Welcome to Money for the Rest of Us. This is a personal financial show on money, how it works, how to invest it, and how to live without worrying about it.

I'm your host, David Stein, today's episode 381. It's titled, Investing in Business Development Companies and other niche investments that trade on stock exchanges.

Back when I was an institutional investment advisor, we would conduct due diligence on stock managers, bond managers, hedge funds.

And these would often involve visiting on-site to these asset management firms.

We would meet the people, we would take a tour of the office, look at desks, some messier than others.

We would also visit the trading floor.

One of the things I noticed over the years as I made these on-site visits is the trading floor kept getting more and more cables, more electronics.

Because previously, a trader at an asset management firm would call up the trading desk at one of the brokers that they worked with.

But more and more trading has moved away from traditional stock exchanges, where the trade hits the floor of the New York Stock Exchange, the order and their specialist on the floor coordinate the buying and selling of that underlying security.

Now, 40% of trades occur off exchange.

Many of them using alternative trading systems that aren't connected to a stock market at all.

These trading systems match buyers and sellers electronically, some even use artificial intelligence.

Many trades occur within the broker itself.

Whereas if a broker firm has a buyer and seller among its own clients, it might actually match those trades.

It's called the internalization of order flow.

Many big institutional investors, they don't want others to know about their trades, particularly if they're trading large blocks of stocks.

Because others could confront run those trades.

In fact, the SEC, the US Securities and Exchange Commission and the Justice Department are investigating whether some investment banks, such as Morgan Stanley and Goldman Sachs, have been letting some of their top hedge fund clients know about block trades.

Some of these big investors, if they have a large block of stock, they might go to this investment bank who will purchase the shares and then will try to resell them to other investors.

Ultimately, institutional investors don't want others to know about their trades because it could impact the price. There could be a market impact.

So there is an element of secrecy to trading and so much of trading insecurities has moved off exchange.

And as I said, about 40% of trades now are off exchange.

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