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That’s not the problem with making money off order flow. The problem is that it fundamentally misaligns incentives: while Robinhood makes money the more people

That’s not the problem with making money off order flow. The problem is that it fundamentally misaligns incentives: while Robinhood makes money the more people transact (and is the reason its fee structure and UX incentivize transacting), it’s not in peoples’ financial best interest to transact as often as possible.

cwyers 6y ago
But that's true of brokers that charge customers per trade too: they too are incentivized for customers to trade more.
- bcherny 6y ago
  Maybe. I’d be curious to see a breakdown of a traditional broker’s revenue compared to Robinhood. I bet Robinhood makes most of its money off order flow (it was founded by HFT traders, after all), while traditional brokers make more money off fees, reinvesting, upselling other products, etc.
  - bostik 6y ago
    IIRC traditional brokers make most of their money off of interest on their float. I wish I could remember where this came up because without a solid reference it sounds utterly absurd.
    - disgruntledphd2 6y ago
      That doesn't surprise me at all, given that most insurers make all their money off investing the premiums before claims happen. When part of your service is to hold money, it's kinda the natural business model. Of course, this is not working out well for insurers in a world of very low interest rates (which is one of the reasons lots of insure-tech startups are getting funded now).
    - thedufer 6y ago
      I'm not sure if this is the source you meant, but patio11 wrote a good overview of various brokerages' revenue sources: https://www.kalzumeus.com/2019/6/26/how-brokerages-make-money/ https://www.kalzumeus.com/2019/6/26/how-brokerages-make-mone...
gnicholas 6y ago
Exactly. And apparently their order flow compensation differs in a key way — they make more money not just based on how often you trade, but on the size of the bid-ask spread. > Also, Robinhood’s compensation model differs from E-Trade and other firms. As an analysis by the investment bank Piper Sandler put it this summer, “Robinhood receives a fixed rate per spread (vs. a fixed rate per share by the other eBrokers).”

cwyers 6y ago

But that's true of brokers that charge customers per trade too: they too are incentivized for customers to trade more.

bcherny 6y ago
Maybe. I’d be curious to see a breakdown of a traditional broker’s revenue compared to Robinhood. I bet Robinhood makes most of its money off order flow (it was founded by HFT traders, after all), while traditional brokers make more money off fees, reinvesting, upselling other products, etc.
- bostik 6y ago
  IIRC traditional brokers make most of their money off of interest on their float. I wish I could remember where this came up because without a solid reference it sounds utterly absurd.
  - disgruntledphd2 6y ago
    That doesn't surprise me at all, given that most insurers make all their money off investing the premiums before claims happen. When part of your service is to hold money, it's kinda the natural business model. Of course, this is not working out well for insurers in a world of very low interest rates (which is one of the reasons lots of insure-tech startups are getting funded now).
  - thedufer 6y ago
    I'm not sure if this is the source you meant, but patio11 wrote a good overview of various brokerages' revenue sources: https://www.kalzumeus.com/2019/6/26/how-brokerages-make-money/ https://www.kalzumeus.com/2019/6/26/how-brokerages-make-mone...

gnicholas 6y ago

Exactly. And apparently their order flow compensation differs in a key way — they make more money not just based on how often you trade, but on the size of the bid-ask spread. > Also, Robinhood’s compensation model differs from E-Trade and other firms. As an analysis by the investment bank Piper Sandler put it this summer, “Robinhood receives a fixed rate per spread (vs. a fixed rate per share by the other eBrokers).”