I do not believe everything I read in the magazine, of course. But I had been asking myself for a long time what exactly were these puzzling and shadowy stock market transactions in which banks were risking billions of dollars and making tons of money in highly unregulated ways.
This article from the magazine has clarified many questions. I think it should be required reading as an introduction to our 21st century's economy.
You and I have always understood that a bank receives our money as a deposit with the purpose of keeping it safe in the first place, then lend it with a maximum care to businesses or individuals engaging in business, or even granting mortgage loans to solvent persons so that they can purchase a home.
Things have changed. Banks are not at all interested in lending to John Smith or Mary Jones the money they need to open their shop or expand their restaurant. They are not even interested in giving a loan to a small or medium sized corporation.
Banks now have changed their trade to:
1) Credit Cards.
2) Asset Management.
3) High level transactions such as corporate buyouts.
4) Selling "forced insurance" at ten times its costs to people whose mortgages they are holding, under any convoluted excuse.
5) Nickel-and-diming their customers (but the total profits are staggering), with all kinds of abusive charges and fees.
6) Taking people's money in deposit and paying hardly any interest to the depositor, thanks to our Federal Reserve's policy of the last few years, while they lend it (see item #1) at interest rates that can reach an effective annual 30% in many cases.
7) And of course, from time to time, get involved in massive mortgage business....(oops!) but this could be the subject of another article.
.... and a few more, I guess.
But you guys, children of the internet, super-computers savvy, intelligent phones users, algorithms apprentices, will surely want to know about some incredible facts that have sunk our country in the deepest recession in many years, and are still threatening our way of life with no relief in sight.
For example, when you hear "STOCK MARKET" you understand that it is a mechanism used by the common person to purchase shares of corporations with his or her savings, invest carefully and get a decent return in profits (dividends) of a successful enterprise, and even make some profit by selling these shares at a higher price later in the future, due to their appreciation.
You will learn how things are done nowadays, you ignorant.
Sorry, it's a bit too long, but still worth a few minutes of your busy time.
Here is the article I am talking about:
- Circuit breaker: A mechanism to shut down trading when the market falls too fast or individual securities trade dramatically outside the normal range.
- Dark pools: Broker-run markets outside the public stock exchanges that allow investors to trade large batches of stocks anonymously.
- Holding period: The time an investor owns a security.
- Latency: How long it takes to execute a financial transaction over a network connection. This winter, two tech companies hope to launch the lowest-latency link yet between Illinois and New Jersey, a 733-mile chain of microwave towers to hurtle data in 8.5 milliseconds round-trip.
- Liquidity: A liquid asset can be easily bought or sold without changing in value—cash, for example, is more liquid than stocks.
- Proprietary trading: When financial institutions trade for the benefit of their companies, rather than for their customers. The Dodd-Frank financial reforms put some restrictions on proprietary trading at big banks, but loopholes abound.
- Quote stuffing: Placing and quickly rescinding a large number of buy or sell orders to confuse or slow down rival traders.
- Spread: In trading, commonly the difference between the highest price a buyer will pay and the lowest price a seller will take.