonders if this is strictly immoral. I propose this thought experiment: What if there was a version of this fraudulent brokerage that conducted this behavior in the open?
Let's say their policy is something like, "You trade for real under favorable commissions and margins. If we decide via internal algorithms that you are liable to lose money, we will instead pocket your trade and credit you 10% of the money you would have lost back. If you win, you win in full as normal."
That's basically taking a short position on whatever the customer thinks they're buying, right?
Whenever the customer wants to sell their position, you'd have to pay them whatever the value was at that time, whether the position had gone up or down. Big risk, unless you're confident that the customers are going to reliably make terrible trades, on balance.
It might still be fraud maybe if you claimed to be performing a service that you're not performing, but if you actually told your customers that you were doing it (as in the situation you ask about), then I can't see how it could be breaking any laws. And I'm not certain why your customers would even care, and might even prefer it, due to the "get 10% back if you lose everything" clause which you don't get with normal day trading.
There are laws against naked shorting, even when you've personally determined that the stock will tank as evidenced by the fact that an idiot is buying it.
There are arguments that naked shorting should be allowed, but it isn't allowed right now.
the parent poster means simply betting against their customers. Not explicitly shorting a security without a locate. Just a lingo thing. In any case, this sounds a lotvlike a Contract-for-Difference type of arrangement. The broker functions as the liquidity provider, taking the contra side to all customer bets. Broker collects the bid-ask spread and hopes that it overcomes losses. One big downside is counterparty risk: if the broker goes bankrupt, the winning customers may not get paid!
I've read sensible arguments about why shorting is ok. I've yet to read any sensible argument about why naked short selling is ok. Mind elaborating or giving a few references?
Lots to unpack there, but the “favorable” margins and low required funding they offered are illegal to offer precisely because they preferentially attract poor, unsophisticated people and mechanically increase the likelihood of their trades blowing up.
This is why being the counterparts to all your client’s trades and using the public markets only as a source of random numbers to operate a gambling operation with a fig leaf of respectability is derisively referred to as a “bucket shop” and is broadly illegal.
Its just wrong. For starters, you're advertising a service that you're not providing. Secondly, you're basically running a twist on a Ponzi scheme. Eventually it will get out of hand.... if your customers have an incredible streak of good luck but no real trades to back them - how do you pay them?
This is market making and is done in currency markets. Your broker/dealer might be the other party taking the other side of the trade. The argument over there is that as long as you trade major currencies, the market depth and liquidity will ensure narrower bid-ask spreads and that you will not get too raw of a deal.
This is different because it seems the account holders were tricked into believing they were buying/selling securities, which are highly regulated activities.
The argument that the market depth and liquidity will ensure narrower bid-ask spreads make no sense. Bucket shops not executing trades don't narrow bid-ask spreads.
Unless you mean, the broker/dealer generally offers fairly competitive spreads and so 10 pips isn't too big of a deal.
The "win in full as normal" guarantee is the weakness. What happens when the producer cannot meet the guarantee for lack of funds due to faulty or too-aggressive algorithmic chump choices?
However, given that hobbyist full-disclosure crypto ponzi schemes are a thing, probably the market has an appetite for anything.
Isn't this basically describing a counterparty? If they decide via internal algorithms that you are liable to lose money, they will pocket your trade and...well, not credit you 10% of the money you lost.
I guess it's sorta like the brokerage having a right of first refusal on all your trades - they have the option to take the other side of the trade first in exchange for a 10% premium. If it's clearly disclosed, I don't think it would be illegal, but it's also not a particularly new concept.
That’s not what the word counterparty means. You’re thinking “internalization.” An internalizer is not a counterparty to the position (“I think you will lose money”) they are a counterparty to the order (“I have extreme confidence that you are not secretly running Goldman Sachs from that eTrade account and so your sale of 2 shares of Google is unlikely to be based on a material edge, and therefore I am happy to make you a market in Google at a tight spread and indeed at a price better than any market covered by Reg NMS, whereas I would not make this offer to someone I knew to be Goldman Sachs because they would gouge my eyeballs out. I express no opinion as to whether you make or lose money on this position; I’m ambivalent as to whether you’re selling these shares because you’re unwisely timing the markets, because your daughter needs braces, or because you spent three hours reading their 10-K; none of these constitute edge and none of them mean I am unlikely to successfully make markets on many hundreds of thousands of similarly situated trades with an average hold time denominated in milliseconds.”)
Dangerous. What happens when your incredibly clever internal algorithm decides a customer is liable to lose money and you pocket their cash, and the trade goes a huge amount the other way? The customer demands their 1000% profits, and sues you when you can't pay up.
Also, if you really had this super always correct algorithm, just use it to place short trades or options trades based on what it predicts across the market and sit back and rake in the cash.
Let's say their policy is something like, "You trade for real under favorable commissions and margins. If we decide via internal algorithms that you are liable to lose money, we will instead pocket your trade and credit you 10% of the money you would have lost back. If you win, you win in full as normal."
Would this be immoral? Illegal?