4 ms·

Robinhood's whole business model is making money from people who think they're getting a free lunch. You're still paying money for the trade. But instead of p

Robinhood's whole business model is making money from people who think they're getting a free lunch. You're still paying money for the trade. But instead of paying a direct fee, you're paying more money via the bid-ask spread. Everytime you make a trade, Robinhood sells that trade to a market maker. Robin hood charges more money for forwarding this trade than most other brokers. To make up for this increased cost to market makers, they then pass the cost to you by charging more money for the trade. This is akin to restaurants that claim you get free delivery. You don't really get free delivery. They just increased the price of the food. Looks like they were trying to play a similar game with that 3% savings account by claiming your money was risk-free when it really wasn't. https://www.wsj.com/articles/why-free-trading-on-robinhood-isnt-really-free-1541772001 https://www.wsj.com/articles/why-free-trading-on-robinhood-i...

jcfrei 8y ago
> Robinhood's whole business model is making money from people who think they're getting a free lunch. You're still paying money for the trade. But instead of paying a direct fee, you're paying more money via the bid-ask spread. This gets brought up in every thread about Robinhood and is simply wrong. Check out this explanation of Robinhood's business model: https://www.bloomberg.com/opinion/articles/2018-10-16/carl-icahn-wants-to-fight-dell-again https://www.bloomberg.com/opinion/articles/2018-10-16/carl-i...
andrewla 8y ago
This is an old trope that gets passed around a lot. It simply isn't true -- you are, in fact, getting a free lunch [1]. If you place a limit order at a given price, you will get that price or better, period. Just as you would at any other retail brokerage. At any other retail brokerage you will get charged fees as well. It is structurally impossible (modulo odd lot requirements that are unlikely to affect you unless you are buying extremely thinly traded stocks) for the price to pass you by while your limit order is active -- if you want to buy at $100, nobody in the US, retail or institutional, trading on any regulated market, will get executed at a better price than $100 while your order is active. For market orders it is more complex, but you will never do worse than picking up the best price available. Yes, you will cross the spread; market orders are always taking orders, but at any retail brokerage you will also cross the spread, in addition to paying fees. All retail brokerages eat price improvement above the executed price, and Robinhood is no different except that they don't charge you fees on top of that. Retail flow is by far the most valuable to wholesale market makers; they pay through the teeth for it, but regulation does not permit Robinhood to front run its customers. [1] There is, of course, no such thing as a free lunch -- your lunch is being paid for by the wholesale market makers and the dark pools of liquidity. More specifically, you are paying for your lunch by expressing a liquidity preference.
bobcostas55 8y ago
Due to RegNMS they still have to fill you at the NBBO. You're not crossing a bigger spread than you would with any other broker.
- xtacy 8y ago
  Yeah, they still have to fill you at the NBBO, and this trade routing is no different from what other brokers (Schwab/E-Trade/etc.) do when you place a trade. I wonder whether the fact that Robinhood doesn't internalise its trades (i.e., capitalise on the bid/ask spread by matching buyers/sellers from their own customer base) is the reason why market makers pay more to Robinhood?
  - lordnacho 8y ago
    The reason why MMs pay more for RH is there are no toxic clients in there. RH's flow is almost entirely a bunch of little guys. Toxic flow would be something like a huge institution that just keeps buying a stock they like. Once the market maker has sold them a few portions, he realises the price has moved against them. With a bunch of little guys the MM combines: - Benefit from the two-way nature of the flow. Some little guys are buying, some selling. - Hedge against other pools of liquidity. Either find a similar stock (stocks are highly correlated) to sell, or an index. - Hold on to the risk until it relaxes and goes the other way. Ex MM / HFT guy.
    - xtacy 8y ago
      Interesting, thanks for sharing your insights. I thought that huge institutions prefer to trade on exchanges directly (for anonymity), but it looks like there are other incentives in play.
      - lordnacho 8y ago
        There are degrees of huge. A large hedge fund still trades through a prime broker, who has the exchange connection. The PB plays yet another game by aggregating the risk of the funds they are servicing.
adminu 8y ago
To claim it is insured by the SIPC when it is not is just false advertising (or big time incompetence). It's not a good game to play if you will get sued for it.
- toomuchtodo 8y ago
  It's more dangerous than being sued. You can have your broker-dealer license revoked by FINRA and other financial regulatory bodies. Do not pass go, do not execute and clear any further trades.
elecengin 8y ago
Except its more like you can choose if you wanted a fraction of a percent added to the price or if you wanted to pay a $5 delivery fee. The answer varies for small and large orders (and even by share price) For most retail investors that use something like Robinhood, the average order size is small so a flat $5 fee would be way worse.
icelancer 8y ago
> you're paying more money via the bid-ask spread No, you aren't. This is effectively illegal if you think frontrunning is occurring. > Everytime you make a trade, Robinhood sells that trade to a market maker. This is true about almost every single discount broker you would use in place of Robinhood.

jcfrei 8y ago

> Robinhood's whole business model is making money from people who think they're getting a free lunch. You're still paying money for the trade. But instead of paying a direct fee, you're paying more money via the bid-ask spread. This gets brought up in every thread about Robinhood and is simply wrong. Check out this explanation of Robinhood's business model: https://www.bloomberg.com/opinion/articles/2018-10-16/carl-icahn-wants-to-fight-dell-again https://www.bloomberg.com/opinion/articles/2018-10-16/carl-i...

andrewla 8y ago

This is an old trope that gets passed around a lot. It simply isn't true -- you are, in fact, getting a free lunch [1]. If you place a limit order at a given price, you will get that price or better, period. Just as you would at any other retail brokerage. At any other retail brokerage you will get charged fees as well. It is structurally impossible (modulo odd lot requirements that are unlikely to affect you unless you are buying extremely thinly traded stocks) for the price to pass you by while your limit order is active -- if you want to buy at $100, nobody in the US, retail or institutional, trading on any regulated market, will get executed at a better price than $100 while your order is active. For market orders it is more complex, but you will never do worse than picking up the best price available. Yes, you will cross the spread; market orders are always taking orders, but at any retail brokerage you will also cross the spread, in addition to paying fees. All retail brokerages eat price improvement above the executed price, and Robinhood is no different except that they don't charge you fees on top of that. Retail flow is by far the most valuable to wholesale market makers; they pay through the teeth for it, but regulation does not permit Robinhood to front run its customers. [1] There is, of course, no such thing as a free lunch -- your lunch is being paid for by the wholesale market makers and the dark pools of liquidity. More specifically, you are paying for your lunch by expressing a liquidity preference.

bobcostas55 8y ago

Due to RegNMS they still have to fill you at the NBBO. You're not crossing a bigger spread than you would with any other broker.

xtacy 8y ago
Yeah, they still have to fill you at the NBBO, and this trade routing is no different from what other brokers (Schwab/E-Trade/etc.) do when you place a trade. I wonder whether the fact that Robinhood doesn't internalise its trades (i.e., capitalise on the bid/ask spread by matching buyers/sellers from their own customer base) is the reason why market makers pay more to Robinhood?
- lordnacho 8y ago
  The reason why MMs pay more for RH is there are no toxic clients in there. RH's flow is almost entirely a bunch of little guys. Toxic flow would be something like a huge institution that just keeps buying a stock they like. Once the market maker has sold them a few portions, he realises the price has moved against them. With a bunch of little guys the MM combines: - Benefit from the two-way nature of the flow. Some little guys are buying, some selling. - Hedge against other pools of liquidity. Either find a similar stock (stocks are highly correlated) to sell, or an index. - Hold on to the risk until it relaxes and goes the other way. Ex MM / HFT guy.
  - xtacy 8y ago
    Interesting, thanks for sharing your insights. I thought that huge institutions prefer to trade on exchanges directly (for anonymity), but it looks like there are other incentives in play.
    - lordnacho 8y ago
      There are degrees of huge. A large hedge fund still trades through a prime broker, who has the exchange connection. The PB plays yet another game by aggregating the risk of the funds they are servicing.

adminu 8y ago

To claim it is insured by the SIPC when it is not is just false advertising (or big time incompetence). It's not a good game to play if you will get sued for it.

toomuchtodo 8y ago
It's more dangerous than being sued. You can have your broker-dealer license revoked by FINRA and other financial regulatory bodies. Do not pass go, do not execute and clear any further trades.

elecengin 8y ago

Except its more like you can choose if you wanted a fraction of a percent added to the price or if you wanted to pay a $5 delivery fee. The answer varies for small and large orders (and even by share price) For most retail investors that use something like Robinhood, the average order size is small so a flat $5 fee would be way worse.

icelancer 8y ago

> you're paying more money via the bid-ask spread No, you aren't. This is effectively illegal if you think frontrunning is occurring. > Everytime you make a trade, Robinhood sells that trade to a market maker. This is true about almost every single discount broker you would use in place of Robinhood.