4 ms·

They should make it illegal to gamble with your customers' balances and risk going insolvent.

by Vadoff 7y ago

brenden2 7y ago
Robinhood makes money by tailgating your orders and selling your trade history to hedge funds et al. If they make too many risky moves, it's possible that they could run out of money very quickly. That, combined with the panic from the 3 days of outages sounds like a very bad recipe to me. EDIT: changed frontrunning -> tailgating.
- mason55 7y ago
  > frontrunning your orders That's a pretty serious criminal allegation, do you have any more info? > and selling your trade history to hedge funds I have not heard about this either, do you have more info? The main way that I'm aware of that Robinhood makes money is payment for order flow. The idea is that HFT firms want make risk-free money by providing liquidity without taking a position (via the bid/ask spread). The problem in the larger market is that every once in awhile the price will move against the HFT firm because some other market participant knows something they don't, and so they get caught holding equities that they didn't want to hold. Instead, they pay Robinhood to send them order flow from retail customers who are unlikely to actually know anything and should have approximately even/random orders on either side of the bid/ask spread. Orders still have to be executed at the best possible price though, they can't send your order to Citadel and have Citadel charge you $0.02/share more than what you could get from someone else.
  - brenden2 7y ago
    It's not criminal in any way, it's actually pretty common for brokers to do this, particularly the free or low-cost ones. Call it market making if you want, but it's essentially the same mechanics.
    - judge2020 7y ago
      Is this not a prohibited practice? https://www.law.cornell.edu/cfr/text/17/38.152 https://www.law.cornell.edu/cfr/text/17/38.152
    - bonestamp2 7y ago
      I'm a fairly new stock investor so these are honest questions. Actual front-running is illegal as far as I can tell, no? What is the difference between what they're doing and illegal front running?
      - SpicyLemonZest 7y ago
        The canonical case of front-running is that your customer calls you up, says "I want to buy 100 shares", and then you go out and buy 50 shares for yourself before buying their shares. Then their purchase makes the price go up and you've made a free profit at either their or the market's expense. The canonical case of market-making is that you think "you know, I think people are going to ask me to buy 100 shares this afternoon, so I'd better buy 50 this morning to hedge". (Or "you know, I've just bought 100 shares for a customer, I'd better buy 50 for myself".) There's a core similarity here - you're buying shares based on your customers' trades - but I think it's also clear that you're not really taking advantage of anyone.
    - humaniania 7y ago
      Do you have a reference for that claim? Or are you repeating something that you read on a forum?
    - SilasX 7y ago
      Are you sure you're not confusing it with tailgating, which is legal but sometimes frowned-upon? Front-running: Broker gets order, broker buys for self, broker executes order. (illegal) Tailgating: Broker gets order, broker executes order, broker buys for self. (legal)
      - brenden2 7y ago
        Yes I think you're right. I will edit my posts.
  - spicywith 7y ago
    Well, maybe read Flash Boys by Michael Lewis - it's literally what all the banks are doing - allowing HFT traders into their dark pools to front run client orders, and they get a cut of it. Robinhood could be making money in a couple ways: - Fulfilling orders inside the RH pool/market making. Not sure if they are big enough, but they could be acting as an exchange. The matchmaking could be "imperfect" if you see what I mean. Essentially front running. - Selling access to the client orders to HFT firms that do the front running and pay handsomely for the privilege. Again, this is pretty fucked up - you never get a real, fair view of the market and are always overpaying for your orders. Again, read Flash Boys. Will blow your mind.

They should make it illegal to gamble with your customers' balances and risk going insolvent.

by Vadoff 7y ago

They should make it illegal to gamble with your customers' balances and risk going insolvent.

Robinhood makes money by tailgating your orders and selling your trade history to hedge funds et al. If they make too many risky moves, it's possible that they could run out of money very quickly. That, combined with the panic from the 3 days of outages sounds like a very bad recipe to me. EDIT: changed frontrunning -> tailgating.

mason55 7y ago
> frontrunning your orders That's a pretty serious criminal allegation, do you have any more info? > and selling your trade history to hedge funds I have not heard about this either, do you have more info? The main way that I'm aware of that Robinhood makes money is payment for order flow. The idea is that HFT firms want make risk-free money by providing liquidity without taking a position (via the bid/ask spread). The problem in the larger market is that every once in awhile the price will move against the HFT firm because some other market participant knows something they don't, and so they get caught holding equities that they didn't want to hold. Instead, they pay Robinhood to send them order flow from retail customers who are unlikely to actually know anything and should have approximately even/random orders on either side of the bid/ask spread. Orders still have to be executed at the best possible price though, they can't send your order to Citadel and have Citadel charge you $0.02/share more than what you could get from someone else.
- brenden2 7y ago
  It's not criminal in any way, it's actually pretty common for brokers to do this, particularly the free or low-cost ones. Call it market making if you want, but it's essentially the same mechanics.
  - judge2020 7y ago
    Is this not a prohibited practice? https://www.law.cornell.edu/cfr/text/17/38.152 https://www.law.cornell.edu/cfr/text/17/38.152
  - bonestamp2 7y ago
    I'm a fairly new stock investor so these are honest questions. Actual front-running is illegal as far as I can tell, no? What is the difference between what they're doing and illegal front running?
    - SpicyLemonZest 7y ago
      The canonical case of front-running is that your customer calls you up, says "I want to buy 100 shares", and then you go out and buy 50 shares for yourself before buying their shares. Then their purchase makes the price go up and you've made a free profit at either their or the market's expense. The canonical case of market-making is that you think "you know, I think people are going to ask me to buy 100 shares this afternoon, so I'd better buy 50 this morning to hedge". (Or "you know, I've just bought 100 shares for a customer, I'd better buy 50 for myself".) There's a core similarity here - you're buying shares based on your customers' trades - but I think it's also clear that you're not really taking advantage of anyone.
  - humaniania 7y ago
    Do you have a reference for that claim? Or are you repeating something that you read on a forum?
  - SilasX 7y ago
    Are you sure you're not confusing it with tailgating, which is legal but sometimes frowned-upon? Front-running: Broker gets order, broker buys for self, broker executes order. (illegal) Tailgating: Broker gets order, broker executes order, broker buys for self. (legal)
    - brenden2 7y ago
      Yes I think you're right. I will edit my posts.
- spicywith 7y ago
  Well, maybe read Flash Boys by Michael Lewis - it's literally what all the banks are doing - allowing HFT traders into their dark pools to front run client orders, and they get a cut of it. Robinhood could be making money in a couple ways: - Fulfilling orders inside the RH pool/market making. Not sure if they are big enough, but they could be acting as an exchange. The matchmaking could be "imperfect" if you see what I mean. Essentially front running. - Selling access to the client orders to HFT firms that do the front running and pay handsomely for the privilege. Again, this is pretty fucked up - you never get a real, fair view of the market and are always overpaying for your orders. Again, read Flash Boys. Will blow your mind.