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sbenthall / SHARKFin

Simulating Heterogeneous Agents with Finance
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Broker can charge markup to consumers #188

Open sbenthall opened 1 year ago

sbenthall commented 1 year ago

Currently Brokers suffer a loss due to price impact after buying/selling the risky asset to the consumers.

As per @llorracc's comment, we can have the brokers charge a markup to the consumers, so they get a profit.

In this case, this will be another parameter to sweep.

sbenthall commented 1 year ago

Consider: clearing this broker markup rate with the internalization rate?

Consider: Shocking this rate to see influx of capital

sbenthall commented 1 year ago

Because we have a realistic price process, we have different prices for selling (ask) and buying (bid) the risky asset.

If I hold the asset, I can sell it for the sale (ask) price. So my wealth should be measured according to the asset quantity * the ask price.

If I want to invest in the asset, I need to buy it at the bid price.

That implies a 'broker markup' of another kind, with respect to the consumer's investment decision. (This is on top of the fee charged by the broker.)

sbenthall commented 1 year ago

Recall that one way to think of the PFOF / best execution rule problem is that we consider two different cases.

For this example, assume the retail investor is buying the asset.

In case 1, the broker buys the asset for the retail investor on the lit market for price $p_0$.

In case 2, the broker clears the retail order on an internal market for price $p_1$, while the lit market offers price $p_2$.

According to the FINRA best execution rule and how it's been interpreted by e.g. Citadel Securities, $p_1 < p_2$.

However, it may be that the counterfactual lit market price is better than the internal market price, i.e. $p_0 < p_1$.

In that case, there may be reason for the SEC to introduce a stronger version of the best execution rule.

In our model, it would be great to figure out if we can model the effects of these price changes on consumers and their returns. (And then the real economy consequences of that.)