Why is the chain of trading so long? Why can't individuals trade with investment banks?
Hi all,
This is the chain of events (as I understand it, please correct me if I'm wrong) that takes place if I were to place a trade through a retail trading account.
I place an buy 1 share at market price order for stock A on a online brokerage account. I am now long 1 share in stock A.
My broker receives this order and sells me 1 share at market price of stock A. My broker is now short 1 share in stock A. My broker does one of three things. Either she matches me with someone who is selling her 1 share in stock A (to neutralise her position) or she goes to another broker and buys 1 share in stock A to neutralise her position, or she buys a share in stock A from an investment bank.
In the case that she buys a share in stock A from an investment bank, the investment bank then books this trade directly with the stock exchange.
I am most interested in the final option she has. Brokers such as TradeKing or E-Trade have the option of calling investment banks and purchasing shares from them. This is an option that retail traders do not have, for example, I cannot call Morgan Stanley and ask a trader to sell me 1 share in stock A.
So, why can I not do this? Why do investment banks not allow me to place trades directly with them? This would kill the brokers and lower commissions for traders.
Just wondering, that's all.
Thank you!
What follows is only one reason why middle men exist. Think about how many retail investors there are and then about how many people at investment banks there are taking orders. Do the numbers seem grossly asymmetric? They should. Middlemen pool orders from retail customers and purchase larger lots of securities. This vastly cuts down on processing time for investment banks and ensures that their highly paid staff are not inundated with calls for single shares and other nonsense. So to recap, middlemen reduce investment banks' staffing costs and opportunity costs associated with handling small orders.
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