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This is a good time to trot out that old tech company adage: if you aren't paying for the product, you are the product. How does Robinhood make money? By selli

by harryh 10y ago

This is a good time to trot out that old tech company adage: if you aren't paying for the product, you are the product. How does Robinhood make money? By selling order flow to market makers. Why do market makers want Robinhood's order flow? Because Robinhood's customers are, collectively, unsophisticated investor with no particular knowledge about the future performance of a stock making them the perfect customers for purchasing liquidity a penny at a time. Worth keeping in mind as you trade stocks every day.

metalliqaz 10y ago
And why is that a bad thing? If I make a couple of $100 trades in a day and make $10, what do I care if the pros used me for liquidity? I believe the same would happen even if I was paying $7 at Fidelity to make the trades. Not trying to be argumentative, just want to make sure I understand the conversation here.
- harryh 10y ago
  Most Robinhood customers will not reliably make more money trading every day than they would buying and holding Vanguard Index funds ($VTI is a good place to start).
  - JBReefer 10y ago
    Given how frequently this is said, I'm shocked that people still don't get it. The only way you know more than analysts is: A. be a full time analyst B. work at the company you're trading If you're on Robinhood, you're not A. And if you're B, you're in touchy legal waters. The average unsophisticated trader loses money vs those ETFs in even small time frames.
    - devopsproject 10y ago
      > The only way you know more than analysts is is to flip a coin: https://finance.yahoo.com/news/coin-flip-beats-listening-wall-203001989.html https://finance.yahoo.com/news/coin-flip-beats-listening-wal... Now you could argue that diversification is key and that the best way to diversify is to choose an index vs picking your own asset mix. But deifying analysts is absurd
- JakeAl 10y ago
  In short it means the pros aka The Market Makers control the market. What that means is they have the ability to see all of the price action which allows them to manipulate the market. When prices go up or down, it's them deciding whether they go up or down or at least throttling the rate to maximizes their earnings. They are both buying and selling at all times. What makes Robinhood such a joke is that they are a middleman between you and a middleman. So instead of buying your drugs from a dealer, you're buying from the pusher on the corner who gets free drugs for every new customer.
  - pgwhalen 10y ago
    I don't really have time to respond to and refute this post, but anyone reading it should know this person doesn't really have any idea what they're talking about, and worse, probably thinks they do. But my go-to resource on understanding market making at least a little bit is this Matt Levine column: https://www.bloomberg.com/view/articles/2015-10-08/why-do-high-frequency-traders-cancel-so-many-orders- https://www.bloomberg.com/view/articles/2015-10-08/why-do-hi...
pfarnsworth 10y ago
They are doing the exact same thing that other brokers do. The difference is they are trying to drive the trading fees down to zero and hope they can make up revenue on all the other avenues, like selling order flow. I don't know if that's a sustainable model or not, though. They need to deal with a lot of fraud associated with their platform which takes revenue from the top line.
- harryh 10y ago
  Indeed you are correct and I think that's great. I just think it makes sense for the retail customers who use Robin Hood (like the OP) to have the realization that they are the "unsophisticated investor" in this transaction. And hence, if they're trading multiple times a day, they are probably not making a great financial decision.
icelancer 10y ago
>By selling order flow to market makers All the discount brokers do this.
pgodzin 10y ago
But I am just as unsophisticated whether I am using Robinhood or Fidelity, I am just avoiding excessive fees instead.
deleted 10y ago
[deleted]

by harryh 10y ago

metalliqaz 10y ago

And why is that a bad thing? If I make a couple of $100 trades in a day and make $10, what do I care if the pros used me for liquidity? I believe the same would happen even if I was paying $7 at Fidelity to make the trades. Not trying to be argumentative, just want to make sure I understand the conversation here.

harryh 10y ago
Most Robinhood customers will not reliably make more money trading every day than they would buying and holding Vanguard Index funds ($VTI is a good place to start).
- JBReefer 10y ago
  Given how frequently this is said, I'm shocked that people still don't get it. The only way you know more than analysts is: A. be a full time analyst B. work at the company you're trading If you're on Robinhood, you're not A. And if you're B, you're in touchy legal waters. The average unsophisticated trader loses money vs those ETFs in even small time frames.
  - devopsproject 10y ago
    > The only way you know more than analysts is is to flip a coin: https://finance.yahoo.com/news/coin-flip-beats-listening-wall-203001989.html https://finance.yahoo.com/news/coin-flip-beats-listening-wal... Now you could argue that diversification is key and that the best way to diversify is to choose an index vs picking your own asset mix. But deifying analysts is absurd
JakeAl 10y ago
In short it means the pros aka The Market Makers control the market. What that means is they have the ability to see all of the price action which allows them to manipulate the market. When prices go up or down, it's them deciding whether they go up or down or at least throttling the rate to maximizes their earnings. They are both buying and selling at all times. What makes Robinhood such a joke is that they are a middleman between you and a middleman. So instead of buying your drugs from a dealer, you're buying from the pusher on the corner who gets free drugs for every new customer.
- pgwhalen 10y ago
  I don't really have time to respond to and refute this post, but anyone reading it should know this person doesn't really have any idea what they're talking about, and worse, probably thinks they do. But my go-to resource on understanding market making at least a little bit is this Matt Levine column: https://www.bloomberg.com/view/articles/2015-10-08/why-do-high-frequency-traders-cancel-so-many-orders- https://www.bloomberg.com/view/articles/2015-10-08/why-do-hi...

pfarnsworth 10y ago

They are doing the exact same thing that other brokers do. The difference is they are trying to drive the trading fees down to zero and hope they can make up revenue on all the other avenues, like selling order flow. I don't know if that's a sustainable model or not, though. They need to deal with a lot of fraud associated with their platform which takes revenue from the top line.

harryh 10y ago
Indeed you are correct and I think that's great. I just think it makes sense for the retail customers who use Robin Hood (like the OP) to have the realization that they are the "unsophisticated investor" in this transaction. And hence, if they're trading multiple times a day, they are probably not making a great financial decision.

icelancer 10y ago

>By selling order flow to market makers All the discount brokers do this.

pgodzin 10y ago

But I am just as unsophisticated whether I am using Robinhood or Fidelity, I am just avoiding excessive fees instead.

deleted 10y ago

[deleted]