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I'm also stuck at the "so what", but for different reasons. What is order flow? I'm guessing that the statement "companies pay for your trades" means they're se

I'm also stuck at the "so what", but for different reasons. What is order flow? I'm guessing that the statement "companies pay for your trades" means they're selling a list of what you trade on and for how much, but what does that mean and what risks does that expose for me? What benefits do the buyers get from knowing my trading history? I feel like the article was written for people who already understand the ins and outs of trading, which I'm going to guess Robinhood users don't. Is there an ELI5 of why I should be concerned? I don't use Robinhood, but I still got nearly nothing from this article other than the author says he's not a conspiracy theorist, which tends to mean they're actually pushing a conspiracy theory.

tptacek 8y ago
At many (maybe most?) consumer brokerages, your brokerage doesn't actually place orders on actual markets. The markets are super complicated! The job of a modern brokerage is to take customer orders, maintain customer accounts, handle expensive telephone support, and pay internalizers. Internalizers do the job you might think of as the core brokerage job. They take raw order flow from brokerages, track the actual prices of securities on exchanges, maintain an inventory of their own, and decide where orders should execute. It's an extremely technical job. Citadel is, I think, still the biggest player here? The most important thing to understand about retail order flow is that it is dumb money. The sharks that market professionals worry about do not as a rule place orders with Schwab or Robinhood. In particular, if you make a market in a particular stock, and an order routed from Robinhood comes in, you don't have to worry that it's a whale moving a giant block of that stock in advance of some fundamental or technical news item you're 2 seconds behind on. As a result, an internalizer can tune its pricing for retail orders: retail customers get better pricing, because the internalizer can access a better spread (the difference between the lowest price they'll sell for and the highest price they'll buy for).
jsoc815 8y ago
What tptacek says is pretty much the gist of things. The issue for some is that because their order(s) are not reaching an actual exchange, the fill (price @ which the trade(s)) is/are executed may not be the best, and that meaningful price discovery is hampered. Both may be correct, however, and I'm loath to say this, the average person lacks the capacity to really compete for the best fill price on a given trade. This is due to asymmetries (speed, data, etc.,). And so, generally, they are as tptacek says, "dumb money," who at best catch and ride a wave. Anyway, you may want to take a look at the following TD Ameritrade sites on fills[1] and order execution[2]. They aren't deep dives, just a flavor... [1] https://tickertape.tdameritrade.com/trading/stock-market-introduction-16061 https://tickertape.tdameritrade.com/trading/stock-market-int... [2] https://www.tdameritrade.com/trade/orderexecution/inc_faq.html https://www.tdameritrade.com/trade/orderexecution/inc_faq.ht...

tptacek 8y ago

At many (maybe most?) consumer brokerages, your brokerage doesn't actually place orders on actual markets. The markets are super complicated! The job of a modern brokerage is to take customer orders, maintain customer accounts, handle expensive telephone support, and pay internalizers. Internalizers do the job you might think of as the core brokerage job. They take raw order flow from brokerages, track the actual prices of securities on exchanges, maintain an inventory of their own, and decide where orders should execute. It's an extremely technical job. Citadel is, I think, still the biggest player here? The most important thing to understand about retail order flow is that it is dumb money. The sharks that market professionals worry about do not as a rule place orders with Schwab or Robinhood. In particular, if you make a market in a particular stock, and an order routed from Robinhood comes in, you don't have to worry that it's a whale moving a giant block of that stock in advance of some fundamental or technical news item you're 2 seconds behind on. As a result, an internalizer can tune its pricing for retail orders: retail customers get better pricing, because the internalizer can access a better spread (the difference between the lowest price they'll sell for and the highest price they'll buy for).

jsoc815 8y ago

What tptacek says is pretty much the gist of things. The issue for some is that because their order(s) are not reaching an actual exchange, the fill (price @ which the trade(s)) is/are executed may not be the best, and that meaningful price discovery is hampered. Both may be correct, however, and I'm loath to say this, the average person lacks the capacity to really compete for the best fill price on a given trade. This is due to asymmetries (speed, data, etc.,). And so, generally, they are as tptacek says, "dumb money," who at best catch and ride a wave. Anyway, you may want to take a look at the following TD Ameritrade sites on fills[1] and order execution[2]. They aren't deep dives, just a flavor... [1] https://tickertape.tdameritrade.com/trading/stock-market-introduction-16061 https://tickertape.tdameritrade.com/trading/stock-market-int... [2] https://www.tdameritrade.com/trade/orderexecution/inc_faq.html https://www.tdameritrade.com/trade/orderexecution/inc_faq.ht...