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I'm curious if anyone with knowledge can speak to how Robinhood sells data to high frequency traders? This seems to result in a large percentage of their reven

I'm curious if anyone with knowledge can speak to how Robinhood sells data to high frequency traders? This seems to result in a large percentage of their revenue which of course makes sense due to not having commission revenue. I've also heard some people argue if you're investing a decent amount, you're better off with commissions over market orders on Robinhood. The arguments were the above & that orders can take a much longer time to process. Though I imagine most small investors are not to concerned with either.

deleted 7y ago
[deleted]
benj111 7y ago
Its market makers generally rather than HFT. Essentially they (market makers) agree to buy stock that you want to sell than they sell it to someone else. Problem is if the market moves against them, you could be a hedge fund manager that knows something they don't. Robin hood customers don't really know anything, their trading is fairly random, so a market maker can be confident that if they buy the shares, the Robin hood customer doesn't know something they don't, that is worth something to them, and allows them to offer tighter spreads.
gringoDan 7y ago
This is a great article from patio11 that explains the general process, though not for Robinhood specifically: https://www.kalzumeus.com/2019/6/26/how-brokerages-make-money/ https://www.kalzumeus.com/2019/6/26/how-brokerages-make-mone...
claytonjy 7y ago
I'll add Matt Levine's insightful take here [0], which delves a bit into the "deal for order flow" controversy, and also makes the unique claim that for Robinhood to engage in this is very much in line with "taking from the rich and giving to the poor", because it does guarantee price improvement for RH users. [0] 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...
- H8crilA 7y ago
  Summary: Retail generates uncorrelated order flows, perfect for the market maker. Institutional generates highly correlated order flows, the nightmare of the market maker. As paradoxical as it may sound this can actually result in price improvement for the retail trader. This is one of those rare places in finance where being small is an advantage. Another is in finding value opportunities - the smaller you are the larger the pool of potential opportunities. Warren Buffett needs big and good opportunities. Retail investor needs just good opportunities. The word "big" restricts choices.
  - tomp 7y ago
    I disagree with this description. Retail flow is primarily uninformed - "noise", not "signal" (i.e. "alpha" in finance speak). Retail traders might trade based on Twitter news, Reddit suggestions, weather, gut feeling, sudden money needs, ... Institutional traders are big and slow and they have long-term alpha (if any), I don't think they'd generate much worry for HFTs/market makers... The real worry is other HFTs, small, short term (well-funded, more rational) traders that do have "alpha". There, you're faced with negative selection - by trading passive (market making), you should assume that your order is more likely to be filled when the counter-party has better information (more alpha/signal than you) so you'll lose in the short term.
    - H8crilA 7y ago
      That makes sense too (avoiding competition). But it's not what the quoted article says. Institutional trading (like mutual funds) certainly is a problem for market makers: > Sometimes, when a customer buys 100 shares at $100.01, it then buys another 100 shares at $100.02, and another 100 shares at $100.03, and keeps going until it has bought 10,000 shares and pushed the price up dramatically. The market maker who sold it the first 100 shares—and who is probably now short and needs to go out and buy those shares at a higher price—has been run over. > This is a risk of being a market maker on the public stock exchanges: Sometimes you sell 100 shares to a small retail investor and it’s random noise; other times you sell 100 shares to Fidelity and you get run over. But if a market maker can guarantee that it will only interact with retail customers—if it can filter out big orders from institutional investors—then its risk of adverse selection goes way down.
moose314 7y ago
The other commenters answered your first question about the sale of flow to HFT firms. Regarding your second question, I wouldn't recommend trading a lot of size on Robinhood, or using market order in general, but brokerages that charge commissions do not necessarily offer better execution than Robinhood, many of them still route your flow to an HFT firm or have less than stellar order routing systems.
- adrr 7y ago
  Execution price is governed by SEC and clients must get the best price. HFT doesn’t really work on retail investors who’s sells and buys can be covered with one order. You can’t front run one order trades. Institutional investors are the prey for most HFTs since they do large stock trades and they need to hide to prevent front running.
  - moose314 7y ago
    The top of book liquidity on most equity stocks is light enough that a single retail investor can absolutely submit orders which must hit multiple exchanges, especially if they do so at non-peak hours. The NBBO doesn't help you if every market maker retreats before your broker can hit the next exchange. There was a post on Reddit just a month ago where a small investment club did just that. https://imgur.com/gallery/qMBAzoQ https://imgur.com/gallery/qMBAzoQ
    - notyourday 7y ago
      This is not 1994. Catching a market order with volume is winning a Power Ball. It will be a limit and if it is not IOC/FOK order, should it clear top of the book and not be filled it would simply become a new national best.
      - moose314 7y ago
        Its not really clear who you are arguing against, the GP mentioned large market orders, I simply made the point that most brokers have worse order routing than the HFT firms and Robinhood is probably not much worse than anything else out there. Using limit IOC orders is a tool that more savvy retail traders can use to prevent bad execution, but if they are trading size the commission they pay to the broker won't make much of a difference. I would also point out that having your IOC order not fully filled is also bad execution. If you want to get a certain size done, repeatedly IOCing the market with manual click trades is not ideal.
adrr 7y ago
They are selling order flow to the market makers. Market makers want retail orders and not hedge fund orders since assumption is hedge funds may be operating on more knowledge than the market maker. Eg: satellite pictures of parking lots to predict earnings report for retailers
alteria 7y ago
This recently posted article does a good job of explaining how Discount Brokerages make money. tl;dr - order flow is $$$, but interest is even better. 1- Interest 2- Commissions 3- Asset Management 4- Securities Lending 5- Payment for Order Flow https://news.ycombinator.com/item?id=20276551 https://news.ycombinator.com/item?id=20276551 https://www.kalzumeus.com/2019/6/26/how-brokerages-make-money/ https://www.kalzumeus.com/2019/6/26/how-brokerages-make-mone...
smogcutter 7y ago
Re the 1st question, the article gringoDan posted will explain it, but I think the important thing to clarify that can get lost in the detail is that "payment for order flow" doesn't mean what it sounds like it means. They don't sell data in the way we usually think of in tech. Payment for order flow means Robinhood sells HFTs the opportunity to execute RH's transactions.
kvna 7y ago
The only issue I have had with Robinhood is regarding tax planning, because they only support FIFO sell orders. There have been several instances where I would have preferred to sell shares purchased more recently, so that my older shares can pass the one year threshold for long term capital gains. The ability to specify lots when selling shares would be worth money to me.
- earthshot 7y ago
  This is the precise reason that I only use Robinhood as a toy trading account. Give me a 'maximize losses' tax basis, please!
- btown 7y ago
  If Robinhood were to roll this out they'd inevitably do it in a way that counted as tax advice, getting them in tons of legal hot water, because they wouldn't be able to help themselves on the marketing side. So it's actually rational for them not to bother building this incredibly obvious feature. /s
- rconti 7y ago
  Can't you use whatever accounting method you wish, regardless of how they report it?
  - adammenges 7y ago
    Yeah would love an answer here too
    - bjacokes 7y ago
      When you sell shares, cost basis is reported to the IRS by the brokerage. The parent comment suggests that RH always reports the FIFO cost basis, i.e. price of the first shares you bought as opposed to the last shares. There are places on tax forms where you can adjust your cost basis up or down from the one reported by your brokerage, but (without doing any research into it) I doubt that "I don't want to use my brokerage's cost basis method" is a valid reason to use those.
elamje 7y ago
TLDR; question answer: An HFT makes money because they see you want to buy 100 shares of Apple. Their servers are located in the exchanges, so they can buy the 100 shares of Apple for $99.99 each quickly, then flip them to you for $100 each, effectively giving them a risk free profit of $1. The HFT then gives Robinhood a small reward for sending them the order data. Multiply that times millions of trades a day. If you are curious where the average broker routes orders to, they all file Rule 606 documents with the SEC. Here is Robinhoods for Q1 2019: https://d2ue93q3u507c2.cloudfront.net/assets/robinhood/legal/RHF%20PFO%20Disclosure.pdf https://d2ue93q3u507c2.cloudfront.net/assets/robinhood/legal... These filings show exactly how much each HFT, aka market maker, got routed by robinhood. Here is Schwabs: https://www.schwab.com/public/schwab/nn/legal_compliance/important_notices/order_routing.html https://www.schwab.com/public/schwab/nn/legal_compliance/imp... What you will notice is that both have roughly similar distribution across execution venues, and the same can be said about many retail brokerage firms (Fidelity, Etrade, and the like). The difference is that Robinhood makes quite a bit more money from Payment for Order Flow than the typical brokerage. Back in 2016 when Robinhood was gaining traction, I was pretty suspicious that they were either directly front-running their own users, or they were selling order flow to HFT's. Back in that day, both of the founders still had a LinkedIn that showed that they both worked at an HFT! before starting Robinhood. Since then they have removed that history from their profiles, but it's definitely not a good look if you are saying you are commission free! Selling order flow is the norm in the industry, but there is certainly a special relationship between Robinhood and their execution venues that isn't completely clear. Overall, I am in the boat that Robinhood should at least be required to say that they aren't perfectly commission free. It seems that the commission most users pay is just indirectly being paid to an HFT, then kicked back to Robinhood. With all of that being said, unless you are making huge block (100's of shares) trades, it's probably still cheaper to use Robinhood than a retail firm. My hypothesis is that Robinhood gets higher kick backs because: 1) The user base is typically not financially savvy. 2) Users are more likely to do "market" orders leading to more profit for HFT's 3) Since there is no commission fee, users feel like they can buy or sell with 0 friction meaning the average user will end up in and out of positions much more frequently. All of those things mean more profit margins for HFT's to kick back to Robinhood. Robinhood certainly is "free", but the issue is that without friction, e.g. $10 trade fee, you as an investor will hop in and out of positions quickly, meaning more profit for the HFT, and indirectly, Robinhood. However, for most of us Robinhood is still cheaper than a brokerage even with this hidden tax. I recommend avoiding options, penny stocks, and cheap-per-share stocks if you want to avoid paying a higher hidden tax to HFT's.
fossuser 7y ago
This is the best article I've seen on this issue (by patio11): https://www.kalzumeus.com/2019/6/26/how-brokerages-make-money/ https://www.kalzumeus.com/2019/6/26/how-brokerages-make-mone...
Lazare 7y ago
> I'm curious if anyone with knowledge can speak to how Robinhood sells data to high frequency traders? They don't sell the data. They sell the trade. > I've also heard some people argue if you're investing a decent amount, you're better off with commissions over market orders on Robinhood. Potentially, although if you have to ask, it's unlikely to really matter for you. (Robinhood, as is required by law, gives you the best publicly available price, and no fees. They can do this because, as above, they're selling your order flow, and their are people willing to privately offer better-than-best prices to certain types of orders. That value can be split a number of ways between the broker and the customer, and Robinhood as opted to keep the money, use it to fund their operations, and offer zero commissions. But you could imagine a different broker who charges "normal" commissions and passes the price improvements on instead. For some customers, that might end up being a better deal...or not.)
tuesdayrain 7y ago
> I've also heard some people argue if you're investing a decent amount, you're better off with commissions over market orders on Robinhood. If you're investing a decent amount, you're better off using limit orders. No real debate to be had there.
raiyu 7y ago
So this isn't about moving the market itself with the orders. There are numerous exchanges on which shares are bought and sold. They aren't just traded on the NYSE and NASDAQ. In fact most large investor institutions have their own Dark Pool exchanges. What Robin Hood does is sell the orders to high frequency traders, which then front run these orders and can great a small incremental disparity per trade. It's not even .01 per trade. However, the benefit is that every trade is done at a profit to the high frequency trader, because they are simply fulfilling an order, and not holding the stock. And to the regular small investor, the price movement is inperceptible. The actual work of high frequency traders was discovered by large institutions because their order volumes were much higher and because they were much more price sensitive, and they saw a much larger swing in their price from which they were closing transactions. This was all detailed in Michael Lewis' book "Flash Boys". So if you liked "The Big Short", this one is a must read as well. So in this case they are giving from the poor to the rich, but it's really a small imperceptible amount and because of the vagueness of what's happening most retail investors are completely unaware nor that much interested in what's happening here. You are getting a zero commission trade, which may cost you $7 somewhere else, do you really care if someone tacks on a $0.50 cent charge? You are still up $6.50.
- jackmodern 7y ago
  I disagree with a lot of this comment, but the largest most glaring mistake is around the perception that robinhood is without fees. Robinhood takes their cut by creating a larger than normal bid/ask spread. I promise you their cut is more than $.50 and most likely > $7 (at least in Crypto land where I have witnessed this behavior). To think that HFT firms are using this data to only front run orders also feels pretty naive to me, but I'm no expert.
  - ikeboy 7y ago
    I don't know about crypto but on stocks they're legally not allowed to execute a transaction outside the NBBO. See https://en.wikipedia.org/wiki/National_best_bid_and_offer https://en.wikipedia.org/wiki/National_best_bid_and_offer
  - 7y ago
anonu 7y ago
Robinhood sells their order flow to the likes of Citadel, Virtu, etc.. These are called "internalizers" and they will often "Pay for Order Flow" or pfof. pfof flow is certainly profitable, because its "retail" and bi-directional. But it's not THAT profitable. For the big guys, it might be a few $10s of millions of dollars in revenue/years. But that revenue is significantly defrayed by the cost to purchase the flow - which is easily in the $10s of millions/year as well. Net net, its still a drop in the bucket compared to money being made in other strategies. Typically, these pfof arrangements require price improvement from the bid-ask. So the retail guy benefits a negligible amount on their trade (1/10th of a penny for example). This may be good for the retail guys in aggregate. There is also some immediacy to an order getting filled (also a requirement) that may not be there if the internalizers didnt exist. Robinhood's valuation comes from the net interest (borrowing short and lending long) and from the upsell of services. https://news.ycombinator.com/item?id=20276551 https://news.ycombinator.com/item?id=20276551 << refer to the excellent article and discussion here about how brokerages make money. Where attention should be turned is whether RobinHood is investing or gambling. More money is lost punting on the markets than through any arrangements to hi-freq guys.

deleted 7y ago

[deleted]

benj111 7y ago

Its market makers generally rather than HFT. Essentially they (market makers) agree to buy stock that you want to sell than they sell it to someone else. Problem is if the market moves against them, you could be a hedge fund manager that knows something they don't. Robin hood customers don't really know anything, their trading is fairly random, so a market maker can be confident that if they buy the shares, the Robin hood customer doesn't know something they don't, that is worth something to them, and allows them to offer tighter spreads.

gringoDan 7y ago

This is a great article from patio11 that explains the general process, though not for Robinhood specifically: https://www.kalzumeus.com/2019/6/26/how-brokerages-make-money/ https://www.kalzumeus.com/2019/6/26/how-brokerages-make-mone...

claytonjy 7y ago

I'll add Matt Levine's insightful take here [0], which delves a bit into the "deal for order flow" controversy, and also makes the unique claim that for Robinhood to engage in this is very much in line with "taking from the rich and giving to the poor", because it does guarantee price improvement for RH users. [0] 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...

H8crilA 7y ago
Summary: Retail generates uncorrelated order flows, perfect for the market maker. Institutional generates highly correlated order flows, the nightmare of the market maker. As paradoxical as it may sound this can actually result in price improvement for the retail trader. This is one of those rare places in finance where being small is an advantage. Another is in finding value opportunities - the smaller you are the larger the pool of potential opportunities. Warren Buffett needs big and good opportunities. Retail investor needs just good opportunities. The word "big" restricts choices.
- tomp 7y ago
  I disagree with this description. Retail flow is primarily uninformed - "noise", not "signal" (i.e. "alpha" in finance speak). Retail traders might trade based on Twitter news, Reddit suggestions, weather, gut feeling, sudden money needs, ... Institutional traders are big and slow and they have long-term alpha (if any), I don't think they'd generate much worry for HFTs/market makers... The real worry is other HFTs, small, short term (well-funded, more rational) traders that do have "alpha". There, you're faced with negative selection - by trading passive (market making), you should assume that your order is more likely to be filled when the counter-party has better information (more alpha/signal than you) so you'll lose in the short term.
  - H8crilA 7y ago
    That makes sense too (avoiding competition). But it's not what the quoted article says. Institutional trading (like mutual funds) certainly is a problem for market makers: > Sometimes, when a customer buys 100 shares at $100.01, it then buys another 100 shares at $100.02, and another 100 shares at $100.03, and keeps going until it has bought 10,000 shares and pushed the price up dramatically. The market maker who sold it the first 100 shares—and who is probably now short and needs to go out and buy those shares at a higher price—has been run over. > This is a risk of being a market maker on the public stock exchanges: Sometimes you sell 100 shares to a small retail investor and it’s random noise; other times you sell 100 shares to Fidelity and you get run over. But if a market maker can guarantee that it will only interact with retail customers—if it can filter out big orders from institutional investors—then its risk of adverse selection goes way down.

moose314 7y ago

The other commenters answered your first question about the sale of flow to HFT firms. Regarding your second question, I wouldn't recommend trading a lot of size on Robinhood, or using market order in general, but brokerages that charge commissions do not necessarily offer better execution than Robinhood, many of them still route your flow to an HFT firm or have less than stellar order routing systems.

adrr 7y ago
Execution price is governed by SEC and clients must get the best price. HFT doesn’t really work on retail investors who’s sells and buys can be covered with one order. You can’t front run one order trades. Institutional investors are the prey for most HFTs since they do large stock trades and they need to hide to prevent front running.
- moose314 7y ago
  The top of book liquidity on most equity stocks is light enough that a single retail investor can absolutely submit orders which must hit multiple exchanges, especially if they do so at non-peak hours. The NBBO doesn't help you if every market maker retreats before your broker can hit the next exchange. There was a post on Reddit just a month ago where a small investment club did just that. https://imgur.com/gallery/qMBAzoQ https://imgur.com/gallery/qMBAzoQ
  - notyourday 7y ago
    This is not 1994. Catching a market order with volume is winning a Power Ball. It will be a limit and if it is not IOC/FOK order, should it clear top of the book and not be filled it would simply become a new national best.
    - moose314 7y ago
      Its not really clear who you are arguing against, the GP mentioned large market orders, I simply made the point that most brokers have worse order routing than the HFT firms and Robinhood is probably not much worse than anything else out there. Using limit IOC orders is a tool that more savvy retail traders can use to prevent bad execution, but if they are trading size the commission they pay to the broker won't make much of a difference. I would also point out that having your IOC order not fully filled is also bad execution. If you want to get a certain size done, repeatedly IOCing the market with manual click trades is not ideal.

adrr 7y ago

They are selling order flow to the market makers. Market makers want retail orders and not hedge fund orders since assumption is hedge funds may be operating on more knowledge than the market maker. Eg: satellite pictures of parking lots to predict earnings report for retailers

alteria 7y ago

This recently posted article does a good job of explaining how Discount Brokerages make money. tl;dr - order flow is $$$, but interest is even better. 1- Interest 2- Commissions 3- Asset Management 4- Securities Lending 5- Payment for Order Flow https://news.ycombinator.com/item?id=20276551 https://news.ycombinator.com/item?id=20276551 https://www.kalzumeus.com/2019/6/26/how-brokerages-make-money/ https://www.kalzumeus.com/2019/6/26/how-brokerages-make-mone...

smogcutter 7y ago

Re the 1st question, the article gringoDan posted will explain it, but I think the important thing to clarify that can get lost in the detail is that "payment for order flow" doesn't mean what it sounds like it means. They don't sell data in the way we usually think of in tech. Payment for order flow means Robinhood sells HFTs the opportunity to execute RH's transactions.

kvna 7y ago

The only issue I have had with Robinhood is regarding tax planning, because they only support FIFO sell orders. There have been several instances where I would have preferred to sell shares purchased more recently, so that my older shares can pass the one year threshold for long term capital gains. The ability to specify lots when selling shares would be worth money to me.

earthshot 7y ago
This is the precise reason that I only use Robinhood as a toy trading account. Give me a 'maximize losses' tax basis, please!
btown 7y ago
If Robinhood were to roll this out they'd inevitably do it in a way that counted as tax advice, getting them in tons of legal hot water, because they wouldn't be able to help themselves on the marketing side. So it's actually rational for them not to bother building this incredibly obvious feature. /s
rconti 7y ago
Can't you use whatever accounting method you wish, regardless of how they report it?
- adammenges 7y ago
  Yeah would love an answer here too
  - bjacokes 7y ago
    When you sell shares, cost basis is reported to the IRS by the brokerage. The parent comment suggests that RH always reports the FIFO cost basis, i.e. price of the first shares you bought as opposed to the last shares. There are places on tax forms where you can adjust your cost basis up or down from the one reported by your brokerage, but (without doing any research into it) I doubt that "I don't want to use my brokerage's cost basis method" is a valid reason to use those.

elamje 7y ago

TLDR; question answer: An HFT makes money because they see you want to buy 100 shares of Apple. Their servers are located in the exchanges, so they can buy the 100 shares of Apple for $99.99 each quickly, then flip them to you for $100 each, effectively giving them a risk free profit of $1. The HFT then gives Robinhood a small reward for sending them the order data. Multiply that times millions of trades a day. If you are curious where the average broker routes orders to, they all file Rule 606 documents with the SEC. Here is Robinhoods for Q1 2019: https://d2ue93q3u507c2.cloudfront.net/assets/robinhood/legal/RHF%20PFO%20Disclosure.pdf https://d2ue93q3u507c2.cloudfront.net/assets/robinhood/legal... These filings show exactly how much each HFT, aka market maker, got routed by robinhood. Here is Schwabs: https://www.schwab.com/public/schwab/nn/legal_compliance/important_notices/order_routing.html https://www.schwab.com/public/schwab/nn/legal_compliance/imp... What you will notice is that both have roughly similar distribution across execution venues, and the same can be said about many retail brokerage firms (Fidelity, Etrade, and the like). The difference is that Robinhood makes quite a bit more money from Payment for Order Flow than the typical brokerage. Back in 2016 when Robinhood was gaining traction, I was pretty suspicious that they were either directly front-running their own users, or they were selling order flow to HFT's. Back in that day, both of the founders still had a LinkedIn that showed that they both worked at an HFT! before starting Robinhood. Since then they have removed that history from their profiles, but it's definitely not a good look if you are saying you are commission free! Selling order flow is the norm in the industry, but there is certainly a special relationship between Robinhood and their execution venues that isn't completely clear. Overall, I am in the boat that Robinhood should at least be required to say that they aren't perfectly commission free. It seems that the commission most users pay is just indirectly being paid to an HFT, then kicked back to Robinhood. With all of that being said, unless you are making huge block (100's of shares) trades, it's probably still cheaper to use Robinhood than a retail firm. My hypothesis is that Robinhood gets higher kick backs because: 1) The user base is typically not financially savvy. 2) Users are more likely to do "market" orders leading to more profit for HFT's 3) Since there is no commission fee, users feel like they can buy or sell with 0 friction meaning the average user will end up in and out of positions much more frequently. All of those things mean more profit margins for HFT's to kick back to Robinhood. Robinhood certainly is "free", but the issue is that without friction, e.g. $10 trade fee, you as an investor will hop in and out of positions quickly, meaning more profit for the HFT, and indirectly, Robinhood. However, for most of us Robinhood is still cheaper than a brokerage even with this hidden tax. I recommend avoiding options, penny stocks, and cheap-per-share stocks if you want to avoid paying a higher hidden tax to HFT's.

fossuser 7y ago

This is the best article I've seen on this issue (by patio11): https://www.kalzumeus.com/2019/6/26/how-brokerages-make-money/ https://www.kalzumeus.com/2019/6/26/how-brokerages-make-mone...

Lazare 7y ago

> I'm curious if anyone with knowledge can speak to how Robinhood sells data to high frequency traders? They don't sell the data. They sell the trade. > I've also heard some people argue if you're investing a decent amount, you're better off with commissions over market orders on Robinhood. Potentially, although if you have to ask, it's unlikely to really matter for you. (Robinhood, as is required by law, gives you the best publicly available price, and no fees. They can do this because, as above, they're selling your order flow, and their are people willing to privately offer better-than-best prices to certain types of orders. That value can be split a number of ways between the broker and the customer, and Robinhood as opted to keep the money, use it to fund their operations, and offer zero commissions. But you could imagine a different broker who charges "normal" commissions and passes the price improvements on instead. For some customers, that might end up being a better deal...or not.)

tuesdayrain 7y ago

> I've also heard some people argue if you're investing a decent amount, you're better off with commissions over market orders on Robinhood. If you're investing a decent amount, you're better off using limit orders. No real debate to be had there.

raiyu 7y ago

So this isn't about moving the market itself with the orders. There are numerous exchanges on which shares are bought and sold. They aren't just traded on the NYSE and NASDAQ. In fact most large investor institutions have their own Dark Pool exchanges. What Robin Hood does is sell the orders to high frequency traders, which then front run these orders and can great a small incremental disparity per trade. It's not even .01 per trade. However, the benefit is that every trade is done at a profit to the high frequency trader, because they are simply fulfilling an order, and not holding the stock. And to the regular small investor, the price movement is inperceptible. The actual work of high frequency traders was discovered by large institutions because their order volumes were much higher and because they were much more price sensitive, and they saw a much larger swing in their price from which they were closing transactions. This was all detailed in Michael Lewis' book "Flash Boys". So if you liked "The Big Short", this one is a must read as well. So in this case they are giving from the poor to the rich, but it's really a small imperceptible amount and because of the vagueness of what's happening most retail investors are completely unaware nor that much interested in what's happening here. You are getting a zero commission trade, which may cost you $7 somewhere else, do you really care if someone tacks on a $0.50 cent charge? You are still up $6.50.

jackmodern 7y ago
I disagree with a lot of this comment, but the largest most glaring mistake is around the perception that robinhood is without fees. Robinhood takes their cut by creating a larger than normal bid/ask spread. I promise you their cut is more than $.50 and most likely > $7 (at least in Crypto land where I have witnessed this behavior). To think that HFT firms are using this data to only front run orders also feels pretty naive to me, but I'm no expert.
- ikeboy 7y ago
  I don't know about crypto but on stocks they're legally not allowed to execute a transaction outside the NBBO. See https://en.wikipedia.org/wiki/National_best_bid_and_offer https://en.wikipedia.org/wiki/National_best_bid_and_offer
- 7y ago

anonu 7y ago

Robinhood sells their order flow to the likes of Citadel, Virtu, etc.. These are called "internalizers" and they will often "Pay for Order Flow" or pfof. pfof flow is certainly profitable, because its "retail" and bi-directional. But it's not THAT profitable. For the big guys, it might be a few $10s of millions of dollars in revenue/years. But that revenue is significantly defrayed by the cost to purchase the flow - which is easily in the $10s of millions/year as well. Net net, its still a drop in the bucket compared to money being made in other strategies. Typically, these pfof arrangements require price improvement from the bid-ask. So the retail guy benefits a negligible amount on their trade (1/10th of a penny for example). This may be good for the retail guys in aggregate. There is also some immediacy to an order getting filled (also a requirement) that may not be there if the internalizers didnt exist. Robinhood's valuation comes from the net interest (borrowing short and lending long) and from the upsell of services. https://news.ycombinator.com/item?id=20276551 https://news.ycombinator.com/item?id=20276551 << refer to the excellent article and discussion here about how brokerages make money. Where attention should be turned is whether RobinHood is investing or gambling. More money is lost punting on the markets than through any arrangements to hi-freq guys.