[dav1app]

They have a reason to make that article: there is a lot of companies fooling the Brazilian people over this.

I'm a Brazilian software developer for the financial market. I also made some financial courses on the same university that the authors.

Brazilian stock exchange market has exploded in the last years and most of my friends decided to 'work' as traders. None of them with prior knowledge or experience in the market. All of the posts on Instagram every time they earn some money.

The cause for this fever was the marketing around 3 or 4 companies who sell the dream of financial independence through high-risk financial market lessons. Normally they offered courses to famous people for free and use their image to convince the rest of us.

One interesting thing: they normally sell the course with a private platform to trade the stocks included. I believe that they use that platform to collect data and operate against the traders that use that platform. They know the strategy that they are going to use (because they teach them), so it is easy to operate against.

[amluto]

> One interesting thing: they normally sell the course with a private platform to trade the stocks included. I believe that they use that platform to collect data and operate against the traders that use that platform. They know the strategy that they are going to use (because they teach them), so it is easy to operate against.

You’re assuming a complex strategy is needed when a simple one can easily suffice: simply pretend that you executed the trades, give the clients their profits, and keep the losses. In other words, the broker can take the opposite side of every deal and keep the spread and commissions. If, indeed, the client is trading based on no information whatsoever, then the broker wins and the client loses.

To improve this, the broker can throw out the best performing clients, since they might genuinely know what they’re doing.

I’m not suggesting that this is what any particular broker does, but it’s a strategy that works very well, at least in principle.

[alexhutcheson]

A business using this approach is called a Bucket Shop - it's both fairly well-known and explicitly illegal in most places: https://en.wikipedia.org/wiki/Bucket_shop_(stock_market)

[tim333]

It's also very similar to 'spread betting', explicitly legal in the UK and a large industry.

[ummonk]

I have a hard time telling the difference between the “bucket shop” described in the lede there and a modern options trading market.

I guess the difference is that in a market third parties eat the spread by market making whereas in a bucket shop the market itself profits off the spread?

[superfrank]

I'm not sure if it's the only difference, but according to the wikipedia definition, in a bucket shop there is "no transfer or delivery of the stock or commodities nominally dealt in", which would be one difference from the option market.

[gbronner]

The bucket shops described in https://en.wikipedia.org/wiki/Reminiscences_of_a_Stock_Opera... operated by offering incredible leverage and using actual ticker tape quotes, which, at the time, were delayed slightly.

They offered the 'service' of being able to trade large nominal amounts at the last market price, without market impact, but had incredible levels of margin -- 50-1+ or something like that.

This meant that customers often hit margin limits, incurring additional 'commissions' to close out their positions.

Operationally, the bucket shop netted long and short positions, and either actually traded the residual or, occasionally, would use market orders (e.g. aggressive sells) to push the punters into margin calls, which they would then execute. They would then buy low and cover their earlier positions.

Jesse Livermore managed to beat them through astute technical analysis and through the installation of a direct telegraph line from the exchange, thus beating his 'brokers', who promptly kicked him out.

[ummonk]

I don’t think most commodities traders actually transfer or take delivery of the commodities though. Sure there are some firms that actually are engaged in the commodities business, and use the futures markets to offset price risk, but most traders in the commodities markets are basically just betting on commodities prices.

[tialaramex]

The nominal dealing on a future's market will be on some paper that entitles the holder to the commodity delivery at a future date. When you buy oil futures, you are NOT buying oil since the oil doesn't exist (well I guess it exists underground somewhere, maybe), you are buying a contract to deliver crude oil and that needs to really exist. If the contracts don't exist that's a Bucket Shop.

It matters when things go badly wrong, because with a Bucket Shop you're left penniless, it was all imaginary anyway. Whereas with a futures market even if the exchange blows up those are real contracts you can sell to somebody who wants the commodity you were trading in, at worst a mild inconvenience and a small haircut to your final profit.

[debatem1]

Interesting, thanks for the link. I wish there were some comprehensive list or taxonomy on these kinds of scams.

[Fr0styMatt88]

There was a really interesting talk I saw a few years back that dealt with this sort of thing. Very much worth watching:

https://www.youtube.com/watch?v=L7G0OfJUON8

[jdurham]

When I worked in Forex (~1999-2003) this was common practice, at least where I worked. Bring in customers, teach them the bare minimum, and let them trade with 100:1 (and sometimes 200:1 leverage). Even better, because 99% of customers lose, we would "assume the risk" of most trades, accepting their trades but not offloading them to larger banks (ABN, Deutsche, etc), so their loss was all profit. If someone demonstrated they were a decent trader (very, very rare), we would set a special bit on their account and, from then on, offload their trades to major banks at better spreads than we offered to the customer, making 5-10 pips per transaction. Most of the "decent" traders traded in huge lots (10-100 millions), so making 5-10 pips per transaction was substantial. Long story short, you make money on the crappy traders and on the good traders, and the good traders were even better because they would keep coming back.

[phillc73]

> To improve this, the broker can throw out the best performing clients, since they might genuinely know what they’re doing.

In a parallel space this is happening in the UK with bookmakers. Winning punters either have their accounts heavily restricted, i.e. only able to place small value bets, or their accounts closed entirely.

Certain states in Australia had to introduce legislation to guarantee a bet size the bookmakers must stand. From memory it was $500 on country race meetings and $1000 on metropolitan meetings.

[spir]

  To improve this, the broker can throw out the best
  performing clients, since they might genuinely
  know what they’re doing.

This practice is pervasive in sports betting. It's a common practice to ban winners, especially in the US and UK.

https://augur.net is an Ethereum-based betting market that will help traders/bettors avoid these kinds of malicious practices. Augur v2 is being developed now, you can expect it to be Really Cool by about April 2020. Millions of dollars will be wagered on Augur for the 2020 election.

[Drdrdrq]

Betting could very well be the killer feature for Ethereum.

[ackbar03]

So far betting seems to be the ONLY feature for all things blockchain. In China quite a few of my friends went to make games on the blockchain during the wave of cryptocurrency mania. That didn't work out so they then went on to make (illegal) gambling games on the blockchain, although that didn't really workout quite as well either (apparently something to do with generating random numbers on the blockchain)

[thefringthing]

I worked on a Bitcoin sports betting site. Been there, done that.

[lallysingh]

You don't have to throw out the clients that perform well! You charge them fees and send their orders to market.

Maybe front-run them a bit if you're into that.

[voldacar]

>If, indeed, the client is trading based on no information whatsoever, then the broker wins and the client loses.

If this were the case, wouldnt both sides just make 0$ on average over a long period of time? (or whatever the avg growth of the market was during this period)

I guess the broker would earn fees, but that still doesn't exactly sound lucrative

[amluto]

For the kind of trader that clicks on a computer all day, fees and spreads (which are not always easy to tell apart) can easily dominate price movement.

[chrisweekly]

I urge people who care at all about how stock exchanges actually work -- it's substantially worse than what you describe -- to read 'Flash Boys: A Wall Street Revolt' by Michael Lewis.

[C4K3]

https://www.sec.gov/news/press-release/2018-178

[bencollier49]

Presumably this strategy would land the operators in jail if enough of their traders successfully predicted a large enough market move.

[Carpetsmoker]

The best way to get rich in a gold rush is to sell shovels.

Every time someone comes up with a "get rich with this training/tool/etc." it's very unlikely to make you rich, because if it would work that great then why isn't the seller of the training/tool using it to get rich, instead of selling whatever they're selling?

[ummonk]

Well, I’ve seen a few people blogging about how they make money by blogging about how to make money.

[WalterBright]

There's a classic one where one places a classified ad that says: "How to make money at home! Send XXX $10 for information."

Send them $10, and you get a letter that says: "Place a classified ad that says: How to make money at home! Send XXX $10 for information."

[jiscariot]

This was probably 30 years ago--make $100's "Stuffing envelopes."

[outworlder]

Exactly. This goes double for when we are talking about investments.

If the proposed strategy really really works, then you would get investors and offer them a share of the pie. "Teaching" them accomplishes nothing and reduces your profits.

[imtringued]

Bitcoin ASIC manufacturers are known to mine Bitcoin before selling their machines.

[brentis]

Thats what i did.

[ChuckMcM]

Welcome to 1999 :-) Or China 2010 or so. It almost feels like there are people who look at these events, figure out who made the money, and then work to recreate them in a new environment where they can be in the position to make all the money.

My experience from the dot com day trading frenzy was that there were three kinds of investors;

Those that had no clue and just followed a bunch of investment "tip" sources and did what ever was the investment of the day (these people were essentially gamblers, and like gamblers were up one day and down the next, only to eventually bottom out).

Then there were the folks who had read up on how the markets worked, maybe taken a finance class or two, and read a bunch of Morningstar reports on various funds and their strategies and tried to create some sort of meta strategy that was a mix of the funds they found impressive. These people had good days and bad days and over the course of a couple of years basically matched the S&P500 or other widely diversified stock indexes in gains. What I learned from them is that if the market in general is up 9% and you're up 10% you are only doing slightly better than the market, even though you feel like "hey I'm getting 10% a year, I'll double my money in 7 years!"

Then there were the very serious folks, these folks read annual reports and 10-Q statements and prospectuses. They kept a databases of people who were executives, board members, and advisors of different companies. They consumed four or five different regional news streams (usually London, Tokyo, New York, Chicago, and Washington) They kept indexes and stock price histories in their own databases and mapped current events to stock motion. They broadly characterized every stock they watched closely by who managed the entity, what markets it was most effected by, and least effected by, and what government policies could help or hurt it. I'm sure if they could afford a Bloomberg Terminal subscription they had one of those too. They did well for themselves but they invested 80 hours a week into doing well.

Not surprisingly there are lots of people in the first group, fewer in the second, and fewer still in the hard core group. I personally see myself in the second group, and over the years my own portfolio has done slightly better than the market.

A unique strategy one person I knew took during the dot com bubble was to convert gains into "things" on a regular basis. At one time he had about a dozen different Porsche sports cars, two houses, and some acreage in the Livermore valley that he rented out as a vineyard. He did pretty well selling that stuff to recover losses from the crash.

[WalterBright]

Haha, I invested in the "shovel" companies that were making real profits (such as Cisco). They got caught in the secondary die-off, when the dot-bust companies stopped buying shovels.

[ummonk]

Yeah, I’m in the second group. I use a diversity of buy and hold strategies (picking individual stocks based on fundamentals or personal brand experience, buying certain sector ETFs, etc). The efficient market hypothesis index ETF promoters think I can’t beat the market, but if they’re right it doesn’t matter, since I make sure to keep my transaction costs low and only use low expense ratio ETFs, and I have a diversified portfolio so I’ll just end up matching the market on average.

[ocschwar]

So, let's see: we have a surge of stock market speculation driven by day traders seeking to get rich quick, in a country with a growing influence from Protestant Evangelicals preaching the prosperity gospel.

Brazillians, you can ask any American about this. We've been there. It does not end well.

[djsumdog]

It's no reason to discount this study of course. It just means it should try to be reproduced by following large samples of day traders in American, European and/or Japanese markets. My hypothesis is that you'd get pretty similar results. Day trading always seemed like gambling to me. It's just fancy Vegas.

[opportune]

What you believe the platforms are doing seems similar, if not the same, to “front running”, which is not allowed in the US

[hellodetroit]

Hey. Brazilian here too. How can I get in touch?