Agency Problem

finance a la shmoop. what does a stockbroker do? I've been working on the

railroad. yep that's what they do. they broker stocks to customers and while

generally speaking. they take a commission for the privilege of selling

shares of whatever dot-com to their customers or clients. think about stock

brokers like you'd think about home Realtors only stockbrokers are selling [lady celebrates in front of a house's sold sign]

47 homes a day for five grand each give or take a lot. in the 1970s Commission's

paid on stock and bond trades were massive. back then there were essentially

no connected consumer computers so processing an order was relatively

expensive and there wasn't a whole lot of competition and it took a lot of

infrastructure to make a trade. and there were relatively few players in the

entire industry back then like only three or four big competitors who all

decided to charge about the same very high commission rates .well the small

number of competitors made for a much less efficient market which meant that

the consumer paid a whole lot more per transaction and more meant Commission's

of 3 4 even 5% like buying a hundred shares of a $20 a share stock for 2

grand carried a commission of something like a hundred bucks. a broker making 50 [equation]

of these trades a day did extremely well but oh how times have changed. today a

typical trade might carry a commission of 0.1 percent that same 2 grand trade

today well would pay a commission of something closer to 2 bucks.

yep you heard that right 98 percent less. so the bottom line is that there are way

fewer stockbrokers in existence today and the ones who have survived have to

sell a whole lot more shares or do more volume business for their customers or

if they end up looking like this guy. so what's the daily routine ? well most

brokers specialize in a given area of client institutional brokers

pretentiously called sales traders. well they sell stocks to large mutual funds

hedge funds and other major volume players the order blocks a million units

at a time and they can trade billions and billions of dollars of stocks

through one hot broker. well the demands on that brokers day are

severe and high pressured. the institutional sales trader is expected [woman frowns behind a desk]

to be up and in the office by 5:00 a.m. New York time.

the reports from Europe and Asia leaving myriad voicemails for her customers so

that nervous Nelly by side investors will be encouraged to place their trades

early and often with that broker. at the other end of the spectrum are brokers

for retail customers who sell just a few hundred or thousand shares at a time to

a small group of people who lovingly rely on the broker for actual advice and

are dramatically less sensitive to Commission prices should they be a few

cents a share higher or lower. that broker is a trusted party who's relied

upon to give advice so that Ethel and Ernie Brillstein can retire in the [man frowns, as lady is excited]

lakeside home of their dreams. so what's the money like well on the institutional

side it's extremely volatile. in a good year a good sales trader managing a desk

of a dozen other sales traders can and does make millions and millions of

dollars a year. and this is great because the average tenure of that sales broker

is short .they die either in a bear market or in the form of a coronary

deliver that courtesy of the tightly pressure-packed difficult nature of you

know kind of fighting that war. well life of a retail broker is kinder

gentler and poorer. a good retail broker lasts much longer time usually and ends

up being on the get rich slow plan. such that year after year they're able to

invest some meaningful amount of money in the stock market on their own

watching their wealth grow at turtle pace but with thick hard shells of [investment returns sheet listed]

covering their behind. the qualifications being a stock broker well ?just be good

with people more than anything else. the deep financial knowledge that used to be

necessary for the job has all but evaporated and the job of the sales

trader retail broker is that of regurgitating dialogue written by sell

side analysts and then synthesize by dozens of lawyers before being allowed

out of the bullpen. progress or ladder climbing happens by winning new clients

obtaining new business and increasing the dollar volumes traded through the

front desk. so yeah stock brokers broker stocks .okay that's the to long didn't

listen version. [man frowns]