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> Robinhood also earns money from rebates its gets for directing its order flow to broker dealers, though Bhatt insists “We do not sell data to anyone. We have

> Robinhood also earns money from rebates its gets for directing its order flow to broker dealers, though Bhatt insists “We do not sell data to anyone. We have never sold data to anyone. We just do not do that.” Just so everyone knows, order flow from unsophisticated investors is considered a valuable resource because, when filling it, you know that you're more informed than the person trading against you.

arcanus 10y ago
Great catch, missed that during the article skim. Doesn't this also enable front-running? Regardless, this is useful info for HFT funds, right?
- celim307 10y ago
  They explicitly call out in the article they don't do that
  - tomp 10y ago
    No, they didn't. It was more of a "non-denial". > Robinhood also earns money from rebates its gets for directing its order flow to broker dealers, though Bhatt insists “We do not sell data to anyone. We have never sold data to anyone. We just do not do that.” There have been misconceptions that Robinhood sells high-frequency traders its data to help them trade against the startup’s customers. But Bhatt says “The rules around this stuff as so tight. We’re not a social media company. If we even step slightly out of line with anything we all go to jail.” Basically all they're claiming is that they're following the rules - i.e. if the rules allow selling "data" (or something that we won't call "data" but "order flow" or something) to HTFs or banks' dark pools, they're not saying they don't do it!
    - morsch 10y ago
      How would that not directly contradict "We do not sell data to anyone."?
      - tomp 10y ago
        > Robinhood also earns money from rebates its gets for directing its order flow to broker dealers So they're selling some data (as opposed to running directly on an exchange, without any intermediaries). Or maybe not "selling" in the strict sense (I give you data, you give me money), but in an indirect way (I give you data, and you give me discount on your other services).
        deleted 10y ago
        [deleted]
        harryh 10y ago
        I give you data, and you give me discount on your other services That's not what rebate means in this context. It is, in fact, actual money. Robinhood also isn't just giving someone data. They're sending order flow to various market makers. Not data about the orders but the actual flow in need of execution.
        tomp 10y ago
        But that's exactly the point; that flow is data, and it's valuable, especially to market makers. If it weren't, they wouldn't be paying for it...
        harryh 10y ago
        That flow isn't really data. Like sure, ok, it's data in the sense that everything is data. But that's not the point. The point of retail flow is that it's not based on other market events but is based on mundane things like regular monthly 401k deposits. This flow is a source of customers for market makers. Those customers get charged a fee. A % of that fee is rebated back to Robin Hood (or other retail brokers) for being originators of the customers.
- Danieru 10y ago
  Front running is something which only exists when you need to fill an order which is too large for one stock exchange's ledger at that price. For retail trader that should not be a common case.
  - makeset 10y ago
    Front-running is an illegal practice that has absolutely nothing to do with order size. https://en.wikipedia.org/wiki/Front_running https://en.wikipedia.org/wiki/Front_running
- harryh 10y ago
  Front running is illegal. Robinhood is regulated by the SEC. If they were front running they would get caught and shut down.
joshdance 10y ago
Can you extrapolate on order flow from unsophisticated investors? Why is it valuable?
- drzaiusapelord 10y ago
  Lets say you're unsophisticated. You say "I like my 1080ti, so I'll buy some NVIDIA stock." I'm a tech stock expert, I know NVIDIA is on a downward slope because its over-valued right now. I tell you "Sure kid, here's a promise for 100 shares at today's price of $50 each." I take your $5,000. Everyone is happy. Joe Investor doesn't actually have the stock in his possession just yet. I buy the stock myself a few days later, but at $40 each for a grand total of $4,000, and I just made $1,000. You get your 100 shares, I make $1,000 plus fees. Now imagine doing this hundreds or thousands of times a day. Or I simply sell my own existing supply conveniently to my own buyer and I dictate the fees, which has value in itself. Sure I'm only making $5 per head per month with these low-end customers, but now I have 100,000 customers instead of 1,000. A savvy investor wouldn't ask to buy these shares. He'd know that he's better off shorting himself. Unsavvy investors are all over the place and if you can get them to come to you, you can make a lot of money off them with minimal investment or risk. On top of that you can offer them predatory loans for investing. This app offers loans, no idea on terms, but I can't imagine them being very nice. They put up collateral like their car or home, so you have no risk. They fuck up, or not, it doesn't matter, you're at least getting fees and probably screwing them in other ways. Oh and you're getting interest on that loan as well. edit: Front Loading absolutely happens, it can be done in a way that's difficult or impossible to detect and has a lot of loopholes as well.
  - brianwawok 10y ago
    Well, I don't think this is a legal use of order flow (waiting days to make a purchase), but the analogy is kinda sorta on the right path. Reality is more like "I know an order for NVIDIA is going to hit at $50, but I see it for sale for 49.9998 all over the place, I can go scoop some up at 49.9998 and put for sale at 49.9999 and make some money. But then real reality is a step more complicated about when it is legal to do this vs not (front running is not legal, but things that are similar can be), and dark pool vs not, and you are way past what I know ;)
manishsharan 10y ago
To be fair, every large bank has a brokerage and wealth management division and a capital markets division. They are all analyzing trades placed on brokerage system to find trends and opportunities for the capital markets division. This is in fact the major driver for big data initiatives in the banks.
chollida1 10y ago
I don't think that's a very good way of putting it. I'd say its more correct to say orders from retail investors are valuable because: 1) They tend to be a relatively equal number of buys and sells. This is figurative manna from heaven for market makers 2) They don't mind crossing the spread, also a gift for market makers. 3) They can't really move the spread and probably least importantly...... 4) they aren't trading based on some sort of knowledge most of the time, ie they are typically just buying because they buy a bit each month or selling because they need money or selling to re-balance, ie they aren't trading due to market signals, but rather due to their own personal situations.
- jessriedel 10y ago
  Can you quantify why you think 1-3 are more important than 4?
  - physguy1123 10y ago
    4 is the root cause of 1-3. By itself 4 doesn't mean much for a market maker, but the collective market behavior it results in (1-3) remove a lot of risk from market making against retail exclusively.
- mywittyname 10y ago
  Retail investors are essentially paying a few pennies more per share in order to trade commission free. I think that's a good deal.
  - taylorwc 10y ago
    I completely agree with this. I'm willing to take a few pennies hit because of HFT front running my order if it means I am saving several dollars per trade in commission. Especially when you first starting out with a tiny amount to invest, the commissions of normal brokers decimate any returns.
- harryh 10y ago
  #1 is largely because of #4
deleted 10y ago
[deleted]
supster 10y ago
True, but all major retail brokers sell their order flows to HFTs (e.g. Etrade used to sell its order flow to Citadel), so this is nothing new

arcanus 10y ago

Great catch, missed that during the article skim. Doesn't this also enable front-running? Regardless, this is useful info for HFT funds, right?

celim307 10y ago
They explicitly call out in the article they don't do that
- tomp 10y ago
  No, they didn't. It was more of a "non-denial". > Robinhood also earns money from rebates its gets for directing its order flow to broker dealers, though Bhatt insists “We do not sell data to anyone. We have never sold data to anyone. We just do not do that.” There have been misconceptions that Robinhood sells high-frequency traders its data to help them trade against the startup’s customers. But Bhatt says “The rules around this stuff as so tight. We’re not a social media company. If we even step slightly out of line with anything we all go to jail.” Basically all they're claiming is that they're following the rules - i.e. if the rules allow selling "data" (or something that we won't call "data" but "order flow" or something) to HTFs or banks' dark pools, they're not saying they don't do it!
  - morsch 10y ago
    How would that not directly contradict "We do not sell data to anyone."?
    - tomp 10y ago
      > Robinhood also earns money from rebates its gets for directing its order flow to broker dealers So they're selling some data (as opposed to running directly on an exchange, without any intermediaries). Or maybe not "selling" in the strict sense (I give you data, you give me money), but in an indirect way (I give you data, and you give me discount on your other services).
      - deleted 10y ago
        [deleted]
      - harryh 10y ago
        I give you data, and you give me discount on your other services That's not what rebate means in this context. It is, in fact, actual money. Robinhood also isn't just giving someone data. They're sending order flow to various market makers. Not data about the orders but the actual flow in need of execution.
        tomp 10y ago
        But that's exactly the point; that flow is data, and it's valuable, especially to market makers. If it weren't, they wouldn't be paying for it...
        harryh 10y ago
        That flow isn't really data. Like sure, ok, it's data in the sense that everything is data. But that's not the point. The point of retail flow is that it's not based on other market events but is based on mundane things like regular monthly 401k deposits. This flow is a source of customers for market makers. Those customers get charged a fee. A % of that fee is rebated back to Robin Hood (or other retail brokers) for being originators of the customers.
Danieru 10y ago
Front running is something which only exists when you need to fill an order which is too large for one stock exchange's ledger at that price. For retail trader that should not be a common case.
- makeset 10y ago
  Front-running is an illegal practice that has absolutely nothing to do with order size. https://en.wikipedia.org/wiki/Front_running https://en.wikipedia.org/wiki/Front_running
harryh 10y ago
Front running is illegal. Robinhood is regulated by the SEC. If they were front running they would get caught and shut down.

joshdance 10y ago

Can you extrapolate on order flow from unsophisticated investors? Why is it valuable?

drzaiusapelord 10y ago
Lets say you're unsophisticated. You say "I like my 1080ti, so I'll buy some NVIDIA stock." I'm a tech stock expert, I know NVIDIA is on a downward slope because its over-valued right now. I tell you "Sure kid, here's a promise for 100 shares at today's price of $50 each." I take your $5,000. Everyone is happy. Joe Investor doesn't actually have the stock in his possession just yet. I buy the stock myself a few days later, but at $40 each for a grand total of $4,000, and I just made $1,000. You get your 100 shares, I make $1,000 plus fees. Now imagine doing this hundreds or thousands of times a day. Or I simply sell my own existing supply conveniently to my own buyer and I dictate the fees, which has value in itself. Sure I'm only making $5 per head per month with these low-end customers, but now I have 100,000 customers instead of 1,000. A savvy investor wouldn't ask to buy these shares. He'd know that he's better off shorting himself. Unsavvy investors are all over the place and if you can get them to come to you, you can make a lot of money off them with minimal investment or risk. On top of that you can offer them predatory loans for investing. This app offers loans, no idea on terms, but I can't imagine them being very nice. They put up collateral like their car or home, so you have no risk. They fuck up, or not, it doesn't matter, you're at least getting fees and probably screwing them in other ways. Oh and you're getting interest on that loan as well. edit: Front Loading absolutely happens, it can be done in a way that's difficult or impossible to detect and has a lot of loopholes as well.
- brianwawok 10y ago
  Well, I don't think this is a legal use of order flow (waiting days to make a purchase), but the analogy is kinda sorta on the right path. Reality is more like "I know an order for NVIDIA is going to hit at $50, but I see it for sale for 49.9998 all over the place, I can go scoop some up at 49.9998 and put for sale at 49.9999 and make some money. But then real reality is a step more complicated about when it is legal to do this vs not (front running is not legal, but things that are similar can be), and dark pool vs not, and you are way past what I know ;)

manishsharan 10y ago

To be fair, every large bank has a brokerage and wealth management division and a capital markets division. They are all analyzing trades placed on brokerage system to find trends and opportunities for the capital markets division. This is in fact the major driver for big data initiatives in the banks.

chollida1 10y ago

I don't think that's a very good way of putting it. I'd say its more correct to say orders from retail investors are valuable because: 1) They tend to be a relatively equal number of buys and sells. This is figurative manna from heaven for market makers 2) They don't mind crossing the spread, also a gift for market makers. 3) They can't really move the spread and probably least importantly...... 4) they aren't trading based on some sort of knowledge most of the time, ie they are typically just buying because they buy a bit each month or selling because they need money or selling to re-balance, ie they aren't trading due to market signals, but rather due to their own personal situations.

jessriedel 10y ago
Can you quantify why you think 1-3 are more important than 4?
- physguy1123 10y ago
  4 is the root cause of 1-3. By itself 4 doesn't mean much for a market maker, but the collective market behavior it results in (1-3) remove a lot of risk from market making against retail exclusively.
mywittyname 10y ago
Retail investors are essentially paying a few pennies more per share in order to trade commission free. I think that's a good deal.
- taylorwc 10y ago
  I completely agree with this. I'm willing to take a few pennies hit because of HFT front running my order if it means I am saving several dollars per trade in commission. Especially when you first starting out with a tiny amount to invest, the commissions of normal brokers decimate any returns.
harryh 10y ago
#1 is largely because of #4

deleted 10y ago

[deleted]

supster 10y ago

True, but all major retail brokers sell their order flows to HFTs (e.g. Etrade used to sell its order flow to Citadel), so this is nothing new