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So, first off, I am not saying internalizers are all evil and that pfof is bad. That $2.40 your retail trade earned the internalizer is the price you pay for co
by anonu 8y ago
So, first off, I am not saying internalizers are all evil and that pfof is bad. That $2.40 your retail trade earned the internalizer is the price you pay for convenience and immediacy. You let someone else handle the order and they do what they want with it - within certain guidelines.
You could have saved the hypothetical $2.40 had you traded differently, albeit slower, and caused less market impact with your order. Of course, trading slower comes with its own slippage risk or opportunity cost that the market moves out of your favor. But it could also move in your favor... However, if you let a greedy HFT use your order to impact the market - it will always be out of your favor.
For a small retail guy, you are powerless unless there is a RobinHood 2.0 that decides to offer comm-free trades + does not sell your orders + makes money doing something else ... stock loan maybe?
EDIT: Also the HFTs hate limit orders because it reduces the amount they can internalize. They also generally have a contractual obligation to always execute your order. So you can always use a limit at or inside the offer if youre buying, and potentially save on that cost.
- tptacek 8y agoI don't understand the outline of your argument. If what you're saying is true, then you can non-hypothetically save that $2.40 by... trading slower and with less impact on the market. This is why I asked for specificity. Yes, we agree, internalizers pay for order flow because they can make money on it. The question is: can you make that money on your own order flow, or is the allocation of orders to internalizers Pareto-optimal?
- anonu 8y agoInternalizers want the entire order. If RH splits a order across multiple internalizers they will not be happy. So RH allocates in a Pareto-optimal way. As the order creator, you cannot earn that $2.40, you can only save by getting a better price.
- tptacek 8y agoUpthread, you said "It's never free. You're always paying somewhere." But it turns out to be pretty hard to even describe how Robinhood customers are "paying" for their order routing.
- btilly 8y agoThere is no market out there that lets you trade slower in return for providing a smaller margin for market makers. It is possible to build one, but it would look so different from existing markets that it would be an uphill battle to get people to adopt it.
- anonu 8y agoNot sure I follow exactly what you're proposing. But it sounds like this was IEX's approach with their self-imposed speed bump.
- physguy1123 8y agoIEX's speed bump in the end simply allowed their special internal dpeg order type to pull slightly back when they saw adverse movements incoming, for many normal trades it's essentially an exchange that acts like it's a little farther away (longer latency) than it actually is with some dark order types which move weird.