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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 Robinho

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.
    - tomp 7y ago
      Indeed, this isn't a comment on your summary (which I have no reason to not believe to be accurate). I'm commenting on the ideas behind the article itself. Still, I disagree. Even a large order won't "move" the market by itself (unless you're the Fed). At best, it might trigger a flash crash (we've seen a few of these in the past few years), where liquidity temporarily dries up (HFT market makers remove their passive orders, until they figure out what the hell is going on, precisely because they already predict cases like this) but comes back as soon as human traders figure out that nothing is going on (and the price has no reason to move). More likely, a large order might blow through a few layers of the order book, which is good for market makers - instead of selling it at $100.01 (which is the "best", i.e. "lowest" price), you're selling it at $100.02 (i.e. you're making more money than your fellow market makers). In general, if you're an "institutional" (or otherwise big & slow) trader trading "large" orders (relative to the standard market volume), you're trying hard to disguise your intents. If HFTs know that you will buy the next 100 shares, they'll just sell it to you for $100.09 or more!
      - H8crilA 7y ago
        This is not Japan, the FED is not trading equities. And continuous movement of price in one direction is bad for market makers. Read the linked article, it explains why.
yellow_postit 7y ago
At the volume of retail though how impactful are those price improvements over the long run? My gut tells me it can’t be much, but I have zero data to back that up on and would love to find some.
- H8crilA 7y ago
  Not much, but it's not like trading is expensive these days. IBKR usually charges me 1 dollar per transaction, unless I trade many thousands USD worth of securities at a time. Improvements (of which there may be none) should be in the same ballpark.
dmix 7y ago
http://archive.is/DzFOg http://archive.is/DzFOg

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.
  - tomp 7y ago
    Indeed, this isn't a comment on your summary (which I have no reason to not believe to be accurate). I'm commenting on the ideas behind the article itself. Still, I disagree. Even a large order won't "move" the market by itself (unless you're the Fed). At best, it might trigger a flash crash (we've seen a few of these in the past few years), where liquidity temporarily dries up (HFT market makers remove their passive orders, until they figure out what the hell is going on, precisely because they already predict cases like this) but comes back as soon as human traders figure out that nothing is going on (and the price has no reason to move). More likely, a large order might blow through a few layers of the order book, which is good for market makers - instead of selling it at $100.01 (which is the "best", i.e. "lowest" price), you're selling it at $100.02 (i.e. you're making more money than your fellow market makers). In general, if you're an "institutional" (or otherwise big & slow) trader trading "large" orders (relative to the standard market volume), you're trying hard to disguise your intents. If HFTs know that you will buy the next 100 shares, they'll just sell it to you for $100.09 or more!
    - H8crilA 7y ago
      This is not Japan, the FED is not trading equities. And continuous movement of price in one direction is bad for market makers. Read the linked article, it explains why.

yellow_postit 7y ago

At the volume of retail though how impactful are those price improvements over the long run? My gut tells me it can’t be much, but I have zero data to back that up on and would love to find some.

H8crilA 7y ago
Not much, but it's not like trading is expensive these days. IBKR usually charges me 1 dollar per transaction, unless I trade many thousands USD worth of securities at a time. Improvements (of which there may be none) should be in the same ballpark.

dmix 7y ago

http://archive.is/DzFOg http://archive.is/DzFOg