Hard Dollars
Categories: Econ, International
Can we make the joke about soft dollars that took Viagra? No? Ok, we won’t. Or maybe we just did. Oh, well. Whatever.
So...there really is such a thing as soft dollars. In fact, they apply to the manner in which stock brokerages are paid on Wall Street. On any given trade, there are somewhere between 3 and 20 different sellers at a price. Like...a mutual fund wants to buy a million shares of Disney at $103.34.
And yes, for a stock like Disney, Goldman is selling, Morgan is selling, JP Morgan is selling, and a gazillion other small banks all around the world are selling, all at that same exact price. The mutual fund wants to do the trade in one block of a million shares. So they’re gonna trade with one bank.
Why would they choose any one bank over another? Well, usually the quality of the bank’s research or values-add contribute to who wins that million-share trade with the 3-cent-a-share commission for a nice $30,000 payday.
But what if that Wall Street mutual fund wanted to purchase specialized trading computer terminals from Bloomberg? Well, why wouldn’t Bloomberg begin their own trading operation…with very little incremental capital cost above what they do already for a living...and they themselves offer a million Disney shares at $103.34?
The mutual fund wants to buy $30,000 worth of computer terminals for its traders, and it would prefer to not have to pay cash to buy those. So, in fact, common practice on Wall Street is to use soft dollars, which is kind of another word for “barter,” wherein the Wall Street firm trades the trade of those million shares of Disney in return for the $30,000 worth of computer terminals.
They soft dollar purchased them. Had they paid cash, it would have been called a hard dollar transaction.
And if your dollars are too hard…may we recommend a better moisturizer?