4 ms·

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

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.

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.