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> 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

> 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.
  - im3w1l 7y ago
    Isn't what they do this: Broker gets order, sends it to their best buddy instead of normal market, buddy takes other side of order (at the same price as market would have given). The assumption being that someone who crosses the spread on the general market may have some good info they are trading on. But a robinhood trader who crosses the spread is basically just trading randomly, and is giving away the spread for nothing.
    - mason55 7y ago
      Yes, that's what happens, although "best buddy" is really "company that pays us the most for the orders." I am not sure if you meant it this way but "best buddy" implies that something shady is going on. If you want to pay Robinhood more for their order flow than Virtu & Citadel I'm sure they would be happen to send you all the orders you could fill.
      - im3w1l 7y ago
        It's essentially using a sub-tick size price improvement (but paid to the broker to cover trading fees) to jump the queue at the market. It arguably undermines the existence of price ticks. I think you know this but for the lurkers, the purpose of price ticks is to make the market first-come-first-serve. Without them people can raise the bid by 0.0000000001 to get first in line, making the market last-come-first serve. But as far as shadiness goes, it's a very light shade of gray.
- perl4ever 7y ago
  Robinhood got in trouble (FINRA) for not taking the requirement to get the best price seriously though. It is common to pay for order flow, but it appears that Robinhood turned out to be exactly the sort of crooks that their customers assumed all the rest of the brokers were. It's instructive how you can be cynical, and believe that equates to sophistication, and end up conning yourself.
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.

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.
- im3w1l 7y ago
  Isn't what they do this: Broker gets order, sends it to their best buddy instead of normal market, buddy takes other side of order (at the same price as market would have given). The assumption being that someone who crosses the spread on the general market may have some good info they are trading on. But a robinhood trader who crosses the spread is basically just trading randomly, and is giving away the spread for nothing.
  - mason55 7y ago
    Yes, that's what happens, although "best buddy" is really "company that pays us the most for the orders." I am not sure if you meant it this way but "best buddy" implies that something shady is going on. If you want to pay Robinhood more for their order flow than Virtu & Citadel I'm sure they would be happen to send you all the orders you could fill.
    - im3w1l 7y ago
      It's essentially using a sub-tick size price improvement (but paid to the broker to cover trading fees) to jump the queue at the market. It arguably undermines the existence of price ticks. I think you know this but for the lurkers, the purpose of price ticks is to make the market first-come-first-serve. Without them people can raise the bid by 0.0000000001 to get first in line, making the market last-come-first serve. But as far as shadiness goes, it's a very light shade of gray.
perl4ever 7y ago
Robinhood got in trouble (FINRA) for not taking the requirement to get the best price seriously though. It is common to pay for order flow, but it appears that Robinhood turned out to be exactly the sort of crooks that their customers assumed all the rest of the brokers were. It's instructive how you can be cynical, and believe that equates to sophistication, and end up conning yourself.

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.