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Well they sell your trade data to HFT firms before a trade is executed to let them arbitrage on you so you are probably net losing money vs fees from other brok

Well they sell your trade data to HFT firms before a trade is executed to let them arbitrage on you so you are probably net losing money vs fees from other brokerages.

tptacek 6y ago
No. The opposite thing is true: HFTs want your retail trades because the cost basis of trading with you is lower than with trading with the broader market, and they can split the difference in savings with the brokerage. If anything, you're likely getting price improvement from the HFT. (None of this makes Robinhood good; it's just that PFOF doesn't explain why they're bad).
- awinder 6y ago
  Ok now I’m re-heartened, it comes up every time but it gets good rebuttals now xD
- edouard-harris 6y ago
  Yes, this is exactly right. The truth about HFT is that it has materially reduced the effective trading fees for retail investors across the board. > the cost basis of trading with you is lower than with trading with the broader market But this is exactly why Robinhood is bad. Trading with you (a retail investor) has a lower cost basis because retail investors are reliably less sophisticated than institutional investors. Therefore: an institution will pay to take the other side of a series of trades with you because it knows you aren't sophisticated, so it's likely to win in the long run. From there, follow the incentives: Robinhood is incentivized to sell more order flow; which it does by increasing its trading volume; which it does by making trades easier. Robinhood is also incentivized to increase its net revenue per trade; which it does by increasing the price at which it can sell a given volume of order flow to institutions; which it does by making its average trade less sophisticated. In summary: The most obvious way for Robinhood to optimize its revenue is to get its investors to make lots of bad trades.
  - tptacek 6y ago
    That's not the sense in which market makers "win" on these trades. The information market makers are capitalizing on is "your tiny retail trade isn't followed by a giant block of additional trades unloading a huge position held by a pension fund", not "you are too dumb to know what this stock costs". The money they're making is just the spread. They can safely quote better spreads to retail investors than they can to execution firms trading for giant funds.
    - tripletao 6y ago
      The market makers win on both factors. Their concern is that my sell order will be followed by many other orders to sell, because that would leave them with a large inventory of stock that they can't unload except at a loss (because the market impact of that selling probably drove the price down). That concern might exist because I'm selling a big position and my order is the tip of that iceberg, as you say; but it could also exist because I'm trading on news that hasn't yet been incorporated into the share price, and my order will be followed by many other people selling once they learn that news themselves.
  - blahbhthrow3748 6y ago
    > Trading with you (a retail investor) has a lower cost basis because retail investors are reliably less sophisticated than institutional investors It's not about winning or losing, it's about getting "run over" by massive momentum. Retail investors move less volume and randomly take both sides of trades, so it's much less risky to trade with them. Conversely, large players can dump so much volume that they move the price against a market maker and decimate their revenue from whatever very small spread they usually collect. > The most obvious way for Robinhood to optimize its revenue is to get its investors to make lots of bad trades. Robinhood doesn't care whether trades are good or bad. A discount brokerage is a moving business, not a storage business (unless you count interest on cash balances, which Robinhood doesn't make much from). They make money from retail investors doing a lot of trades. Arguably that's against the interest of the investors because retail investors tend to make bad trades, but there's no malice on the part of Robinhood there. If all their clients made a lot of money presumably they'd use it to make more trades and make Robinhood more money.
- this_user 6y ago
  That is not true. The market makers buying the order flow are bound by the National Best Bid and Offer (NBBO) according to Reg NMS. Which means they cannot fill you at a worse price than the NBBO. However, there is a lot of liquidity on venues that are not part of the National Market System. A good, real broker will find you that price improvement, and pass it through. The MM buying your order flow will not, and will pocket the difference. So, let's say you are trading 1000 shares. Normally, you might pay around $10 for that with a real broker. Now you execute that same trade at RH (or some other zero-commission broker), and let's say your average price is just 2c worse than what the other broker would get you. Well, now you just paid $20 for your "free" trade. And this gets worse for odd-lot orders (those that are not multiples of 100 shares). Because with those the MM is not bound to the NBBO, and can give you an even worse fill. Given that a lot of these RH accounts are presumably rather small, that likely applies to a decent amount of orders executed. > the cost basis of trading with you is lower than with trading with the broader market These are market makers; they don't take directional bets, hence this is irrelevant, as they only trade in a reactive way while trying to maintain a neutral book. What you are presumably talking about is toxic (i.e. informed) vs non-toxic order flow. Having a big player, who knows more than the MM, is what they are afraid off, because they can lose a lot of money by being on the wrong side of the market. They know that retail traders are unlikely to be informed traders, hence their order flow is less risky. However, the volume retail traders are moving is a drop in the bucket compared to what instis do.
  - Scoundreller 6y ago
    Out of curiousity, what happens with a 123 share order? Are 100 subject to those rules and 23 are not or?
  - jmole 6y ago
    yeah - if you place two market orders with two different brokers, you will get two different results. so what? use a limit order. with all the electronic routing that markets have nowadays, I would be surprised if retail brokerages differed that much in their ability to execute a limit order in the same set of market conditions.
  - tripletao 6y ago
- KoftaBob 6y ago
  Interesting, is there anywhere I can read more about this? Having a bit of trouble wrapping my head around it.
  - wolf550e 6y ago
    https://www.kalzumeus.com/2019/6/26/how-brokerages-make-money/ https://www.kalzumeus.com/2019/6/26/how-brokerages-make-mone...
paulgb 6y ago
Matt Levine has written about how that's not exactly an accurate portrayal (second section of the newsletter below) https://www.bloomberg.com/opinion/articles/2018-10-16/carl-icahn-wants-to-fight-dell-again https://www.bloomberg.com/opinion/articles/2018-10-16/carl-i...
cosmodisk 6y ago
It's called frontrunning. I would believe it if they'd do it themselves,as there isn't enough time to pass on the trading data to someone else.
- kevin_thibedeau 6y ago
  There is when you've got a microwave link.
jariel 6y ago
"Well they sell your trade data to HFT firms before a trade is executed " Is this actually true? If so it blows me away this this is not illegal, or that the press hasn't destroyed them for it. RobinHood is has one of the most ridiculous branding efforts ever: 'borne of the Occupy Wall Street' movement, the idea was to empower Millennials to 'break the system' ... by 'buying into the system'??? It's like the perfect script written by a NY agency for a bank to re-position the exact same financial products under the banner of a ridiculous 'empowerment branding', like Exxon creating a hipster brand to sell 'clean oil'. "Robinhood Raises $323M to Democratize Finance For All" [1]. "Trading app tries to fix a 'rigged' financial system" [2] from CNN. How does a startup get major news agencies to consistently promote their narratives unchallenged, especially when they're so ridiculous? We saw this a lot with WeWork as well. I can't figure out is how the press, particularly CNN bought into hook-line and sinker especially early on. They've been consistently promoting Robin Hood and their 'empowering message' with fluff stories, not remotely critical of the materiality of the business. Have a look [3] Recently, they've started to question some things, and perhaps the press will fall out of love with them and it'll be narrative in the other direction. There is absolutely something amiss here, if anyone with deep relationships in the PR and story placement care to comment, it would be enlightening as I think that's a big part of the underlying story. Edit: another great example of the press point-blank driving RH's branding, in this case 'intergenerational' [4]. What kind of agency can get this kind of coverage? [1] https://blog.robinhood.com/news/2019/7/21/robinhood-raises-323m-to-democratize-finance-for-all https://blog.robinhood.com/news/2019/7/21/robinhood-raises-3... [2] https://www.cnn.com/videos/business/2018/09/21/robinhood-founders-investing-fresh-money-orig.cnn https://www.cnn.com/videos/business/2018/09/21/robinhood-fou... [3] https://money.cnn.com/2017/09/08/investing/robinhood-baiju-bhatt-vlad-tenev-fresh-money/index.html https://money.cnn.com/2017/09/08/investing/robinhood-baiju-b... [4] https://www.trtworld.com/magazine/robinhood-and-merry-millennial-investors-stare-down-boomers-37200 https://www.trtworld.com/magazine/robinhood-and-merry-millen...
- basch 6y ago
  Everybody does it. "Schwab earned 1.4% of revenue from payment for order flow, TD Ameritrade about 8.4%, and E*TRADE about 6.1%. Interactive Brokers has historically been quite reticent about participating in internalization, because it doesn’t play well with their sophisticated clients; they earn about 1.1% from it." Scroll down to "payment for order flow" https://www.kalzumeus.com/2019/6/26/how-brokerages-make-money/ https://www.kalzumeus.com/2019/6/26/how-brokerages-make-mone... Schwab sells theirs as a feature/benefit. https://www.schwab.com/public/schwab/active_trader/trading_tools/execution_quality https://www.schwab.com/public/schwab/active_trader/trading_t...
awinder 6y ago
Man this comes up every time. Pretty much everyone does payment for order flow now, and some brokerages cut you in on it, all reflected in the price of the buy/sell. You should look at overall order quality and not just PFOF because places that do PFOF are trading better than national best average and places that do PFOF are doing worse, it’s a variable.
vgatherps 6y ago
The hfts HAVE to give you at least as good execution as is available on the market, and if they trade while they are holding your order your order can’t execute at a worse price than their trades (Manning rule). HFTs like retail orders because they don’t move the market, so you can collect some of the spread without worrying about getting run over by an informed institutional player.

Well they sell your trade data to HFT firms before a trade is executed to let them arbitrage on you so you are probably net losing money vs fees from other brokerages.

tptacek 6y ago

No. The opposite thing is true: HFTs want your retail trades because the cost basis of trading with you is lower than with trading with the broader market, and they can split the difference in savings with the brokerage. If anything, you're likely getting price improvement from the HFT. (None of this makes Robinhood good; it's just that PFOF doesn't explain why they're bad).

awinder 6y ago
Ok now I’m re-heartened, it comes up every time but it gets good rebuttals now xD
edouard-harris 6y ago
Yes, this is exactly right. The truth about HFT is that it has materially reduced the effective trading fees for retail investors across the board. > the cost basis of trading with you is lower than with trading with the broader market But this is exactly why Robinhood is bad. Trading with you (a retail investor) has a lower cost basis because retail investors are reliably less sophisticated than institutional investors. Therefore: an institution will pay to take the other side of a series of trades with you because it knows you aren't sophisticated, so it's likely to win in the long run. From there, follow the incentives: Robinhood is incentivized to sell more order flow; which it does by increasing its trading volume; which it does by making trades easier. Robinhood is also incentivized to increase its net revenue per trade; which it does by increasing the price at which it can sell a given volume of order flow to institutions; which it does by making its average trade less sophisticated. In summary: The most obvious way for Robinhood to optimize its revenue is to get its investors to make lots of bad trades.
- tptacek 6y ago
  That's not the sense in which market makers "win" on these trades. The information market makers are capitalizing on is "your tiny retail trade isn't followed by a giant block of additional trades unloading a huge position held by a pension fund", not "you are too dumb to know what this stock costs". The money they're making is just the spread. They can safely quote better spreads to retail investors than they can to execution firms trading for giant funds.
  - tripletao 6y ago
    The market makers win on both factors. Their concern is that my sell order will be followed by many other orders to sell, because that would leave them with a large inventory of stock that they can't unload except at a loss (because the market impact of that selling probably drove the price down). That concern might exist because I'm selling a big position and my order is the tip of that iceberg, as you say; but it could also exist because I'm trading on news that hasn't yet been incorporated into the share price, and my order will be followed by many other people selling once they learn that news themselves.
- blahbhthrow3748 6y ago
  > Trading with you (a retail investor) has a lower cost basis because retail investors are reliably less sophisticated than institutional investors It's not about winning or losing, it's about getting "run over" by massive momentum. Retail investors move less volume and randomly take both sides of trades, so it's much less risky to trade with them. Conversely, large players can dump so much volume that they move the price against a market maker and decimate their revenue from whatever very small spread they usually collect. > The most obvious way for Robinhood to optimize its revenue is to get its investors to make lots of bad trades. Robinhood doesn't care whether trades are good or bad. A discount brokerage is a moving business, not a storage business (unless you count interest on cash balances, which Robinhood doesn't make much from). They make money from retail investors doing a lot of trades. Arguably that's against the interest of the investors because retail investors tend to make bad trades, but there's no malice on the part of Robinhood there. If all their clients made a lot of money presumably they'd use it to make more trades and make Robinhood more money.
this_user 6y ago
That is not true. The market makers buying the order flow are bound by the National Best Bid and Offer (NBBO) according to Reg NMS. Which means they cannot fill you at a worse price than the NBBO. However, there is a lot of liquidity on venues that are not part of the National Market System. A good, real broker will find you that price improvement, and pass it through. The MM buying your order flow will not, and will pocket the difference. So, let's say you are trading 1000 shares. Normally, you might pay around $10 for that with a real broker. Now you execute that same trade at RH (or some other zero-commission broker), and let's say your average price is just 2c worse than what the other broker would get you. Well, now you just paid $20 for your "free" trade. And this gets worse for odd-lot orders (those that are not multiples of 100 shares). Because with those the MM is not bound to the NBBO, and can give you an even worse fill. Given that a lot of these RH accounts are presumably rather small, that likely applies to a decent amount of orders executed. > the cost basis of trading with you is lower than with trading with the broader market These are market makers; they don't take directional bets, hence this is irrelevant, as they only trade in a reactive way while trying to maintain a neutral book. What you are presumably talking about is toxic (i.e. informed) vs non-toxic order flow. Having a big player, who knows more than the MM, is what they are afraid off, because they can lose a lot of money by being on the wrong side of the market. They know that retail traders are unlikely to be informed traders, hence their order flow is less risky. However, the volume retail traders are moving is a drop in the bucket compared to what instis do.
- Scoundreller 6y ago
  Out of curiousity, what happens with a 123 share order? Are 100 subject to those rules and 23 are not or?
- jmole 6y ago
  yeah - if you place two market orders with two different brokers, you will get two different results. so what? use a limit order. with all the electronic routing that markets have nowadays, I would be surprised if retail brokerages differed that much in their ability to execute a limit order in the same set of market conditions.
- tripletao 6y ago
KoftaBob 6y ago
Interesting, is there anywhere I can read more about this? Having a bit of trouble wrapping my head around it.
- wolf550e 6y ago
  https://www.kalzumeus.com/2019/6/26/how-brokerages-make-money/ https://www.kalzumeus.com/2019/6/26/how-brokerages-make-mone...

paulgb 6y ago

Matt Levine has written about how that's not exactly an accurate portrayal (second section of the newsletter below) https://www.bloomberg.com/opinion/articles/2018-10-16/carl-icahn-wants-to-fight-dell-again https://www.bloomberg.com/opinion/articles/2018-10-16/carl-i...

cosmodisk 6y ago

It's called frontrunning. I would believe it if they'd do it themselves,as there isn't enough time to pass on the trading data to someone else.

kevin_thibedeau 6y ago
There is when you've got a microwave link.

jariel 6y ago

"Well they sell your trade data to HFT firms before a trade is executed " Is this actually true? If so it blows me away this this is not illegal, or that the press hasn't destroyed them for it. RobinHood is has one of the most ridiculous branding efforts ever: 'borne of the Occupy Wall Street' movement, the idea was to empower Millennials to 'break the system' ... by 'buying into the system'??? It's like the perfect script written by a NY agency for a bank to re-position the exact same financial products under the banner of a ridiculous 'empowerment branding', like Exxon creating a hipster brand to sell 'clean oil'. "Robinhood Raises $323M to Democratize Finance For All" [1]. "Trading app tries to fix a 'rigged' financial system" [2] from CNN. How does a startup get major news agencies to consistently promote their narratives unchallenged, especially when they're so ridiculous? We saw this a lot with WeWork as well. I can't figure out is how the press, particularly CNN bought into hook-line and sinker especially early on. They've been consistently promoting Robin Hood and their 'empowering message' with fluff stories, not remotely critical of the materiality of the business. Have a look [3] Recently, they've started to question some things, and perhaps the press will fall out of love with them and it'll be narrative in the other direction. There is absolutely something amiss here, if anyone with deep relationships in the PR and story placement care to comment, it would be enlightening as I think that's a big part of the underlying story. Edit: another great example of the press point-blank driving RH's branding, in this case 'intergenerational' [4]. What kind of agency can get this kind of coverage? [1] https://blog.robinhood.com/news/2019/7/21/robinhood-raises-323m-to-democratize-finance-for-all https://blog.robinhood.com/news/2019/7/21/robinhood-raises-3... [2] https://www.cnn.com/videos/business/2018/09/21/robinhood-founders-investing-fresh-money-orig.cnn https://www.cnn.com/videos/business/2018/09/21/robinhood-fou... [3] https://money.cnn.com/2017/09/08/investing/robinhood-baiju-bhatt-vlad-tenev-fresh-money/index.html https://money.cnn.com/2017/09/08/investing/robinhood-baiju-b... [4] https://www.trtworld.com/magazine/robinhood-and-merry-millennial-investors-stare-down-boomers-37200 https://www.trtworld.com/magazine/robinhood-and-merry-millen...

basch 6y ago
Everybody does it. "Schwab earned 1.4% of revenue from payment for order flow, TD Ameritrade about 8.4%, and E*TRADE about 6.1%. Interactive Brokers has historically been quite reticent about participating in internalization, because it doesn’t play well with their sophisticated clients; they earn about 1.1% from it." Scroll down to "payment for order flow" https://www.kalzumeus.com/2019/6/26/how-brokerages-make-money/ https://www.kalzumeus.com/2019/6/26/how-brokerages-make-mone... Schwab sells theirs as a feature/benefit. https://www.schwab.com/public/schwab/active_trader/trading_tools/execution_quality https://www.schwab.com/public/schwab/active_trader/trading_t...

awinder 6y ago

Man this comes up every time. Pretty much everyone does payment for order flow now, and some brokerages cut you in on it, all reflected in the price of the buy/sell. You should look at overall order quality and not just PFOF because places that do PFOF are trading better than national best average and places that do PFOF are doing worse, it’s a variable.

vgatherps 6y ago

The hfts HAVE to give you at least as good execution as is available on the market, and if they trade while they are holding your order your order can’t execute at a worse price than their trades (Manning rule). HFTs like retail orders because they don’t move the market, so you can collect some of the spread without worrying about getting run over by an informed institutional player.