For example, 1. No one forces customers to deposit money in banks, they do it because a valuable service is provided (ATM's, direct deposit). How will using a check cashing place (thereby disrupting wall st) help me?

Or 4. If you don't want your money "skimmed" by high frequency folks (disclaimer: I'm one of them) and don't want to pay commissions, use ALO orders [1]. This has the problem that your order might never be filled. If I want to own 100 shares of Tesla now (and I believe it is worth $1.00, assuming a bid/ask of $0.01), how does harming wall st help me?

Or 8. The author seems unaware that mutual funds are already being disrupted...by the ETF's (issued by Wall St) he suggests we buy. Maybe we should stick are money under a mattress?

To borrow a phrase from other discussions, "the goal isn't to kill facebook, it's to help our customers." This applies here - focus on the consumer, not on the competitor.

[1] http://www.nasdaqtrader.com/content/ProductsServices/Trading... http://www.nyse.com/equities/nysearcaequities/1157018931913....

A couple of the markets Dixon identified are not competitive, namely credit cards and mutual fund management [1].

But quite a few are highly competitive and don't have high profit margins: retail banks, market making (HFT) and research, for example.

Prop trading is also highly competitive, but profits are high because the risk is high as well. Dixon explicitly advises individuals not to compete with the big players because they will probably lose. It's hard even for big players - remember AIG, Lehman and Bear? Thousands of hedge funds went under, so many that the big banks had to lay off most of their prime brokerage divisions.

[1] Mutual funds benefit from an agency problem - your employer selects which funds you can put your retirement into. I'd love to buy low cost ETF's, but then I wouldn't get the tax advantage.

The stock market functioned perfectly well (well, you know what I mean) for 100 years before HFT came about. Now that it's here, does the stock market work better? No, it works worse, if anything. It's just another way for insiders to win by rigging the game.

My problem with Wall St and seemingly Dixon's is that it's all about rigging things to your advantage rather than competing on quality. HFT doesn't create value, it just agglomerates wealth to those with servers in the right colos. Mutual funds and credit cards, as you say, are optimized towards leveraging an immovable market position to extract money from the rest of the economy.

If someone on Wall St is creating value commensurate with their salary, I'm all about that. But it seems like the vast majority are extracting their salary from the rest of the country as an effective tax on investment rather than actually creating wealth.

In the past, you'd pay a market maker 1/8 or 1/4, and even then only in thickly traded securities. In thinly traded securities, your order might just go unfilled. The market makers were humans with a physical seat on the trading floor rather than a server in a colo and you'd pay your broker $100/trade (assuming you could get him on the phone).

Now you pay a $0.01-0.02 spread, maybe $0.10 on thinly traded securities. You pay your broker $0-$10/trade and you can trade from your N1 or iphone. A colo server is also much cheaper than access to the physical trading floor.

HFT provides value: liquidity and immediacy. If you don't believe that is worth $0.02, you can place ALO orders and you won't need to pay for it.

Let's disambiguate 2 developments here : There's the computerization of market-making, which leads to efficiency gains and transparency gains, allowing trades to be fulfilled more cheaply and for more bids/asks to be visible at a given point in time, adding liquidity. None of that really constitutes "high frequency trading" in my mind, more just the inevitabilites of IT.

Then there's stuff like front-running, or micro-arbitrage where the first one to the post wins the money. Are these fulfilling a need that didn't exist before? Or is it just a large amount of money being invested by brokerages in order to extract a larger amount of money from people without servers in the right places? My instinct leans towards the latter. It's not like 1/4-second price inconsistencies were creating some huge problem before. I don't even notice 1/4 second, and the stock market shuts down at 4pm anyways. Prices don't have to be a continuous curve.

If I don't believe HFT provides value, I can go spit up a rope -- it'll still eat away at my margins if I try to invest based on value. God help me if I tried to day trade or swing trade.

As far as "works worse than in the past", I did qualify with "if anything", but to my mind it's become less reflective of the value of companies and more reflective of the current state of various algorithms, which may or may not have anything to do with company value. I see that as a recipe for bubbles and calamities.

Concering micro-arbitrage, if you don't notice 1/4 second price inconsistencies, you also won't notice if computers resolve them in 1ms rather than a fast fingered human resolving them in 1/4 sec. The money is being extracted regardless, the only difference between now and the past is that a geek with a computer beats the fast fingered frat boy. That's bad if you were the human trader, but who else is harmed?

Front running is illegal and has been for a long time. I'm also not sure how you think HFT traders do it - do you think HFT firms have trojans which alert them when your mouse is hovering over the "place order" button at etrade?

I'm really curious how you believe HFT will "eat away at your margins" if you make long term value investments. If you believe apple will go up 20%, do you really care about the $0.01 spread? Even if you care, how can the HFT guys make money off you if you place an ALO order? Could you explain the mechanics?

I won't miss the .01 that much, but if they do it a billion times.. they still didn't create anything. They just extracted money from the system while producing zero value.

EDIT: As far as who's being hurt? All of us. Smart people should be creating value, not playing silly parlor games against each other for money. We're all missing out by making a video game more profitable than creating things.

But I suspect that the transition to HFT over human market makers/daytraders is a net gain even with regards to smart people creating value; isn't it a good thing to have 3 geeks writing programs to replace 100 daytraders? (Based on your previous comment, I assume you agree with me that profitable day/swing trading does create value.) In general, isn't replacing lots of humans by a few smart people + machines a good thing?

As far as robots running the stock market -- I don't know. Frankly, I'm inclined to be awfully conservative about the stock market at present. If you told me we were going backwards 5 years in technology and there'd be way less money made on the stock market, I'd probably be ok with it, for a few reasons.

1) Frankly, I'd rather be conservative on cutting edge approaches to stock pricing for a little bit.

2) To my mind, the stock market doesn't exist to enrich participants, it exists to efficiently distribute capital. Enriching participants is good motivation, but it shouldn't be legalized gambling and game playing. If an unreasonable share of that capital is going to the console cowboys rather than being distributed to companies and investors (not traders), then something's wrong there. I'm not sure if we're at that point but I don't like the trend.

3) As I said upthread, I don't understand the gains for the economy as a whole of smoothing out the price curve in the sub-second range. I really don't. Anybody who's going to spend a lot of money on something takes more than a second to make up their mind, right? They probably had to get it budgeted and everything. So the subsecond trading on, say, commodities seems to me to be at the expense of actual purchasers of commodities. The gains have to come from somewhere, right?

In general, I'd settle for slower, dumber and less profitable day traders if the upshot is less risk to the system, greater portions of investment gains going to grandma and a more deliberately moving stock market. I'd be fine with that state of affairs, despite my general drive towards futurism on anything else.

I'll make it simple for you. There are none.

HFT traders as a whole make no gains from trading in microseconds as opposed to milliseconds or even seconds. If an investor wants to buy 100 shares right now with a spread of $0.02/share, market makers will earn $2.00 over the next few seconds. The only question is which market maker will earn the $2.00, and the answer is whoever is fastest.

Trading fast doesn't increase profits, all it does is redistribute them. Of course, one HFT firm could also outbid the rest, lowering the spread to $0.01/share and allowing the retail investor to pay only $1.00. That's why competition among HFT firms is good.

But you are correct that all the effort put into lowering latency (rather than improving trading strategies) is a deadweight loss to society.

Lots of problems Dixon listed revolve around fees, and my guess is that a lot of people feel ripped off by the financial industry because it makes tons of money while not seeming to provide equal value.

Any disruption that lowers the costs of doing business helps both customers while achieving Dixon's goal of disrupting the establishment. This is true in many industries.

Having worked in both finance and real estate, the parallels between real estate transactions and I-banking deals are shockingly similar, only I-banking deals are much more complex and high stakes. If you think investment bankers will soon be out of work, you should also be betting the real estate broker as a profession will be eradicated the way eTrade destroyed the old school retail stock broker.

Sadly, right now I'd take the other side of the trade for the next 5 years (long Wall Street, short startups trying to disrupt M&A). When amateurs engage in very complex and high stakes deals, such as buying or selling a house priced more than their net worth, they tend to want professional hand holding, among many, many other things.

Don't look now, but these guys are still very much alive[1].You may not use them, but plenty of people are still charging $150 for a stock trade under a theory their advice is of value.

[1] Assuming you're referring to the mid-80s school of brokers, not the standardized commissions school.

And it's not exactly hidden knowledge when which large pension/mutual funds make their adjustments.

By the way, if you're having problems doing financial research, I'd love to hear about them. Ping me. My email is in my sig.

1. Lots of regulations ensure high barriers to entry. 2. Lots of money to ensure regulations stay in place.

Here is Dixon's list and my reasons why it is so hard to disrupt (usually due to the two reasons above):

1. Retail Banks- I'm not very knowledgeable on the specific regulations that banks face, but various rules that have changed throughout time are the areas where banks can operate (part of Glass-Steagel, Gramm-Leach-Bliley repealed it, again not an expert on their specifics), branches vs no branches, capital requirements, etc. Pretty much any of these and the ones I've left out create difficulties for any newcomers. You see some successful online alternatives like ING Direct, and hopefully the future of banking goes in a similar direction.

2. Credit Cards: To address one of Dixon's points, how do you have a payment company that DOESN'T rely on current financial infrastructure to some degree? He lists PayPal as an example, but PayPal is basically a payment processor/credit card alternative. They address the credit card problem but not the banking one, and there's still much room for improvement here (if Square was tied to banks instead of credit cards, they'd be one step closer).

3. Proprietary Trading: Some ideas to improve the system would be lowering accredited investor rules to allow more people to invest as they please and decreased regulations on hedge and mutual fund requirements to allow more competitive behavior between the two. Also added transparency on the availability of financial information and especially the actions of the proprietary trading desks within non-investment firms, so that shareholders of banks know the trading behavior occurring.

4. Trading: Similar to #3 except focused on the broker-dealers and not the investment banks. Most of the same points stand. Generally this industry has improved quite a bit over time, with commissions on trades dropping in 20 years from $100+ down to $7-$0. The latest concern Dixon points out is high-frequency trading. I'm not in favor regulating fair HFT, just the shadier dealings of front-running where they are using knowledge of other individual trades for their own game, essentially pumping up stocks before the public can buy them because they know what the public is buying before they buy it. Generally, as long as any citizen either directly by investing in an HFT firm (which is rarely, if never, allowed due to accredited investor rules) directly or through their hedge/mutual fund, then it's not really that unfair a playing ground.

5. Investment Banking: I am more sympathetic to the plight of the i-banks than most. I spoke once with the owner of a boutique i-bank in Illinois that does M&A and bond issuing on a mid-level scale and he said the regulations here are fewer than those related to trading. This is anecdotal. My gripe here is the same as everyone else. Due to their size, investment banks are have been protected from their losses by the government, when there were other options to cushion the blow while still holding the firms liable for their malinvestments. One of the few, but best ways I've thought of disrupting this industry is to have boutique specialist firms really start competing on price and features. The obvious problem here is that i-banking is often an industry of "it's who you know" as opposed to actual competitiveness. I.E. A company looking to do a bond issuing or M&A will go to the firm where they're comfortable friends of the people on the other side of the negotiation table.

6. Research: Dixon barely points out any problems here. The biggest problem is that similar to lots of consulting firms; they produce garbage for large fees. The simple solution is that well-meaning people and financial firms should only hire research firms that perform well. This industry should probably consolidate because theirs so much shitty finance research and modeling done.

7. Mutual funds: Could start measuring their compensation on performance, rather than fixed fees they receive now. Make the industry more lean. They might be "finance" companies, but they're traders, not investment banks. Being based on performance would mean every year half the industry would go starving while the rest were feasting, so it's unlikely to see that happen much. But if it did, it'd allow the industry to consolidate a bit. Traders/investors at large funds who think they could outperform their companies could start a new firm to get even greater personal gains. To me, that's the price for wanting to be in the trading game. It's like a salesman who works only on commission. You're paid for doing your job well.

What we have in modern finance is a regulatory-protected cartel. I believe some of the ideas I've brought up and problems Dixon pointed out could lead to a healthier financial future for the world.

However, many of these regulations are in place for good reasons, and I understand that. Most people should NOT have to dedicate their lives to handling their finances when it can be outsourced to specialists. That's how we manage most industries. Like in other industries, competition is the check and balance to that freedom. No one firm can dominate forever without continually improving its service if it doesn't want another upstart to come eat its lunch.

In that regard, the financial system we have now is significantly better than it was 100 years ago when people could get conned out of money by characters such as Charles Ponzi or whole towns could become bankrupt because the local bank couldn't diversify risk.

Simply put, we have put faith in financiers and have allowed regulations to protect them when we were trying to protect their customers. Now I believe is the time to bring down some of the walls so they may face competition. This will result in a healthier financial landscape.

It is my hope that as we move forward through the economic challenges facing out country, the financial industry is allowed to innovate, whether in a regulated fashion or not, in order to return to being a "financial services" industry.

Financial firms should exist to support industries and people, not abuse them.

I agree that there is no getting around the banking system completely (unless you rely in cash somehow), but theoretically you could enable another way to move money from one bank account to another without charging 20%+ interest rates and exorbitant late fees, no?

Like a debit card, a wire transfer or a check? Or like setting up online bill pay to pay off your credit card in full every month?

I imagine a startup (would it have to be a bank? I'm not sure) could build something where the transfer is semi-instantaneous and disperse the risk among it's other customers somehow in a more equitable manner (perhaps charging a fee?). It might, of course, be difficult to compete against the credit card, which seems free to most consumers (but is subsidized by the merchants and those borrowers who don't pay in full)

To disrupt Wall Street you would have to get legislation passed and regulators on board. The time scale for change is a different order of magnitude than most startups can handle.

These people generally come from or are connected to the industry and will fear change. Also, what type of disruption would actually benefit society? Not saying nothing is needed. It's just that the arguments would have to be strong to even get an audience in Congress, and they think they just fixed everything.

Why keep money in a mattress when the FDIC and its insurance is backed by the full faith of the USGovt? If you buy a share of stock well, that is different.

When you buy a share of stock, what does that mean? How is the value derived (of the share)? How does the system that tells you that value work? Most people can't answer these questions and yet invest money anyways.

The banking/financial system provides plenty of valuable services. That it also participates in value-destroying activities is always partially the fault of the consumers who want these activities to exist in the first place.

I think "only" is dismissive of the whole point, which is that they have been intertwined from a regulatory standpoint, arguably undermining the regulation of each.

Why keep money in a mattress when the FDIC and its insurance is backed by the full faith of the USGovt?

The mattress alternative is a patent strawman, but FDIC insurance hardly protects against all the damage a bank failure causes its depositors. What's the average amount of time between a bank failing to pay its depositors and the FDIC paying a claim?

I want to open a new business bank account for a new venture and that will be with them.