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Aren't there opportunities for arbitrage given the zero transactional costs on Robinhood? I haven't thought it through that much, but it feels like a lot of so

Aren't there opportunities for arbitrage given the zero transactional costs on Robinhood? I haven't thought it through that much, but it feels like a lot of sound trading strategies (which were previously impractical due to high transactional costs) can be made to work on Robinhood. *Maybe arbitrage is the wrong term, but zero cost of trading would mean more efficient trading strategies. No?

rl3 10y ago
That's my line of thinking as well. Not arbitrage, but perhaps trading at a frequency not profitable on other retail platforms (and obviously a couple orders of magnitude slower than HFT). Some things you could perhaps do on Robinhood that aren't feasible with other retail brokers include: a) Tiny, tiny position sizes, even on small accounts. 1% position sizing? What about 0.1%? b) Not incurring a transaction fee if your system decides to immediately exit a position after entering it due to adverse movement in the time it took to fill the order. Potential concerns might be: 1. Order execution speed. Sending orders to retail brokers via the internet can only be so fast, but it'd be interesting to benchmark Robinhood vs IB for example. 2. Order execution capability. There's no public API, just Quantopian integration. My other post in this thread touches on that. 3. Order execution quality. RH sells order flow. How much this matters is probably beyond my knowledge. I'm inclined to think that it wouldn't matter too much, and is more likely to adversely affect competing HFT firms who are in competition against the order flow buyer(s) than it would people trading at even the upper bounds of retail frequencies. 4. How many trades is too many? Will Robinhood shut you off at some point? Another post suggested RH is paid a fixed amount per share in their order flow dealings, so if that's the case then maybe Robinhood wouldn't care. Certainly as soon as they have a public API there's going to be people making a lot of trades, barring any artificial limitations. Of course, if your margin account balance is below $25,000 you'll be subject to pattern day trading restrictions and unable to execute such a system since Robinhood is purely stocks. I loathe PDT rules to the core of my being and believe they actually increase risk for short-term traders, but that's a rant best saved for another time.
- vostok 10y ago
  > Order execution quality. RH sells order flow. How much this matters is probably beyond my knowledge. I'm inclined to think that it wouldn't matter too much, and is more likely to adversely affect competing HFT firms who are in competition against the order flow buyer(s) than it would people trading at even the upper bounds of retail frequencies. This problem is that if all of the uninformed flow is internalized then I have to quote wider on the lit exchanges because all of my fills are going to come from informed traders. This is bad for the market as a whole.
jcfrei 10y ago
Since they route your orders for you I'm guessing you don't get very good prices - ie. you get a larger spread than other market participants.
- vostok 10y ago
  You can't get filled at a worse price than the lit exchanges are showing. I have no affiliation with Robinhood and think that they're bad for the markets, but what you listed is FUD.
  - jcfrei 10y ago
    > You can't get filled at a worse price than the lit exchanges are showing. Can you be more specific? I believe you are talking about a market order. Unless you have full access to all order books you can't really know whether you were filled at the best price of all lit exchanges. AFAIK brokers have a duty for best execution - still I'm pretty sure that you get poorer execution on Robinhood than on other brokers: They route your orders to just 4 firms. Though the "loss" might be insignificant for the average retail investor trading very liquid instruments. Adding further to my point: If you compare price improvements between Schwab (http://www.schwab.com/public/schwab/nn/legal_compliance/important_notices/retail_execution_quality.html http://www.schwab.com/public/schwab/nn/legal_compliance/impo...) and KCG (https://www.kcg.com/access-performance/execution-quality https://www.kcg.com/access-performance/execution-quality) (one of the 4 firms) you can see Schwab achieves better execution for SP500 firms. Two Sigma and Citadel are both worse as well. You get what you pay for.
    - vostok 10y ago
      > Can you be more specific? I believe you are talking about a market order. No, I am not talking about both limit orders and market orders. I am talking about nearly all orders that a retail trader would use. As an institutional trader, you would sometimes use orders that will be filled at worse prices than the lit market. Retail traders do not typically have a need for those orders. > Unless you have full access to all order books you can't really know whether you were filled at the best price of all lit exchanges. This is true, but the person filling your order does have a responsibility to ensure that your order is filled at the lit exchange price or better. If you find contrary evidence,the regulators would possibly be willing to pay you a lot of money for it. > Though the "loss" might be insignificant for the average retail investor trading very liquid instruments. Compared to trading on a lit exchange, you should not be experiencing a loss and you are possibly experiencing a small gain. You might be experiencing a small loss compared to trading through a broker that sends your orders to HFT firms, but does not accept payment for order flow. I would be interested in seeing data on that, but I would very surprised if that were true. According to your Schwab link, if there is no fill improvement on Robinhood then you are better off using Robinhood for orders under 500 shares because commissions are $4.95 and the fill improvement is less than that. Is that your interpretation as well? Do you have a link showing that Robinhood customers do not get any fill improvement? I don't think the KCG link is relevant as they do not have retail customers. This means that KCG's customers are going to be more informed than Schwab's customers so you can't afford to give them as much fill improvement.
jdjebc82747 10y ago
Can we just clear this up now? You're just paying wider spreads and they're making money that way. So no, and if you want low execution fees, you're up against the hedge funds that are members of the exchange. Talk about low fees per trade

rl3 10y ago

That's my line of thinking as well. Not arbitrage, but perhaps trading at a frequency not profitable on other retail platforms (and obviously a couple orders of magnitude slower than HFT). Some things you could perhaps do on Robinhood that aren't feasible with other retail brokers include: a) Tiny, tiny position sizes, even on small accounts. 1% position sizing? What about 0.1%? b) Not incurring a transaction fee if your system decides to immediately exit a position after entering it due to adverse movement in the time it took to fill the order. Potential concerns might be: 1. Order execution speed. Sending orders to retail brokers via the internet can only be so fast, but it'd be interesting to benchmark Robinhood vs IB for example. 2. Order execution capability. There's no public API, just Quantopian integration. My other post in this thread touches on that. 3. Order execution quality. RH sells order flow. How much this matters is probably beyond my knowledge. I'm inclined to think that it wouldn't matter too much, and is more likely to adversely affect competing HFT firms who are in competition against the order flow buyer(s) than it would people trading at even the upper bounds of retail frequencies. 4. How many trades is too many? Will Robinhood shut you off at some point? Another post suggested RH is paid a fixed amount per share in their order flow dealings, so if that's the case then maybe Robinhood wouldn't care. Certainly as soon as they have a public API there's going to be people making a lot of trades, barring any artificial limitations. Of course, if your margin account balance is below $25,000 you'll be subject to pattern day trading restrictions and unable to execute such a system since Robinhood is purely stocks. I loathe PDT rules to the core of my being and believe they actually increase risk for short-term traders, but that's a rant best saved for another time.

vostok 10y ago
> Order execution quality. RH sells order flow. How much this matters is probably beyond my knowledge. I'm inclined to think that it wouldn't matter too much, and is more likely to adversely affect competing HFT firms who are in competition against the order flow buyer(s) than it would people trading at even the upper bounds of retail frequencies. This problem is that if all of the uninformed flow is internalized then I have to quote wider on the lit exchanges because all of my fills are going to come from informed traders. This is bad for the market as a whole.

jcfrei 10y ago

Since they route your orders for you I'm guessing you don't get very good prices - ie. you get a larger spread than other market participants.

vostok 10y ago
You can't get filled at a worse price than the lit exchanges are showing. I have no affiliation with Robinhood and think that they're bad for the markets, but what you listed is FUD.
- jcfrei 10y ago
  > You can't get filled at a worse price than the lit exchanges are showing. Can you be more specific? I believe you are talking about a market order. Unless you have full access to all order books you can't really know whether you were filled at the best price of all lit exchanges. AFAIK brokers have a duty for best execution - still I'm pretty sure that you get poorer execution on Robinhood than on other brokers: They route your orders to just 4 firms. Though the "loss" might be insignificant for the average retail investor trading very liquid instruments. Adding further to my point: If you compare price improvements between Schwab (http://www.schwab.com/public/schwab/nn/legal_compliance/important_notices/retail_execution_quality.html http://www.schwab.com/public/schwab/nn/legal_compliance/impo...) and KCG (https://www.kcg.com/access-performance/execution-quality https://www.kcg.com/access-performance/execution-quality) (one of the 4 firms) you can see Schwab achieves better execution for SP500 firms. Two Sigma and Citadel are both worse as well. You get what you pay for.
  - vostok 10y ago
    > Can you be more specific? I believe you are talking about a market order. No, I am not talking about both limit orders and market orders. I am talking about nearly all orders that a retail trader would use. As an institutional trader, you would sometimes use orders that will be filled at worse prices than the lit market. Retail traders do not typically have a need for those orders. > Unless you have full access to all order books you can't really know whether you were filled at the best price of all lit exchanges. This is true, but the person filling your order does have a responsibility to ensure that your order is filled at the lit exchange price or better. If you find contrary evidence,the regulators would possibly be willing to pay you a lot of money for it. > Though the "loss" might be insignificant for the average retail investor trading very liquid instruments. Compared to trading on a lit exchange, you should not be experiencing a loss and you are possibly experiencing a small gain. You might be experiencing a small loss compared to trading through a broker that sends your orders to HFT firms, but does not accept payment for order flow. I would be interested in seeing data on that, but I would very surprised if that were true. According to your Schwab link, if there is no fill improvement on Robinhood then you are better off using Robinhood for orders under 500 shares because commissions are $4.95 and the fill improvement is less than that. Is that your interpretation as well? Do you have a link showing that Robinhood customers do not get any fill improvement? I don't think the KCG link is relevant as they do not have retail customers. This means that KCG's customers are going to be more informed than Schwab's customers so you can't afford to give them as much fill improvement.

jdjebc82747 10y ago

Can we just clear this up now? You're just paying wider spreads and they're making money that way. So no, and if you want low execution fees, you're up against the hedge funds that are members of the exchange. Talk about low fees per trade