4 ms·

Brokers are required to, yes. But Robinhood doesn’t submit orders directly to exchanges, it always passes through a middle man who has to collect some fee for t

by elamje 7y ago

Brokers are required to, yes. But Robinhood doesn’t submit orders directly to exchanges, it always passes through a middle man who has to collect some fee for their service.

tomp 7y ago
No, they're not (if my understanding is correct) passing their orders through a middle man, they're passing their orders to a market maker. Market makers don't get "fees" and don't perform arbitrage (they can't, they need to match the best bid/offer). They make money by trading the spread (the difference between offer and bid). They buy at $100.01 (best bid) and sell at $100.02 (best offer) and pocket the difference ($0.01). This of course relies on statistics, law of large numbers (doing this often enough) and avoiding risk (a single large move can wipe out your profits from 1000s of trades). The reason they like trading with Robin Hood (and other retail traders) is that the chances of a large move following a retail trade is much smaller (retail traders are "uninformed", i.e. noise).
- elamje 7y ago
  I'm pretty confident we are talking about the same thing. I was referring to market makers as the middle men because they are not the stock exchange. Call it whatever you want, but trading the spread is arbitrage, i.e. a price mismatch with opportunity to profit.
  - tomp 7y ago
    It's unlikely that we're talking about the same thing. Based purely on your reply I reckon you have your concepts all mixed up. (1) The exchange is the middle man. The market maker is your counterparty, i.e. the person you actually trade with. The exchange facilitates the trades (often, not always - e.g. you might also trade off exchange, e.g. in dark pools (but you wouldn't do that unless you thought you were getting better prices) or by trading directly with market makers - in which case the US law protects retail customers from being "scammed") and also does clearing which means that it "guarantees" the trades - but that might not really work because an exchange cannot print money and so can go bankrupt itself - recent example in Norway: https://www.bloomberg.com/news/articles/2018-09-14/nordic-power-whale-s-losses-on-nasdaq-another-blow-to-exchange https://www.bloomberg.com/news/articles/2018-09-14/nordic-po... > The loss for Nasdaq’s default fund, that helps guarantee trades, amounts to 107 million euros ($125 million) and the exchange has issued a “replenishment contribution request” to cover the default losses. Current trading members will have to contribute in relation to their size and this is the kind of event the default fund was designed to handle, a company spokesman said. (2) If you really want to call market-making "arbitrage", sure, go ahead - but it's time arbitrage, not price arbitrage. Similar to how your bank is (or was) doing time arbitrage by connecting short-term deposits with long-term loans (and earning a fee in the process). Without market makers, if you wanted to sell 1 share of AAPL (Apple), you'd have to wait until someone came along wanting to buy 1 share, and then you'd have to agree on a price. Market-makers facilitate trading by continuously providing bid-ask quotes, so that you can sell immediately at a known price, and then 1 hour later someone can buy immediately at a known price (minus the "fee" (spread) that marker makers earn). All in all, I don't think you even need to use brokers. You can just find buyers yourself and sell directly to them, avoiding the "evil arbitraging market makers" in the process.
    - elamje 7y ago
      Thank you for clarifying my misunderstanding.
adrr 7y ago
Robinhood is a broker dealer.
Lazare 7y ago
> Brokers are required to, yes. Correct. And Robinhood is a broker, so it is also required to. > Robinhood doesn’t submit orders directly to exchanges Correct, but irrelevent. > it always passes through a middle man Correct. > who has to collect some fee for their service. Incorrect. They are not charging Robinhood (or their customers) a fee. Robinhood's clients get the NBBO, as required by law, full stop. There's no trick here.

by elamje 7y ago

Brokers are required to, yes. But Robinhood doesn’t submit orders directly to exchanges, it always passes through a middle man who has to collect some fee for their service.

tomp 7y ago

No, they're not (if my understanding is correct) passing their orders through a middle man, they're passing their orders to a market maker. Market makers don't get "fees" and don't perform arbitrage (they can't, they need to match the best bid/offer). They make money by trading the spread (the difference between offer and bid). They buy at $100.01 (best bid) and sell at $100.02 (best offer) and pocket the difference ($0.01). This of course relies on statistics, law of large numbers (doing this often enough) and avoiding risk (a single large move can wipe out your profits from 1000s of trades). The reason they like trading with Robin Hood (and other retail traders) is that the chances of a large move following a retail trade is much smaller (retail traders are "uninformed", i.e. noise).

elamje 7y ago
I'm pretty confident we are talking about the same thing. I was referring to market makers as the middle men because they are not the stock exchange. Call it whatever you want, but trading the spread is arbitrage, i.e. a price mismatch with opportunity to profit.
- tomp 7y ago
  It's unlikely that we're talking about the same thing. Based purely on your reply I reckon you have your concepts all mixed up. (1) The exchange is the middle man. The market maker is your counterparty, i.e. the person you actually trade with. The exchange facilitates the trades (often, not always - e.g. you might also trade off exchange, e.g. in dark pools (but you wouldn't do that unless you thought you were getting better prices) or by trading directly with market makers - in which case the US law protects retail customers from being "scammed") and also does clearing which means that it "guarantees" the trades - but that might not really work because an exchange cannot print money and so can go bankrupt itself - recent example in Norway: https://www.bloomberg.com/news/articles/2018-09-14/nordic-power-whale-s-losses-on-nasdaq-another-blow-to-exchange https://www.bloomberg.com/news/articles/2018-09-14/nordic-po... > The loss for Nasdaq’s default fund, that helps guarantee trades, amounts to 107 million euros ($125 million) and the exchange has issued a “replenishment contribution request” to cover the default losses. Current trading members will have to contribute in relation to their size and this is the kind of event the default fund was designed to handle, a company spokesman said. (2) If you really want to call market-making "arbitrage", sure, go ahead - but it's time arbitrage, not price arbitrage. Similar to how your bank is (or was) doing time arbitrage by connecting short-term deposits with long-term loans (and earning a fee in the process). Without market makers, if you wanted to sell 1 share of AAPL (Apple), you'd have to wait until someone came along wanting to buy 1 share, and then you'd have to agree on a price. Market-makers facilitate trading by continuously providing bid-ask quotes, so that you can sell immediately at a known price, and then 1 hour later someone can buy immediately at a known price (minus the "fee" (spread) that marker makers earn). All in all, I don't think you even need to use brokers. You can just find buyers yourself and sell directly to them, avoiding the "evil arbitraging market makers" in the process.
  - elamje 7y ago
    Thank you for clarifying my misunderstanding.

adrr 7y ago

Robinhood is a broker dealer.

Lazare 7y ago

> Brokers are required to, yes. Correct. And Robinhood is a broker, so it is also required to. > Robinhood doesn’t submit orders directly to exchanges Correct, but irrelevent. > it always passes through a middle man Correct. > who has to collect some fee for their service. Incorrect. They are not charging Robinhood (or their customers) a fee. Robinhood's clients get the NBBO, as required by law, full stop. There's no trick here.