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There is no such thing as a free lunch. Marketing trades either by Schwab or others is extremely misleading since Schwab is one of the brokers that sells your

There is no such thing as a free lunch. Marketing trades either by Schwab or others is extremely misleading since Schwab is one of the brokers that sells your order flow. What's better- paying $5 bucks to trade or losing a % of your total order to someone like Citadel or routed to certain exchanges at a lesser price? If your trade size is even remotely decent in size you will lose a lot more on restricted order flow. The SEC needs to require the disclosure of this practice because most people don't realize that in exchange for "free" they are getting nuked every single transaction all the while thinking they are skirting the system. Like the old saying - if you look around the table and wonder who the patsy is-- you're the patsy!

zigzaggy 7y ago
Which is why I always use limit orders. If I pick a price I don’t really care if someone front runs it or not. I’m getting it for my target price so everyone’s happy.
- perl4ever 7y ago
  The problem is the vast majority of people have essentially no sense of what they should pay other than the current price. You could ban market orders, but that doesn't completely solve the problem of not having an objective yardstick.
cheriot 7y ago
Are there empirical estimates for how trades routed through Citadel and other intermediaries differ from trading directly on the exchange? I've read elsewhere that a large volume of small trades lets them sell to large entities the ability to avoid all the HFT players. It's less about making money on the small trades.
- thedufer 7y ago
  I'm not sure what kind of differences you're asking about, but they're required to give at least as good of a price as the exchange is offering, and in many cases they give a better price
tptacek 7y ago
Citadel wants your orders because they can safely quote you lower prices, since you’re retail and not Vanguard unloading a position that will blow through every price on the book and leave them holding the bag. So this complaint doesn’t make a lot of sense.
anonu 7y ago
Payment for order flow (pfof) is demininis revenue for both sides. Look at Schwab's income statement: pfof is less than 1 percent of it's $5bn 2018 revenue. On the other side, the traders or internalizers, they must pay to buy this order flow and it's a competitive landscape. The money they make on the flow barely covers what they pay for it. Markets have become very efficient. My sources: Schwab annual report. Also I used to internalize trades at a big bank. I still know some people at the big shops who still do it.
- jboydyhacker 7y ago
  Right they make all their money on margin. Most people are not trading a lot- but if you do- you will get fleeced- especially with any kind of a complex order.
fancyfish 7y ago
The rumor that the investor is getting fleeced has been debunked, and on the contrary, the investor is potentially getting better execution and price than otherwise. Schwab, Robinhood et al are registered brokers subject to Regulation NMS and have a duty to seek the best execution reasonably available for customer orders. Your order is not changed, and no HFT is paying Schwab to be able to execute at worse than the publicly quoted price. Schwab is heavily regulated as a broker and required to execute your trade at at least the National Best Bid and Offer (NBBO). [https://www.sec.gov/reportspubs/investor-publications/investorpubstradexechtm.html https://www.sec.gov/reportspubs/investor-publications/invest...]
- jboydyhacker 7y ago
  Not true. Step 1- open accounts at Schwab and then IB. Put in say a complex butterfly order at the exact same time at both brokers and see the difference in price you get. It adds up to millions pretty quick.
lordgrenville 7y ago
You need to read Patrick McKenzie's (of Stripe) excellent analysis of this topic called 'How Discount Brokerages Make Money' https://www.kalzumeus.com/2019/6/26/how-brokerages-make-money/ https://www.kalzumeus.com/2019/6/26/how-brokerages-make-mone...
- jboydyhacker 7y ago
  I've read it- It's very true profits at Schwab in aggregate are from margin loans often sitting in accounts with no activity but that doesn't have anything to do with what happens to people that trade. It's a totally different question. Most people at Schwab are not trading a lot every month- usually their&L. The way to properly do the analysis is run the same trades through a robinhood or a Schwab Vs IB which hardly does this nasty practice. If you have investments of any size the amount of money lost dwarfs anything in his analysis. So while his analysis is excellent it doesn't have anything to do with the specific question at hand.
  - lordgrenville 7y ago
    As other commenters have said, they make only a tiny amount of revenue from PFOF. If it was to the detriment of their customers, it wouldn't be worthwhile for them. But it's also possible that they don't care much about customers who do a lot of large trades, since they're making money from net interest.
    - jboydyhacker 7y ago
      Several former SEC heads disagree The practice can pretty quickly add up to millions on a sizable account Just because they don’t make most of their profits this way doesn’t mean people are not getting ripped off by the brokers that do this
      - patio11 7y ago
        The practice can pretty quickly add up to millions on a sizable account Can you demonstrate this claim, with math? Within an order of magnitude, what would the size of that account need to be, what would its trading frequency need to be, what would its average trade need to be, and what would the average PFoF per trade need to be, to result in $1,000,000 of PFoF revenue incident to that account? There are technologists who have an emotional relationship to the claim you just made. It feels correct. If it is correct, it should be amenable to analysis via numbers in the same fashion that other claims about numbers are amenable to e.g. multiplication. Spoiler: There is no account which generates $1 million in PFoF fees [+]. Your estimate is off by at least 3 orders of magnitude, and more than that for e.g. typical HN users, including those who have hundreds of thousands or millions of financial assets, including those who trade relatively actively. [+] There are plenty of accounts in the world which generate $1 million in net interest revenue; they are generally not owned by individuals but a company which doesn't have a treasury team and which doesn't execute aggressively could fairly easily do that if e.g. they raised +/- $100 million and kept it in the same place they kept their seed round.

zigzaggy 7y ago

Which is why I always use limit orders. If I pick a price I don’t really care if someone front runs it or not. I’m getting it for my target price so everyone’s happy.

perl4ever 7y ago
The problem is the vast majority of people have essentially no sense of what they should pay other than the current price. You could ban market orders, but that doesn't completely solve the problem of not having an objective yardstick.

cheriot 7y ago

Are there empirical estimates for how trades routed through Citadel and other intermediaries differ from trading directly on the exchange? I've read elsewhere that a large volume of small trades lets them sell to large entities the ability to avoid all the HFT players. It's less about making money on the small trades.

thedufer 7y ago
I'm not sure what kind of differences you're asking about, but they're required to give at least as good of a price as the exchange is offering, and in many cases they give a better price

tptacek 7y ago

Citadel wants your orders because they can safely quote you lower prices, since you’re retail and not Vanguard unloading a position that will blow through every price on the book and leave them holding the bag. So this complaint doesn’t make a lot of sense.

anonu 7y ago

Payment for order flow (pfof) is demininis revenue for both sides. Look at Schwab's income statement: pfof is less than 1 percent of it's $5bn 2018 revenue. On the other side, the traders or internalizers, they must pay to buy this order flow and it's a competitive landscape. The money they make on the flow barely covers what they pay for it. Markets have become very efficient. My sources: Schwab annual report. Also I used to internalize trades at a big bank. I still know some people at the big shops who still do it.

jboydyhacker 7y ago
Right they make all their money on margin. Most people are not trading a lot- but if you do- you will get fleeced- especially with any kind of a complex order.

fancyfish 7y ago

The rumor that the investor is getting fleeced has been debunked, and on the contrary, the investor is potentially getting better execution and price than otherwise. Schwab, Robinhood et al are registered brokers subject to Regulation NMS and have a duty to seek the best execution reasonably available for customer orders. Your order is not changed, and no HFT is paying Schwab to be able to execute at worse than the publicly quoted price. Schwab is heavily regulated as a broker and required to execute your trade at at least the National Best Bid and Offer (NBBO). [https://www.sec.gov/reportspubs/investor-publications/investorpubstradexechtm.html https://www.sec.gov/reportspubs/investor-publications/invest...]

jboydyhacker 7y ago
Not true. Step 1- open accounts at Schwab and then IB. Put in say a complex butterfly order at the exact same time at both brokers and see the difference in price you get. It adds up to millions pretty quick.

lordgrenville 7y ago

You need to read Patrick McKenzie's (of Stripe) excellent analysis of this topic called 'How Discount Brokerages Make Money' https://www.kalzumeus.com/2019/6/26/how-brokerages-make-money/ https://www.kalzumeus.com/2019/6/26/how-brokerages-make-mone...

jboydyhacker 7y ago
I've read it- It's very true profits at Schwab in aggregate are from margin loans often sitting in accounts with no activity but that doesn't have anything to do with what happens to people that trade. It's a totally different question. Most people at Schwab are not trading a lot every month- usually their&L. The way to properly do the analysis is run the same trades through a robinhood or a Schwab Vs IB which hardly does this nasty practice. If you have investments of any size the amount of money lost dwarfs anything in his analysis. So while his analysis is excellent it doesn't have anything to do with the specific question at hand.
- lordgrenville 7y ago
  As other commenters have said, they make only a tiny amount of revenue from PFOF. If it was to the detriment of their customers, it wouldn't be worthwhile for them. But it's also possible that they don't care much about customers who do a lot of large trades, since they're making money from net interest.
  - jboydyhacker 7y ago
    Several former SEC heads disagree The practice can pretty quickly add up to millions on a sizable account Just because they don’t make most of their profits this way doesn’t mean people are not getting ripped off by the brokers that do this
    - patio11 7y ago
      The practice can pretty quickly add up to millions on a sizable account Can you demonstrate this claim, with math? Within an order of magnitude, what would the size of that account need to be, what would its trading frequency need to be, what would its average trade need to be, and what would the average PFoF per trade need to be, to result in $1,000,000 of PFoF revenue incident to that account? There are technologists who have an emotional relationship to the claim you just made. It feels correct. If it is correct, it should be amenable to analysis via numbers in the same fashion that other claims about numbers are amenable to e.g. multiplication. Spoiler: There is no account which generates $1 million in PFoF fees [+]. Your estimate is off by at least 3 orders of magnitude, and more than that for e.g. typical HN users, including those who have hundreds of thousands or millions of financial assets, including those who trade relatively actively. [+] There are plenty of accounts in the world which generate $1 million in net interest revenue; they are generally not owned by individuals but a company which doesn't have a treasury team and which doesn't execute aggressively could fairly easily do that if e.g. they raised +/- $100 million and kept it in the same place they kept their seed round.