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Robinhood Gets Almost Half Its Revenue from Bargain with High-Speed Traders
- krn 8y agoFreetrade[1] is a crowdfunded European alternative to Robinhood. [1] https://freetrade.io/ https://freetrade.io/
- tptacek 8y agoDoes Freetrade say somewhere that they don't pay for execution services from some other company? If they don't, is that a good thing? Doesn't that imply that they think they can outcompete Citadel and Two Sigma on execution? Because, like, they can't? Right?
- krn 8y ago> A year in the making, Freetrade has built a bona-fide “challenger broker,” including obtaining the required license from the FCA (the U.K. regulator), rather than simply partnering with an established broker as it is understood Revolut initially plans to do. This, Dodds explained on a call, has enabled the startup to plug directly into the capital markets “piping,” with as few intermediaries as possible. It means Freetrade can execute trades on its own behalf and ultimately be much more in control of its own destiny. It should also help the startup maintain a lower cost-base as the app scales. https://techcrunch.com/2018/10/02/freetrade/ https://techcrunch.com/2018/10/02/freetrade/
- tptacek 8y agoI saw that, but that just says they have (in some circumstances) the option to place their orders. I'm unclear why that would necessarily be a good thing, but either way: have they made a clear statement that they're not farming retail orders out to other firms? If they are, they're going to get paid for them.
- krn 8y agoTheir entire business model seems to be extremely transparent[1], and they treat their users as customers, not products. I don't know what they are doing now, but I think that farming retail orders out is not something they would be focused on in the long run. It's more like "mobile-first Interactive Brokers for equity trading". [1] https://freetrade.io/pricing/ https://freetrade.io/pricing/
- kasey_junk 8y agoIf you read their order-execution statement they are very clearly doing things that are going to have bad execution. Their 'default' order price is a market order that they promise will not clear until after hours or the next day. https://freetrade.io/order-execution/ https://freetrade.io/order-execution/ This is quite possibly the worst way a retail investor could send in an order.
- krn 8y ago> Their 'default' order price is a market order that they promise will not clear until after hours or the next day. Isn't this only true for the non-paying users, who are not subscribers of their premium plan? That's probably their entire (freemium) business model. It's the same with Revolut: free users might lose more money in foreign exchange and withdrawal fees, which pushes them to upgrade[1]. [1] https://www.revolut.com/pricing https://www.revolut.com/pricing
- tptacek 8y agoEven if you pay them $10/mo (whether you trade or don't, and keeping in mind that most people shouldn't be trading most months!), they still charge you for "instant" orders (the kind they don't delay purposely) in the one market they actually execute orders in. Robinhood seems like a better deal.
- krn 8y agoThat's a good point. It's hard to compare a crowdfunded company with a one burning through more than 500 mln USD in VC funding. But I see no reason why people shouldn't be increasing their passive portfolios every month if they can. And with many brokers, $10 is around a minimum commission for a single trade.
- kasey_junk 8y agofreetrade.io uses market makers (or reserves the right to anyway): https://freetrade.io/order-execution/ https://freetrade.io/order-execution/ In the US they would be required to disclose how much they are being compensated for that. I don't know if that is a requirement for the UK so have been unable to magic search term my way to their disclosures.
- kasey_junk 8y agoBecause I am curious about such things and had a moment I went and looked it up. In the UK payment for order flow is effectively banned (there are some firms who are trying to say they aren't brokers so it isn't payment for order flow but the FCA has taken a dim view of this practice). https://www.fca.org.uk/publication/thematic-reviews/tr14-13.pdf https://www.fca.org.uk/publication/thematic-reviews/tr14-13.... So for as long as freetrade is UK only I think you can probably assume they aren't receiving payment for order flow.
- ForHackernews 8y agoDumb money for sale.
- kasey_junk 8y agoThis is true, but it uses an unfortunate industry term that is more pejorative sounding than it actually is. When people in the industry talk about 'dumb money' they aren't talking about how informed or intelligent the order flow is. They are talking about how likely the order relates to market structure. An individual investor who has looked at their portfolio and decided that the best move for their investment horizon is to move a big component out of equities and into bonds is still 'dumb money'. Even though that might be the most intelligent option. A bot that has a terribly performing algorithm that takes market structure into account is not dumb money though.
- 394549 8y ago> They are talking about how likely the order relates to market structure. What do you mean by "market structure?"
- physguy1123 8y agoIn this specific case, it means that retail flow is much less likely to immediately move the market than flow from an informed (knows the market will move soon) or large (will trade so much that it will move the market) player, and is much more valuable to market makers who try to capture the spread on that order (and usually improve it) and hedge/trade out of that risk relatively soon.
- kasey_junk 8y agoWhen people talk about 'the stock market' or 'the stock price' they are using a very coarse abstraction. In reality for most trade-able instruments there are a variety of exchanges all operating at once. Further in each exchange there isn't a single price. There is a collection of buy and sell orders that combined together form the 'book'. For instance if you had 10 buy orders at $1 and 2000 sell orders at $1.10 what is the 'price' of that thing? The structure of the book and how all the exchanges relate (and Reg NMS in the US equities space) are all the 'market structure'.
- rdxm 8y agooh man, this is priceless.....pretty much made my day.
- gammateam 8y agoAs someone that paid $25,000 in options commissions in 2015 even after negotiating down to 50 cents/contract and no ticket charge, free options trading in exchange for my trade data is a fair trade Now if only they'd give the option of Portfolio Margining instead of just Reg-T margining, I'd let the HFT's pair-program with me in person.
- deleted 8y ago[deleted]
- anonu 8y agoIt's never free. You're always paying somewhere. If not explicitly, you're paying via spreads or rich options valuations when you're buying...
- tptacek 8y agoExactly how do you think you're paying it here? Be specific. Later: to be clear, my subtext is that Robinhood customers aren't actually paying anything and are sort of getting a free lunch here. The money Robinhood pockets from your trades isn't available to you in any form, at least until someone starts the brokerage that pays you to trade.
- anonu 8y agoTypical internalizer trade is: 1. RH user wants to buy 1000 shares of XYZ. Offer price is $10.00 2. RH forwards the full order to their execution venue partner. They get paid (assuming SeekingAlpha story is true) $260/$1mm traded, or $2.60. 3. Executor takes the order and immediately sends 900 shares to the market, lifting the offers. Now best offer is $10.10 4. Executor facilitates the tail of the order, 100 shares, at $10.10. So they are short -100 shares here - or they can give a de minimis price improvement (like 10.0985) to meet their contractual obligations. 5. Temporary market impact attenuates and offer mean reverts to $10.05 6. Executor still has risk on their books - but their paper mark-to-market profit is $5.00. 7. Risk can be mitigated by waiting for crossing order or waiting for more favorable offers to close out the short. So roughly speaking they paid $2.60 to get the order, but made $5 on it...
- wgerard 8y agoI was under the impression that retail order flow is mostly useless to HFT and they make money on large institutional moves - retail investors just don't affect the market enough for it to matter. Is that a wrong assumption? If not, seems like maybe RH is just taking advantage of the rebate for not much benefit to Citadel?
- anonu 8y agoIt's the other way around. Retail flow is uninformed. Many crossing opportunities as well. It's extremely valuable to hft folks. On the other hand if you're trading against a hedge fund... You don't know what info they have. You also don't know when they'll stop buying or selling. Their orders could come across multiple days. You don't want to touch that stuff
- JumpCrisscross 8y ago> retail order flow is mostly useless to HFT and they make money on large institutional moves This is incorrect. Retail volumes are smaller. (This also makes them less risky to fill and offload.) But spreads are wider. I worked on an algorithmic derivatives desk many years ago. We paid a well-known national broker lots of money to get their options flow. Their customers were notorious for forgetting to exercise slightly in-the-money options, putting in misplaced limit orders, putting in market orders for illiquid names, et cetera. Robinhood has its hands on the money of a generation that was too young to lose money in the last crisis.
- adrr 8y agoDon't most brokerages exercise ITM options at expiration? Here is Etrade's policy: > Equity options $0.01 or more in the money will be automatically exercised for you unless you instruct us not to exercise them.
- anonu 8y agoThis is called pfof. Pay for order flow. It's very common practice to sell retail flow or exhaust flow to the likes of citadel and a dozen others. The buyers make money by either taking the spread on an order, reducing risk in their own portfolio or using the order to create impact and internalizing the tail.
- deleted 8y ago[deleted]
- dawhizkid 8y agoAccording to this analysis https://seekingalpha.com/article/4205379-robinhood-making-millions-selling-millennial-customers-high-frequency-traders?page=3 https://seekingalpha.com/article/4205379-robinhood-making-mi... HFTs pay Robinhood significantly more for their order flow than other brokerage firms i.e. claiming almost 12x more than E-Trade makes ($260 per $1m in orders vs $22 per $1m). If this is true (I haven't independently verified but these fees must be published publicly by law), then clearly HFTs are getting something more from RH than they are from other brokerages. The author goes on to say "Robinhood is well on their way to making hundreds of millions of dollars in cash income by selling their customers' orders to the HFT meat grinder. High-frequency traders are not charities. The only reason high-frequency traders would pay Robinhood tens to hundreds of millions of dollars is that they can exploit the retail customers for far more than they pay Robinhood."
- deleted 8y ago[deleted]
- anonu 8y agoI read that analysis when it came out. I'm not sure how accurate it is... in the end Robinhood still needs to make money since they aren't charging the typical per trade commissions. You can probably back out what the HFTs margin is on this stuff by looking at public financials... KCG was public for a while.
- dawhizkid 8y ago
- api 8y agoOnce again: if the product is free it usually means you are the product.
- tptacek 8y agoIsn't this the entire idea behind Robinhood? Obviously, they make money elsewhere (from interests on deposits?) but hasn't it been clear for years that they were getting paid by internalizers for order flow? Whoever you use to place stock market orders is also getting paid the same way. People have a funny idea of what a retail brokerage does. They do not execute orders on exchanges for you; that's a specialized capability that long ago became its own kind of company. Retail brokerages specialize in picking up the phone when you call with a complaint or request, and in advertising to acquire users. You shouldn't care. The reason your order flow is valuable isn't that Citadel is trying to screw you. Rather, they can (occasionally) quote you better prices than they do the market as a whole, because they know you're not a giant investment bank or hedge fund about to roll over them like a freight train with a giant block order that will demolish every level of the order book. Internalizers can essentially arbitrage the difference. They're required by law to meet or improve the NBBO.
- jakarta 8y agoInteractive Brokers does not sell your order flow
- tptacek 8y agoI think they might literally be the only one? Here's a quote I found (this time on Marginal Revolution): It should be shocking, but it probably is not, that according to the Rule 606 reports mandated by the U.S. Securities and Exchange Commission, no major online broker, with the sole exception of Interactive Brokers, sent more than 5% of its orders to an organized exchange. More than 95% of their orders go to internalizers! Later: Like, a minute later I read their Rule 606 report, and they do in fact get rebated for sending order flow to dark pools. They also get paid to take institutional orders and trade them against their customers.
- jbeyer 8y agoYea....Timber Hill is owned by Thomas Petterffy, founder of Interactive Brokers, and handles much of the options order flow from IB users. So...IB may not be making money off those trades, but the founder is still profiting from them. Don't get me wrong, as someone who has followed market structure for years, I don't think that IB is doing anything worse than anyone else, but they aren't innocent in this regard.
- nodesocket 8y agoProTip: use LIMIT/STOP orders when buying and selling. Sending MARKET orders to Robinhood guarantees you going to get a "worse" price compared to the spot price.
- ZainRiz 8y agoThat advice applies no matter which brokerage you're going to
- colinbartlett 8y agoDoes this apply to an ordinary low-level retirement investor like me? If I am buying, let's say $500 a week, in some fund as part of my IRA, what does a LIMIT/STOP order do for me? I'm buying it no matter what, the share price is meaningless to me, I will just get more or less shares.
- nodesocket 8y ago> what does a LIMIT/STOP order do for me? For example buying a LIMIT says the highest price I am willing to pay per share is X. So you can be confident you'll get a price at least equal to or below the limit price. > the share price is meaningless to me ??? Confused. Do you like buying high and selling low?
- physguy1123 8y agoThe downside of setting a limit order is that you only get executed when the market moves against you, OR just don't get filled. For retail order sizes and holding periods, that's probably fine as long as you place orders close to the current price.
- cinquemb 8y agoThere is also the case when no one else wants to sell (buy) and bids (asks) way out number asks (bids), especially on contracts that people are using to cover for their other trades. There's plenty of times where I massaged the price up (or down) to where I wanted it more, and dumped/slurped up contracts (at least confirming by checking the bar once it filled and seeing that the price I got filled at was the highest/lowest price of that bar). Granted, it doesn't happen every time, nor do I count on it.
- httpz 8y agoSo other brokers charge you and sell your trade data and Robinhood just sell your trade data? I'll just stick with Robinhood then..
- vasilipupkin 8y agothis article is extremely misleading, creating what essentially is a fake controversy. I highly recommend reading this SEC guide to understand how it really works. https://www.sec.gov/reportspubs/investor-publications/investorpubstradexechtm.html https://www.sec.gov/reportspubs/investor-publications/invest...
- pazimzadeh 8y agoI'm not sure I completely understand this article, but I'd like to take this opportunity to rant about my recent experience using Robinhood. Two weeks ago I noticed that Tesla stock dropped significantly after the SEC's investigation into Elon Musk's "funding secured" tweet led to Elon being ousted as chairman of the board. I thought the stock would recover from this, so I placed a market price order for TSLA shares on Sunday night (September 30th). Indeed, on Monday the stock rose +17% but lo and behold, my order never went through. The reason given was that the stock price had supposedly changed by at least 5% by the time the market opened. I suspect this is because Robinhood prioritizes orders from high speed trading firms over its own customers. Is this common practice, and can anyone recommend a service that doesn't do this? Thanks in advance.
- tbenst 8y agoI think this is because when you do a “market order” on Robinhood it’s actually placed as a limit order 5% above the price. Just set your own limit order next time
- thebird 8y agoIt was obvious to many people that the stock price would rebound significantly after Musk settled with the SEC, so the stock had already effectively increased in price before market open. Robinhood couldn't find anyone willing to sell you shares at the market close price Monday morning because there were none to be had.
- pazimzadeh 8y agoThe settlement news came out earlier - Friday’s news was Musk’s punishment, which was light. But thanks for the reminder that stock prices are not numbers on an app, in my rage/greed I forgot how markets operate.
- codeplea 8y agoI think Robinhood implements market orders as limit %5 above/below market. You should be able to enter a limit order at your own max price, and it would've executed.
- thejgr 8y agoCheck out Robinhood’s Co-Founder’s blog post here http://blog.robinhood.com/news/2018/10/12/a-letter-from-robinhood-co-founder-amp-co-ceo-vlad-tenev http://blog.robinhood.com/news/2018/10/12/a-letter-from-robi...
- swampthing 8y agoAt the beginning of the article, the authors cite 3 anonymous sources: > ... according to three people with knowledge of the matter, who asked not to be identified because the details are private... Then, the end of the article mentions 3 VCs: > Two venture capitalists, speaking on condition of anonymity because the discussions were private, expressed concern that Robinhood's ties to high-frequency traders might undermine its image and stymie expansion plans. A third said it was the reason he didn't invest. I wonder if this article is the product of some VC sour grapes.
- dang 8y agohttps://news.ycombinator.com/item?id=17956740 https://news.ycombinator.com/item?id=17956740 https://news.ycombinator.com/item?id=17998846 https://news.ycombinator.com/item?id=17998846
- pg_bot 8y agoHmm, I'm assuming this is illegal (otherwise someone would likely be doing it) but why doesn't a high frequency trading firm make a competing application and just keep that order flow for themselves? Why not vertically integrate?
- kasey_junk 8y agoBecause retail sucks & their core competencies have nothing to do with dealing with customers.
- tptacek 8y agoSeriously you'd think on a board ostensibly obsessed with CAC and ARPU metrics, it would be immediately obvious why a specialty player wouldn't want to compete with Schwab and Fidelity.
- pg_bot 8y agoMultiple players along the chain could decide to vertically integrate. Although I used the example of high frequency traders, a better question which I should have asked is why hasn't someone dipped their toes into retail and HFT? It seems like someone would want to grab that land for themselves if it were particularly valuable, which the valuation of Robinhood purports. Considering some guys in that industry made this app, I don't think it's too far a stretch of the imagination for someone to believe that an industry player could have made that move.
- physguy1123 8y agoIf you're an HFT, you would much rather just pay for the order flow and not deal with all the shit that is retail (government, customers, all that shit). If you're some big retail firm, you're probably run by suits, way to beauracratic to run a difficult high-tech trading team, and any talent you got would get siphoned off to a good trading firm.
- 8y ago
- jhabdas 8y agoRobinhood locked me out of my own account because I was "traveling too long"; demanded I show them proof of US residence (my verified Chase Bank account and US passport aren't good enough). I'm not surprised they're hurting the little guy.
- m0j0e 8y agoAs usual, Matt Levine provides great comments on this: https://www.bloomberg.com/amp/view/articles/2018-10-16/carl-icahn-wants-to-fight-dell-again https://www.bloomberg.com/amp/view/articles/2018-10-16/carl-... (second section)