Added by on 2009-10-31

This morning I decided to begin creation of a scripted documentary on the house edge in the capital markets. It just appears that investment banking types and the support persons, as well as the hedge fund managers are creating inordinate amounts of wealth for themselves at the expense of investors. I have coined terms like “croupier  economics,” defined as a system that moves money from many to few by method, and “slices of ham” economics, where middlemen take cuts at each action and the investor is left with a ham stump.

At a casino, the house edge is probably blended around 4-6%. It’s low on pass line bets in craps and in Baccarat, low in slots usually (for casinos that get player time) and higher in the stranger, more exotic games. In horse racing, it’s usually pretty high, as much as 20% which is retained from the betting pool to run a racetrack and provide incentive for owners to lose money in the thoroughbred business.  In sports betting it’s usually 10%, with the vigorish (the Russian word for winning I am told by Wikipedia), which is the retained difference between the inbound and outbound money in a balanced book.

I’m curious as to what the vigorish is in financial markets. Is it half a percent or 10%? As I examine the major investment banks, I’m taken with the fact that they earn most of the predictable money that pays their fixed costs from trading. It seems that the trading spreads are small when I look at quote screens. I’m just wondering how they do it. More to follow and Happy Halloween.

Be mindful, be careful, and good luck!

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