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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 N
by 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 agoI 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 agoI 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
- vasilipupkin 7y agoIt’s sctually the opposite: retail orders have no information about direction of market, so the profitable thing is not to “front run”, but to trade in the opposite direction of the retail order. If the retail order is selling the bid price, you want to buy the bid because you know on average those retail orders don’t indicate that market is going in any direction
- Kranar 7y agoWhat you're describing is illegal in most regulated markets around the world and certainly illegal on U.S. markets [1]. Brokers are legally required as per Reg NMS to offer the best quote to their customers. https://en.wikipedia.org/wiki/Regulation_NMS https://en.wikipedia.org/wiki/Regulation_NMS
- Lazare 7y ago> I promise you their cut is more than $.50 and most likely > $7 For stocks? Absolutely not. You get the National Best Bid or Offer (NBBO), as required by law, ie, the best spread available on the public stock markets. > at least in Crypto land Well, maybe there's your mistake. > To think that HFT firms are using this data to only front run orders They're not using it to front run orders. Not only is that illegal, but it's also in this case impossible by definition. You front run an order that might move the market by trading in advance of it, but in this case the internalisers are paying for retail order flow because it won't move the market. That's the only reason it has value to them. And because it won't move the market, you (obviously) can't get out in front of that market movement. I'd suggest doing a bit more research.
- Lazare 7y agoInternalisers do not "front run" retail orders. That's not even a thing you can do; the idea of front running is to get ahead of a trade that will move the market, but the internalisers are buying retail order flow because it won't. If the order isn't moving the market, you can't "get in front of it". If front running happens at all (and by strict definitions, it really doesn't), it certainly isn't happening to Robinhood customers (or the custoemrs of any other discount brokerage).