“There Is No Free Lunch on Wall Street”

“There Is No Free Lunch on Wall Street”

The phrase at the top of this column is popular with investors and traders of the New York Stock Exchange.

He maintains that it is impossible to obtain something without giving anything in return in the world of money and financial services.

As much as many are excited about investments that are offered as unique and unrepeatable opportunities, capital markets are not characterized by charity and what is most abundant are promotions too good to be true.

Let’s go with the examples:

1) No commissions on the sale of shares

“That good! I got a broker that doesn’t charge me commissions! ”

As we will see next, it is wrong who holds this. At the end of last year, we analyzed the case of Robinhood, a successful fintech buying/selling of shares founded in 2013 in Palo Alto, California (USA), by Vladimir Tenev and Baiju Bhatt. The firm today has a market value of between 7,000 and 10,000 million dollars.

One of the reasons for its success is that it offers its customers to operate for free in the US stock market. It is an advertising “hook” that even led TD Ameritrade, the world’s largest online broker, to follow in its footsteps and stop charging charges since this month for the operation of shares, ETFs, and options.

Now, we know that there is no free lunch on Wall Street. So who ends up paying for the dish? The answer is the investor, although he does it indirectly, thanks to a system known in the world of financial trading as payment for order flow (POF, a kind of payment for active order).

The POF works as follows: instead of processing the customer’s purchase or sell order in the traditional market, the broker redirects it to an exchange or market maker (the “market makers” are firms that receive financial compensation for facilitating the operation of a certain asset by increasing the volume of buying and selling tips) to which he pays a penny of dollar for each share traded.

Thus, although the payment that Robinhood receives does not come directly from the customer but from a specific exchange or market maker, the price at which the operation is agreed is usually less competitive than that of other markets that do not operate with POF, whereby the investor ends up buying assets at a higher price or selling them at a lower price than would correspond.

On the other hand, POF has a delay compared to traditional orders. Anyway, it is just a few seconds and can go unnoticed in the eyes of the investor, who also should know that the operation is not as ideal as it is promoted.

At this point, it is worth a fact of color: the forerunner of the POF modality was Bernard Madoff, that former Nasdaq president who orchestrated some of the biggest scams in financial history.

2) 12 installments without interest in Argentina

“I just bought a cell phone in 12 installments without interest! With the inflation there is, I save half as much! ”

Who has not heard this phrase in the mouth of others or even their own? Common sense leads us to think that the promotions of telephone companies and credit card issuing financial institutions came to make our lives easier, but the truth is that neither the former nor the banks pay for lunch in this case. You guessed: the customer pays it.

It is a common practice to charge interest directly to the total price of the product so that the client does not perceive that he is paying an extra for deferring payments in comfortable installments. In truth, this additional one is embedded in the price of the cell phone or any other product that is acquired.

Unmasking this is easy: it is enough to compare the total cost of the product financed with its equivalent when everything is paid in cash and at the moment in other locations. The comparison within the same place does not usually work: the price with cash payment can be identical since the merchant bets to sell in installments and thus make sense of the word “promotion”, preventing some customers from realizing the deception.

As you can see, believing that a third party will assume the inflationary risk in our country has a high dose of ingenuity that can be very expensive.

3) Free calls from WhatsApp

“I don’t call the phone line anymore. Talking on WhatsApp is free! ”

Google, Facebook, Instagram, Twitter, and WhatsApp are similar in terms of their business model: they offer their services (search engine, social network, communication, news) for free and thus earn millions of subscribers around the world.

But, as many know, their true business involves collecting big data (large volumes of data) on the interests, behaviors, and tastes of their users, in order to sell them to millions of companies and entrepreneurs who will pay a lot of money in exchange for targeted advertising to users seen as potential customers. The collection and use of this information are often invasive for people spied on by these companies.

First example: in a WhatsApp talk you tell a friend about how much you want to clear yourself and go on vacation to a good beach. The next day, you open Instagram and between history and history you are bombarded with advertisements for air tickets, hotels and complete packages for tourist cities in Brazil.

What happened? Did anyone hear your conversation? It would be materially impossible for these companies to listen to customer conversations, but it is very likely that through algorithms and software based on Artificial Intelligence, upon hearing the word “beach” in a conversation, a system automatically places you on a list of potential buyers of tour packages and invade you with notices that might interest you.

Second example: this is a bit more sinister but real. An acquaintance learned about the sad news that a family member was diagnosed with tuberculosis and began searching Google for information about the disease, advice on treatment and advice to family members of people who suffer from it. Two days later, watching a video on YouTube, publicity of burials appeared and after another one of a private cemetery in his area. None of these services had been offered before.

It is clear that those tools that Google, Facebook, and companies sell us as free are nothing more than an advance on our privacy.


“When the alms are great even the saint distrusts”

There is no free lunch on Wall Street or virtually any commercial transaction. If you sit at a poker table and do not know who is “knitting”, most likely it is you.

In any service that we hire or receive (unless it is subsidized by the State, an NGO, a charity or solidarity and inclusive venture) there is a cost that can be explicit or hidden, but that is lurking there.

Distrust, analyze and understand the nature of these embedded costs will place us in a better place to compare them with similar products or services offered by other companies or businesses. To the sin of naive and to pretend that they are giving us lunch will be, financially speaking, more expensive than we imagine.

Did you ever suffer this kind of “creative sales”? I would like to see in the comments more examples of these hidden costs to analyze them in future columns. I am reading from you!


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