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Robinhood was indeed too good to be true

300 points by RickJWagner 6y ago

PaywallBuster 6y ago
tl;dr another reason why day trading is bad idea. You'll be eaten by the fees.
- rybosworld 6y ago
  I don't see how this is an indictment of day trading (not that I recommend it). Fees are not specific to "how" you trade (e.g. day trading vs buy-and-hold), for one thing. But also, many brokerages don't have any fees at all. Successful day traders will be using limit-orders for which the issue described in this article would not exist.
Bayart 6y ago
One thing I gathered from my small-time trading hobby is that if a broker's « goodness » is inversely proportional to the smile on their face. The more boring a firm is, the better I feel.
- vertigolimbo 6y ago
  Can you expand on that?
- 2OEH8eoCRo0 6y ago
  "The wider the smile the bigger the lies." - Takemura
Kreotiko 6y ago
What about the similar services like Trading 212. Should they be trusted?
- cj 6y ago
  Not familiar with them, but was surprised to see this disclosure in the footer of their about page: > [...] 76% of retail investor accounts lose money when trading CFDs with this provider [...]
  - Kreotiko 6y ago
    Must be some EU/U.K. rule imposing clarity on risk but usually I find this stuff buried deep in terms and condition.
grumple 6y ago
This headline is nonsense. The article basically comes down to: Robinhood users may get slightly worse prices on trades. If your trades comes down to a cent or two, you shouldn't be using Robinhood. If you're actually investing, and not a high frequency trader, Robinhood is great. From the article: "The SEC identified $34 million that Robinhood customers lost by not receiving best execution, which is much less than the money they saved by forgoing trading commissions." The article literally confirms that the saved money on trading commissions is far more than the money lost on slightly worse executions.
- jedimastert 6y ago
  > which is much less than the money they saved by forgoing trading commissions. Now that other platforms have started to offer commission-free trading, is this still the case?
- pedrocr 6y ago
  That paragraph continues with: "(That said, their losses might also be much higher. That $34 million comes only from “certain” transactions, which might be the tip of the iceberg that the SEC possessed the ability to measure.)"
- chrisbennet 6y ago
  But they lied about how they made money. Martin Shkreli's customers made money but he still went to prison for fraud. fraud: wrongful or criminal deception intended to result in financial or personal gain
- elliekelly 6y ago
  I commented above[1] that the author seems to have misunderstood. The SEC Order[2] actually says the opposite: > ... certain Robinhood orders lost a total of approximately $34.1 million in price improvement compared to the price improvement they would have received had they been placed at competing retail broker-dealers, even after netting the approximately $5 per-order commission costs those broker-dealers were charging at the time. [1]https://news.ycombinator.com/item?id=25517658 https://news.ycombinator.com/item?id=25517658 [2]https://www.sec.gov/litigation/admin/2020/33-10906.pdf https://www.sec.gov/litigation/admin/2020/33-10906.pdf
le_didil 6y ago
didn't the customers notice that they were given bad execution prices ? or would that be very hard to notice in practice ? (I'm not a trading expert obviously)
- calmworm 6y ago
  Only place limit orders. If you place a market order you will absolutely get a bad execution price on Robinhood.
  - le_didil 6y ago
    aha i see. thanks
  - nickpeterson 6y ago
    To add to this, the swing is really wild. I’ve been tinkering with crypto trades manually through the app to get a hang for it, and limit orders still only tend to go through after you’re a few cents away from the market price, but if you naively do a market buy it will be 50-60 cents off in the wrong direction.
    - solaarphunk 6y ago
      You’re crossing the spread
    - smabie 6y ago
      You're taking instead of making with a market order, the fees are higher and the execution is worse.
- reissbaker 6y ago
  You'd only typically lose cents (if that; often enough you don't lose anything) per share. And there's no easy way to validate the price is "fair," since share prices are so fluid. It's also a fairly victimless crime, as the article notes (although it downplays this); in practice, it seems users typically saved more money thanks to Robinhood's zero-fee trading than they lost in less optimal pricing for their trades. The problem here wasn't that payment-for-order-flow is bad — even Schwab does it for their zero-fee trading platform, and in practice it's often a good tradeoff — the problem is Robinhood lied about it.
runawaybottle 6y ago
Seems like we are having the same discussion we had in previous bubbles. Robinhood, to put it simply, represents the retail investor market. What’s the first rule of fight club? The stock market is not for retail investors. When the retail investor shows up (represented via the prominence of a Robinhood or a Etrade once upon a time), you’ve entered ‘time to get real’ territory. Their entire customer base will be gone once things get ugly, so don’t even worry about how they make money since they are going to have bigger problems inevitably. What happened the last time everyone’s mom became a real estate agent pre-2008? These things are symptom of a fantasy playing out.
MontyCarloHall 6y ago
> That Robinhood sold its order flow is unremarkable, but the scale of its activities certainly merits comment. Forbes reports that in the first quarter 2020, 70% of Robinhood’s revenues derived from payments for order flows, as opposed to 17% for E-Trade and just 3% for Schwab. Yes, Robinhood has observed standard practice–but with distinctly above-average enthusiasm. Those other brokerages charge trading fees (these days, just for options trading), so of course their proportion of revenue from order flow will be lower.
- deleted 6y ago
  [deleted]
- lucisferre 6y ago
  They do address that concern in the article.
- dehrmann 6y ago
  On the revenue share breakdown, this is a guess, but I suspect Robinhood users trade more and have lower account balances than Schwab customers.
rabbut 6y ago
> This tale also illustrates the point that you can move companies from Wall Street to Silicon Valley, and replace cynical baby boomers with optimistic millennials (Robinhood’s co-founders are in their mid-30s) who issue rousing mission statements, such as Robinhood’s promise to “democratize finance for all,” but ultimately the underlying math does not change. Sometimes, a business decides that its fortunes may diverge from those of its customers. Caveat emptor. This was completely unnecessary, but true. And now, please permit me a hearty laugh at the expense of millennials... LOLOLOL However, I know people that have used robinhood, I’m upset that they were affected, and I don’t blame millennials.
- saalweachter 6y ago
  I'm honestly just thrilled they correctly labeled millennials (as opposed to conflating them with Gen Z).
aphextron 6y ago
I don't think most people see Robinhood as a competitor to Schwab or eTrade. It's a competitor to mobile games. The millenial/zoomer cohort that primarily uses it are not investing for their retirements with it. It's a casino app used for entertainment.
- oxymoran 6y ago
  Yea that’s what 401k and IRAs are for. Whether you like it or not, Robinhood has lowered the barriers to entry for actual investing. Sure, there are people that use it like a casino. But the lack of fees per trade and the ability to buy fractional shares opens the door for anyone to be able to start investing with even a small amount of capital. Go yell at clouds somewhere else.
- JKCalhoun 6y ago
  You're right. But they're probably learning a thing or two and will be better investors when it actually matters — when it's real money. Seems like the big brokerages should encourage Robinhood "gaming". Speaking of which — would love to see a game (does it exist?) where you can play at an investor with pretend money and real market day to say numbers drive your winnings.
  - aphextron 6y ago
    >Speaking of which — would love to see a game (does it exist?) where you can play at an investor with pretend money and real market day to say numbers drive your winnings. Paper trading is definitely a thing, and there's plenty of apps that support it. The problem is people will never act the same with paper as they do with real money. It doesn't correlate at all. This is why Vegas odds tend to be far more reliable than polling numbers.
  - skinnymuch 6y ago
    Yeah it is sometimes called fantasy stocks. Paper trading. However no one treats that remotely the same as real money. Good chance whatever you do with fake money won’t matter much the second you have a big loss with your real money.
lucraft 6y ago
In the UK, Morning Star is the name of the Communist newspaper (not throwing shade, it was founded by the Communist Party of Great Britain in 1930). So whenever I see a link to this site I wonder what I'm about to read.
- dbt00 6y ago
  In the US, they're a boring respectable investment analysis service. Originally focused on mutual funds.
cwhiz 6y ago
Practically no one was harmed by this. A penny or two per trade. It’s more the principle of the matter than the actual costs. The fact that Robinhood was clearly lying is the most concerning thing.
- alwayseasy 6y ago
  SEC doesn't look at direct investor harm to litigate so you won't find them trying to build such a case either. They want a fair market that's about it.
- frockington1 6y ago
  Agreed. Its even worse as it fits into their entire business model to capture young unsophisticated investors. An experienced investor would make one trade and notice the order execution was off, however when you specifically target an inexperienced investor its easier to get away with the con
  - IfOnlyYouKnew 6y ago
    An "experienced investor" would neither care nor, most likely, notice anything about this. Mostly because "experienced investors" aren't in the business of day trading. But also because nothing was "off" here. It isn't the Robinhood customer that is harmed by this, but institutional investors who, by this mechanisms, are excluded from the services of these market makers because they present a different risk profile.
  - kasey_junk 6y ago
    I worked in HFT building trading platforms and it would be virtually impossible for me to see order execution being off using retail tooling. In fact it takes incredibly sophisticated infrastructure to do it. The kind of infrastructure you build if you are a market maker who would like to pay for order flow. Even the SEC doesn’t have the capabilities to check execution rates for every order. They rely on audits of smaller subsets of the orders in historical reports.
- IshKebab 6y ago
  I agree. I used Freetrade and they delay all free trades until 3pm the next day. Obviously they are doing some nonsense to make a tiny bit of money from that, but it doesn't really matter to me any more than the 0.5% duty does because I'm not idiotic enough to make short-term trades. Just put the money in, forget about it and take it out years later. 0.5% will be irrelevant.
rwmurrayVT 6y ago
This article isn't exactly convincing. The SEC identified $34mm in poor execution. If you did 65c each way per option contract & free stock trades that would only be 52.3m option trades. That's miniscule. That's over 5 years. It would take a whole lot of unidentified trades for that to be substantial. The spread on most trades is probably in the range of 50c on low liquidity shares and $1 on low liquidity options. Perhaps the reason RH collects more in revenue from order flow is because they: 1) get paid more for their order flow on a per trade basis 2) they don't collect any fees from options driving down revenue 3) they charge less for margin fees with less users using margin There are any number of reasons, but to say that you're getting royally screwed is a massive stretch in my mind. Prior to RH fees were outrageous. The fees are still outrageous on my self-directed 401k. I'm not getting $10 in losses from bad execution.
- ceejayoz 6y ago
  The article mentions that may just be the amount the SEC can actually prove. > Overall, Robinhood’s investors may not have been harmed by their decision. The SEC identified $34 million that Robinhood customers lost by not receiving best execution, which is much less than the money they saved by forgoing trading commissions. (That said, their losses might also be much higher. That $34 million comes only from “certain” transactions, which might be the tip of the iceberg that the SEC possessed the ability to measure.) They were, however, duped.
  - elliekelly 6y ago
    I think the author has misunderstood the SEC Order. The article says (emphasis added): > The SEC identified $34 million that Robinhood customers lost by not receiving best execution, which is much less than the money they saved by forgoing trading commissions. But paragraph 42 of the Order[1] says (emphasis added): > ... certain Robinhood orders lost a total of approximately $34.1 million in price improvement compared to the price improvement they would have received had they been placed at competing retail broker-dealers, even after netting the approximately $5 per-order commission costs those broker-dealers were charging at the time. [1]https://www.sec.gov/litigation/admin/2020/33-10906.pdf https://www.sec.gov/litigation/admin/2020/33-10906.pdf
docflabby 6y ago
I though the whole "con" with Robinhood is where they front-run the retail trades
- rybosworld 6y ago
  That's basically what the article says.
  - harryh 6y ago
    That is not at all what it says.
  - smabie 6y ago
    That's not how it works, and that's not what the article says. Why do people keep saying this
    - tptacek 6y ago
      Because they're not doing the reading, and it's a lot more fun to talk about "front-running" than about what's actually happening, and "fun" has a lot of power on message boards.
- deleted 6y ago
  [deleted]
ForHackernews 6y ago
Wait, you're telling me the company that implemented the Infinite Money Cheat Code isn't entirely legit? https://banyanhill.com/robinhood-infinite-leverage-money-cheat-code/ https://banyanhill.com/robinhood-infinite-leverage-money-che... https://www.bloomberg.com/news/articles/2019-11-05/robinhood-has-a-glitch-that-gives-traders-infinite-leverage https://www.bloomberg.com/news/articles/2019-11-05/robinhood...
drcode 6y ago
Is this just another piece of data confirming that it is a bad idea to place market orders? With a market order you are essentially saying to the broker "I want this stock right now, you can decide what the price is". With a limit order, it seems much harder to pull any tricks. It seems like market orders are, and always have been, for chumps. Robinhood is just being more shameless about abusing them than previous brokers.
- Bostonian 6y ago
  I agree with placing limit orders instead of market orders, but if an illiquid stock is quoted at 20.00 to 20.10, placing a limit order to buy at 20.10 is not much different from a market order, at least for a small number of shares. It's possible some brokers will offer more price improvement than others in this trade, filling you at less than 20.10.
  - drcode 6y ago
    Agreed
  - hef19898 6y ago
    Thinking about it, I never used anything else than limit orders. Not saying much, so, as I maybe used that to sell like 4 times in tha last one year and half.
    - dboreham 6y ago
      Jim Cramer has been advising never to use market orders for several years.
- Dirlewanger 6y ago
  How much does this actually matter for the casual retail investor? I'll typically buy 5-10 shares of some ETFs every couple months via market orders (not on Robinhood), am I really getting bilked that bad?
  - 6y ago
dmurray 6y ago
The SEC decision seems a little harsh on Robinhood. If RH had executed all of its customers orders on the public exchanges, instead of routing any to brokers, it would be in the clear (and a lot of people would be saying how great it was that RH didn't take payment for order flow). Directed orders are absolutely fine. But because they chose to shop around for better prices than they could have achieved with directed orders, they had an obligation to pass on more of that price improvement to the customer. How much more? It's not clear. Seems like the SEC is hinting at "roughly as much as everyone else does" - brokers shouldn't be allowed a business model that subsidises low trading fees with high PFOF. Other brokers subsidise their low or zero trading fees by collecting interest on their customers' cash balances. This only works when the balances are relatively large. The SEC's approach arguably encourages transparency, but I don't find either business model particularly transparent - the bigger effect is to discourage brokers targeting smaller clients.
- SpicyLemonZest 6y ago
  As a matter of law, brokers have a duty to seek what’s called “best execution”, meaning they’re required to both shop around for better prices and pass all of the price improvement they can find onto their customers. Payment for order flow is still kosher in many circumstances; there's no clear duty to go to the people offering it and demand price improvement instead. But what you definitely can’t do is accept a worse deal (or stop trying to find better deals) in order to protect your payment for order flow revenue stream. It’s fair to say that this rule cuts off some interesting business models which might better serve different market segments, but that’s largely the point. In the SEC’s judgment, the potential for abuse is too high if stock brokers start acting like retail stores.
  - dmurray 6y ago
    > As a matter of law, brokers have a duty to seek what’s called “best execution”, meaning they’re required to both shop around for better prices and pass all of the price improvement they can find onto their customers. That's the definition of best execution as it applies to undirected orders. But you can also offer your clients direct execution on the exchange, in which case you don't have to (and must not) shop the order around. If RH had done that, they'd be in the clear. Yes, I understand that retail brokers aren't usually in the business of directed orders (because shopping round the orders is in the interest of both them and the client).
oldgradstudent 6y ago
The more important question is why is no one going to jail? These were specific actions approved by specific people. Why hasn't the SEC file criminal referrals against the people involved?
- wpietri 6y ago
  Seems like a reasonable question to me. Leandro Andrade got 25-to-life for stealing $150 worth of kids' video tapes from K-Mart. But if some guys in suits steal (at least!) $34 million and they get a sternly worded letter from the SEC telling them to be best. Lawyer Ken White, aka Popehat, regularly points out that laws about crimes appear to vary quite a bit based on how much a lawmaker can imagine that they might see the sharp end of the law. Seems like that's in play here.
  - smabie 6y ago
    No one stole anything, this is about an incorrect FAQ page.
    - wpietri 6y ago
      The SEC appears to disagree with you, and given that they're the experts, I'm going with them. Robinhood ended up with at least tens of millions of dollars of customer money that they shouldn't have, and were covering it up with lies.
      - smabie 6y ago
        No, literally the SEC is fining them about an inaccurate FAQ page. If their FAQ page was different, they would not have been fined.
        wpietri 6y ago
        Yes, it was inaccurate in the same sense that it was inaccurate for 7-year-old me said the candy bar must have accidentally fallen into my pocket at the store. A false statement that covers up one party gaining at another's expense is something that I'm going to presume is a lie. Especially when that false statement is made prominently, over and over. Calling that an inaccuracy strikes me as another convenient inaccuracy.
inthewoods 6y ago
"The SEC’s order officially censures Robinhood for its actions, fines the firm $65 million, and requires that the company work with an independent consultant to ensure that henceforth it will satisfy its duty of best execution." So, could this mean that Robinhood's business model just went bust? If they are getting the majority of their revenue from, and they will now be required to provide, presumably, some form of execution that is closer to best execution, then the other firms they are trading with will lower the money that RH receives, no? Naturally it may not matter - they are a SV darling and have quickly made Schwab et al look like dinosaurs.
- ludamad 6y ago
  Probably not. It looks like overall, they can make the same amount as a normal firm, just indirect instead of direct, and still have "best execution"
- frockington1 6y ago
  Their interface pales to anything else. Download TDAs think or swim platform for a look at what could be. The only piece Robinhood does better is the SV gamification that lures investors who won't notice their orders are off
  - dQw4w9WgXcQ 6y ago
    As a huge ToS fan, Robinhood did the gamification so well it forced TD/ToS to add better (simpler) PnL features to their apps. And there really wasn't anything special about their main graph either, it's just simple.
phillc73 6y ago
I was completely surprised by this story and website. For me, the Morning Star is a British socialist newspaper[1] and I thought the story would be about debunking the myth of the outlaw Robin Hood. Quite an irony that this Morning Star website seems to be an investment and stock market news site. [1] https://morningstaronline.co.uk/ https://morningstaronline.co.uk/
- QuesnayJr 6y ago
  This Morningstar provides information and analysis to investors, and predates the web by a decade (it was founded in 1984). It is most famous for rating mutual funds.
  - phillc73 6y ago
    The Morning Star newspaper I referred to was founded in 1930 as the Daily Worker, and renamed to the Morning Star in 1966.[1] [1] https://en.wikipedia.org/wiki/Morning_Star_(British_newspaper) https://en.wikipedia.org/wiki/Morning_Star_(British_newspape...
TedDoesntTalk 6y ago
> you can move companies from Wall Street to Silicon Valley, and replace cynical baby boomers with optimistic millennials (Robinhood’s co-founders are in their mid-30s) who issue rousing mission statements, such as Robinhood’s promise to “democratize finance for all,” but ultimately the underlying math does not change.
ikeboy 6y ago
Robinhood closed out an option spread I had deep in the money with no notice, citing some kind of risk. I get a notification that "my" order executed two minutes before market closed, I immediately contact Robinhood saying that I didn't place the order. It took a week for them to tell me that they had put the order in on my behalf. Cost me $1800 vs the value held to expiration (which was a month out.) Seriously considering taking them to small claims court. No notification beforehand, and even afterwards it took a week to find out what happened.
- notyourwork 6y ago
  Their support is beyond unacceptable as far as I’m concerned. I left them as quickly as I joined.
- anonu 6y ago
  Research this a bit more. It may be within their risk parameters or guidelines. But if you think theres a breach here, you should raise a FINRA complaint.
  - ikeboy 6y ago
    They pointed me to an obscure page on their site that implies but doesn't directly say that this might happen. I don't know the laws, have to do more research.
    - gamblor956 6y ago
      Doesn't matter. Raise a FINRA complaint now. You don't need to be an expert in the rules and try to determine on your own whether it's a violation of FINRA's rules. FINRA will do that for you. Even if Robinhood technically disclosed that they might do it, violating a customer's express orders without documenting appropriate reasons for doing so is generally a violation of FINRA's rules. Brokers have lost their licenses for shenanigans like that.
      - ikeboy 6y ago
oxymoran 6y ago
As a Robinhood user with a finance degree, I have never experienced any issues with order execution or misrepresented prices that are passed on to the investor. In fact, I use the TD Ameritrade Think or Swim app for charts and research and I regularly compare the spreads between Robinhood and Ameritrade. Robinhood regularly has lower spreads that are actually executable. Quite honestly, I feel like the old school brokers are padding their spreads so that they can offer “free trades” like Robinhood. This article feels like a smear to me. As a knowledgeable investor, I can say that however Robinhood makes their money, hasn’t had any significant impact on the performance of my investments. Quite the opposite. By not incurring fees per trade and by allowing fractional shares, I was able to start with a much smaller amount of capital.
- smabie 6y ago
  What does RH offer that Schwab doesn't, for example? As far as I can tell, nothing really?
  - dred_prte_rbrts 6y ago
    A mobile user interface that actually is designed for a mobile device?
daniel957 6y ago
Doesn’t this also mean that, depending on the market, Robinhood’s actions could have benefited investors?
- NovemberWhiskey 6y ago
  No; why would you think that?
  - daniel957 6y ago
    Person A places a trade which ends up executing at a certain time that causes the person to lose money. Person B places a trade, then there’s some breaking news about the COVID vaccines and the market fluctuates, and then the trade is executed. Person B makes more money than expected because it took longer for the trade to execute and there was time for the market to change.
    - NovemberWhiskey 6y ago
      This is not about timing; it's about the proportion of price improvement that benefits the customer vs the broker.
      - daniel957 6y ago
        I see. I assumed that order flow implied something about timing (i.e. we send these orders to this broker who executes the order in an untimely fashion causing an inferior execution price).
        NovemberWhiskey 6y ago
        It's more like this: the NBBO bid for a stock may be $10.00, which is effectively a worst-case for "best execution", which is what a broker is obligated to provide if I place a market sell order. The broker may be able to route order that to a venue that will execute at $10.05; this is potential price improvement for the seller. The potential price improvement is split between the broker and the customer. This is what "payment for order flow" really means. The broker routes the order to a particular trading venue in exchange for a cut of the potential price improvement, with the rest going to the customer. What's worth knowing about Robinhood is a) they did not disclose that they were being paid for order flow and b) that they contracted to receive a much larger cut of the potential price improvement than was typical; e.g. other brokers might take $0.01 of that improvement, whereas Robinhood was taking $0.04.
oxymoran 6y ago
Legitimate criticism of Robinhood: -the app crashes at the worst possible times -they gamify the investing process too much -they have no customer service Everything else is pretty much just sour grapes or outright smears.
- jkhdigital 6y ago
  I agree to some extent, but only because I think most SEC regulations have the effect of creating walled gardens for established players rather than protecting investors. But you can always apply Godel’s incompleteness theorems (capital markets edition).
totaldude87 6y ago
can anyone put this on layman terms, from what I understood 1) a robin hood trader submits order 2) robin hood routes it to principal trading firm for a small amount 3) principal trading firm executes trades and makes profit by selling or matching order on other end? (this i got from a high frequency trading book ) so robin hood was fined because, they got more money for this? or customers have to pay more for a stock since it goes via robin hood, how the customer was affected ?
- CarelessExpert 6y ago
  > or customers have to pay more for a stock since it goes via robin hood, how the customer was affected ? That one. It's a bit complicated but the gist is the price Robinhood customers pay for their securities is worse than it could be due to the deals RH has with their trading partners.
humbleMouse 6y ago
I posted on here saying they were selling order flow months ago and got heavily downvoted
- IfOnlyYouKnew 6y ago
  They've openly said they were selling order flow since the very beginning, so I can sort-of understand the downvotes. Read any second post by Matt Levine over at Bloomberg as to why selling of order flow isn't necessarily bad, and probably quite ok, for retail customers. But the gist is: fulfilling retail customer orders is lucrative for market-makers because they do not run the risk of fulfilling some order that is part of a larger, institutional, trade that will make the market move against them a short time later.
- toast0 6y ago
  Everybody knew they were selling order flow. Almost all brokerages are selling order flow, and it's not a problem per se. The difference is Robinhood is taking a larger percentage of the payment than most others. If you provided that information months ago, it may have been a worthy comment.
LatteLazy 6y ago
You always pay your broker. You pay commission. If you don't pay commission, you pay in bigger spreads they offer. If the spreads aren't bigger then you're getting worse execution. All anyone can do is understand HOW they are paying and use that information to minimise what they ultimately pay. "Free" isn't a thing.
- tachyonbeam 6y ago
  I wish there was a way to democratize direct access to the exchanges and their APIs. As it is, it's really an insider's club.
  - birdsbirdsbirds 6y ago
    Make your own exchange.
  - frockington1 6y ago
    What does democratize mean in this use case? Running direct access to exchanges isn't cheap, someone has to pay. Most "democratizing" seems to end up being opaque fees that naive customers don't realize (i.e. Robinhood)
  - iav 6y ago
    Interactive Brokers offers a cost plus commission structure, where your trades pay the exchange commission (or collect the rebate, if you are providing liquidity) and they just take on a ~$1 fee per trade on top. Very few "regular Joes" actually want that - what you don't realize is that exchange fees vary a LOT, each exchange easily has dozens of different rates depending on security, time of trade execution, the state of the order book at the time, and order type. Placing a market buy order when the book is sell-heavy? The exchange will actually pay you for that. Going the other way? That's a very expensive order. What if you take the order to a different exchange where the book is more balanced but the price is worse for you? It might make sense when you factor in the difference in commissions. This is why online brokerages exist, to abstract all of this complexity away.
    - 6y ago
nkohari 6y ago
I don't think I understand what's wrong with this model. If I wanted to actively trade, I'd still prefer Robinhood's zero commission model, even if it meant that my buy price was slightly higher. $10 a trade vs. pennies? Sign me up, we both win. What am I missing?
- _lazlo 6y ago
  I was looking to see if anyone caught this. It seems that Robinhood would be better for someone not investing a lot of money. If I execute a trade for $1,000,000 a small difference in stock price makes a difference and its better to pay a straight $5.00 commission with the lowest price possible. However, if I buy a single share for $50, that $5 commission is now substantial. This seems like a very clever way to compete and offer a better service to poorer people. Unless I'm missing something the boomer either didn't catch that, or chose not to acknowledge it. As a millennial I'll assume his best intentions and that this isn't an attack on a successful company business model that he's receiving a kickback for to de-legitimizing Robinhood.
- greenshackle2 6y ago
  There is nothing wrong with the Payment For Order Flow model. Virtually every retail broker does it. What you're missing is that Robinhood is not the only commission-free brokerage. I'm sure you'd rather have no commissions and 80% of the price improvement instead of no commissions and 20% of the price improvement. The real problem is that Robinhood advertised they have THE BEST EXECUTION compared to other brokers, set up a Committee to ensure they have THE BEST EXECUTION, and then that Committee somehow failed to notice that Robinhood clearly doesn't have THE BEST EXECUTION because they're taking an 80% cut of price improvement, instead of 20% like everyone else.
mcherm 6y ago
The article says: "investors greatly prefer paying indirect fees, through opaque arrangements, to paying explicit costs". This is not true. Investors prefer paying indirect, opaque fees to paying explicit fees AND indirect, opaque fees. They simply assume that they are being charged the opaque fees no matter what. As this article demonstrates, they are generally correct about that.
gifnamething 6y ago
>That, regrettably, is what it discovered. The SEC’s investigation revealed the secret behind Robinhood’s high order-flow revenues: The company charged principal trading firms much more than the going rate. Typically, the SEC found, payments for order flow equal about 20% of the average price improvement that investors realize on their trades. But Robinhood insisted on receiving what amounted to 80% of the improvement: 4 times the customary level. >When Robinhood made that demand, the principal trading firms with which it was negotiating informed the company that something had to give. If Robinhood were to take that much of the proceeds for itself, then “there would be less money available for the principal trading firms to provide price improvement for Robinhood’s customers.” In other words, Robinhood explicitly was informed that more for it meant less for its customers. The company accepted those terms. There's a missing logical step here: if 80% fees mean there is less money available, so will 20% fees. So is it just that payment for order flow is inherently bad for the customer, and RH are the worst of a bad bunch?
qaq 6y ago
There are brokers like interactive brokers that give you all options e.g. "free" or fixed price passing on full amount of rebates to you.
asidiali 6y ago
Robinhood’s own documentation for the greater part of last year explicitly stated they would automatically sell or execute your options within a 1 hour window of expiry. I lost thousands when Robinhood prematurely executed my position ~100 minutes before market close. I was waiting for right before the hour window. Of course, 10 minutes after they sold my position, it quadrupled in value. I even already had had a limit sell order on the books! They cancelled my order, and executed their own, without any notice, outside of their own documented window. When I contacted support and pointed them to the docs, their reply was that it could be “anywhere from 60-90 minutes before close.” Here is their email [1]. I asked them to provide a link to where their documentation says such - they never responded. I followed up twice. Such utter bullshit. Immediately switched to ETrade and have had a great experience. There is a nice representative who’s direct phone number I can call and always reach, she always answers, and gives me any info or help I need. She called me within a week of me opening the account just to say hi and walk me through my account settings. Also, sure, ETrade will auto sell your position too - within 10 minutes of market close. That sounds a lot more like protecting my investment, than a 60-90min window used to drain retail investors of their expiring options. Edit: this page [2] still says "about an hour" to define the auto-exercise window. Click on the "What happens" dropdown under the first header. [1] https://imgur.com/1jfkZNG https://imgur.com/1jfkZNG [2] https://robinhood.com/us/en/support/articles/expiration-exercise-and-assignment/ https://robinhood.com/us/en/support/articles/expiration-exer...
- ptero 6y ago
  Robinhood does not have the same weight as larger brokerages, like Schwab, ETrade or Fidelity, so I would definitely expect it to perform worse on time-critical trades. By the same token, those large consumer and pension-fund focused brokerages would fare worse than internal trading desks and shops focusing on the HFT traders. I would not use Robinhood for HFT or in general where I would care about the speed of trade execution.
  - sidlls 6y ago
    There's no good reason for any company putting itself up as a brokerage to have a 60-90 minutes window for any equity or options trade. They most definitely have the ability to cap that window, and cap it to a much smaller range. They just choose not to--probably so they have some plausible deniability or wiggle room to fleece people like the OP.
luc_ 6y ago
"how do they even make money?" .. reads FAQ .. "yeah they're probably selling your data"
fny 6y ago
I think Robinhood is total trash, but this is exactly what every single other free brokerage does. If you don't pay for your trades, someone else has to pay for them. This is true for ETrade, TDA, Schwab, TradeStation, TastyWorks, and friends. Your order flow must be sold to give you free trades. It's operationally impossible to be any other way since everyone, at minimum, is required to pay fees to the exchanges. Someone needs to pay for you, and a broker sure as hell isn't doing that for free. - CME Fees: https://www.cmegroup.com/company/clearing-fees.html https://www.cmegroup.com/company/clearing-fees.html - NYSE Fees: https://www.nyse.com/markets/nyse/trading-info/fees https://www.nyse.com/markets/nyse/trading-info/fees - NASDAQ Fees: http://www.nasdaqtrader.com/trader.aspx?id=pricelisttrading2 http://www.nasdaqtrader.com/trader.aspx?id=pricelisttrading2 Robinhood, for example, waives all of these somehow only charging for certain regulatory fees: - Robinhood: https://robinhood.com/us/en/support/articles/trading-fees-on-robinhood/ https://robinhood.com/us/en/support/articles/trading-fees-on... Robinhood also miraculously waives these mandatory fees for small transactions. How? By selling your order flow just like everyone else. If you really care about good executions and your order flow not being sold, you should use a service like Interactive Brokers.
- klipt 6y ago
  > this is exactly what every single other free brokerage does Kind of, but the article specifically mentions that Robinhood is getting 4x more money than the industry average, in exchange for giving users worse prices: > Typically, the SEC found, payments for order flow equal about 20% of the average price improvement that investors realize on their trades. But Robinhood insisted on receiving what amounted to 80% of the improvement: 4 times the customary level. > When Robinhood made that demand, the principal trading firms with which it was negotiating informed the company that something had to give. If Robinhood were to take that much of the proceeds for itself, then “there would be less money available for the principal trading firms to provide price improvement for Robinhood’s customers.” In other words, Robinhood explicitly was informed that more for it meant less for its customers. The company accepted those terms.
- devmunchies 6y ago
  > Someone needs to pay for you yeah they have VC money. you can offload the cost as a consumer until they change their business model.
RcouF1uZ4gsC 6y ago
I am starting to become convinced that most VC backed companies either are scammy from the start or quickly become scammy. Basically they are given a lot of money to “disrupt” a market. So they first have to have to show a lot of growth. The easiest way to do that is to offer for free (or deeply discounted) what used to cost money. So the growth numbers go up. Eventually, they need to be able to start showing a profit. However, the original, most obvious way of monetizing customers is gone, so then the company begins doing shady stuff to try to boost revenue.
Below_The_Line 6y ago
If you dig a layer deeper on payments for order flow, the majority of that revenue comes from options trading. Because they're more opaque, options carry fatter margins versus stock. Not surprisingly, Robinhood makes it very easy for users to trade options. Lucrative for Robinhood, but potentially risky for investors. More thoughts on that below. https://kjlabuz.substack.com/p/57-robinhood-traders-anonymous https://kjlabuz.substack.com/p/57-robinhood-traders-anonymou...
anonu 6y ago
I've stated this before and got downvoted in other posts: RobinHood is a gambling platform. It is run fast and loose by its managers. I am glad the SEC came down on it. This is actually a very minor penalty and more like a slap on the wrist than anything else. But it shows at least that there is some scrutiny of what RH tells its customers. I have raised FINRA complaints in the past about this company for their poor order handling. I encourage anyone else to do the same when they see something wrong with RH or any other trading platform. RH needs to massively increase its controls as well as investor education. I think this penalty is also a massive day of reconing for their business model. They need to move to more of a full service broker - like all the other old-school firms. There's no money in order routing such as this. They need to boost their account size and attract higher quality users focused on investing - not gambling.
- daniel-cussen 6y ago
  > They need to boost their account size and attract higher quality users focused on investing - not gambling. This seems like one of those companies that can't both carry out their business and say what that business actually is. In any industry there's the official story of how it makes money--obsessing with quality is a common stated goal--and then there's the actual nitty gritty of how it gets the impression of that quality without going to all the expense.
- oarabbus_ 6y ago
  >Overall, Robinhood’s investors may not have been harmed by their decision. The SEC identified $34 million that Robinhood customers lost by not receiving best execution, which is much less than the money they saved by forgoing trading commissions. (That said, their losses might also be much higher. That $34 million comes only from “certain” transactions, which might be the tip of the iceberg that the SEC possessed the ability to measure.) They were, however, duped. This seems like the financial equivalent of Facebook/Google. Free to use, but you are the product the company profits off of. I'm not really seeing an issue if there is no measurable _net_ harm to the investors.
  - gnopgnip 6y ago
JohnJamesRambo 6y ago
Time for me to trot out my Margin Call quote again- “There are three ways to make a living in this business: be first, be smarter, or cheat.” I constantly wish for the new Silicon Valley startups to do the first two and I usually only get the last one.
chews 6y ago
PFOF or paying for order flow is a strange way to make money. There are other attempts at normalizing this sort of behavior, free trades and apis over at alpaca.markets is another example of it.
newdude116 6y ago
I always get downvoted here, but again, what did you expect? There is no free lunch. Use a decent broker like Interactive Brokers, Thinkorswim or Schwab. Schwab comes with a decent bank account. And I am neither a big fan of day traiding nor trading on the phone with an app.
optimalsolver 6y ago
From what I could find after a quick Google, you can't trade commodities on Robinhood. Is there any demand for this? I would've thought the self-styled "retards" of WSB would love the high-volatility, high-return nature of the commodities market.
kevinventullo 6y ago
By deriving revenue from order flow rather than a per-transaction fee, they’ve effectively made trading fees progressive. That is, a college student getting their wet buying a few shares of Apple pays less than someone moving around $100k‘s worth of equity from one index fund to another. Kinda fits the Robinhood moniker, right?
Veminder 6y ago
Someone tell Prof Galloway!

300 points by RickJWagner 6y ago

PaywallBuster 6y ago

tl;dr another reason why day trading is bad idea. You'll be eaten by the fees.

rybosworld 6y ago
I don't see how this is an indictment of day trading (not that I recommend it). Fees are not specific to "how" you trade (e.g. day trading vs buy-and-hold), for one thing. But also, many brokerages don't have any fees at all. Successful day traders will be using limit-orders for which the issue described in this article would not exist.

Bayart 6y ago

One thing I gathered from my small-time trading hobby is that if a broker's « goodness » is inversely proportional to the smile on their face. The more boring a firm is, the better I feel.

vertigolimbo 6y ago
Can you expand on that?
2OEH8eoCRo0 6y ago
"The wider the smile the bigger the lies." - Takemura

Kreotiko 6y ago

What about the similar services like Trading 212. Should they be trusted?

cj 6y ago
Not familiar with them, but was surprised to see this disclosure in the footer of their about page: > [...] 76% of retail investor accounts lose money when trading CFDs with this provider [...]
- Kreotiko 6y ago
  Must be some EU/U.K. rule imposing clarity on risk but usually I find this stuff buried deep in terms and condition.

grumple 6y ago

This headline is nonsense. The article basically comes down to: Robinhood users may get slightly worse prices on trades. If your trades comes down to a cent or two, you shouldn't be using Robinhood. If you're actually investing, and not a high frequency trader, Robinhood is great. From the article: "The SEC identified $34 million that Robinhood customers lost by not receiving best execution, which is much less than the money they saved by forgoing trading commissions." The article literally confirms that the saved money on trading commissions is far more than the money lost on slightly worse executions.

jedimastert 6y ago
> which is much less than the money they saved by forgoing trading commissions. Now that other platforms have started to offer commission-free trading, is this still the case?
pedrocr 6y ago
That paragraph continues with: "(That said, their losses might also be much higher. That $34 million comes only from “certain” transactions, which might be the tip of the iceberg that the SEC possessed the ability to measure.)"
chrisbennet 6y ago
But they lied about how they made money. Martin Shkreli's customers made money but he still went to prison for fraud. fraud: wrongful or criminal deception intended to result in financial or personal gain
elliekelly 6y ago
I commented above[1] that the author seems to have misunderstood. The SEC Order[2] actually says the opposite: > ... certain Robinhood orders lost a total of approximately $34.1 million in price improvement compared to the price improvement they would have received had they been placed at competing retail broker-dealers, even after netting the approximately $5 per-order commission costs those broker-dealers were charging at the time. [1]https://news.ycombinator.com/item?id=25517658 https://news.ycombinator.com/item?id=25517658 [2]https://www.sec.gov/litigation/admin/2020/33-10906.pdf https://www.sec.gov/litigation/admin/2020/33-10906.pdf

le_didil 6y ago

didn't the customers notice that they were given bad execution prices ? or would that be very hard to notice in practice ? (I'm not a trading expert obviously)

calmworm 6y ago
Only place limit orders. If you place a market order you will absolutely get a bad execution price on Robinhood.
- le_didil 6y ago
  aha i see. thanks
- nickpeterson 6y ago
  To add to this, the swing is really wild. I’ve been tinkering with crypto trades manually through the app to get a hang for it, and limit orders still only tend to go through after you’re a few cents away from the market price, but if you naively do a market buy it will be 50-60 cents off in the wrong direction.
  - solaarphunk 6y ago
    You’re crossing the spread
  - smabie 6y ago
    You're taking instead of making with a market order, the fees are higher and the execution is worse.
reissbaker 6y ago
You'd only typically lose cents (if that; often enough you don't lose anything) per share. And there's no easy way to validate the price is "fair," since share prices are so fluid. It's also a fairly victimless crime, as the article notes (although it downplays this); in practice, it seems users typically saved more money thanks to Robinhood's zero-fee trading than they lost in less optimal pricing for their trades. The problem here wasn't that payment-for-order-flow is bad — even Schwab does it for their zero-fee trading platform, and in practice it's often a good tradeoff — the problem is Robinhood lied about it.

runawaybottle 6y ago

Seems like we are having the same discussion we had in previous bubbles. Robinhood, to put it simply, represents the retail investor market. What’s the first rule of fight club? The stock market is not for retail investors. When the retail investor shows up (represented via the prominence of a Robinhood or a Etrade once upon a time), you’ve entered ‘time to get real’ territory. Their entire customer base will be gone once things get ugly, so don’t even worry about how they make money since they are going to have bigger problems inevitably. What happened the last time everyone’s mom became a real estate agent pre-2008? These things are symptom of a fantasy playing out.

MontyCarloHall 6y ago

> That Robinhood sold its order flow is unremarkable, but the scale of its activities certainly merits comment. Forbes reports that in the first quarter 2020, 70% of Robinhood’s revenues derived from payments for order flows, as opposed to 17% for E-Trade and just 3% for Schwab. Yes, Robinhood has observed standard practice–but with distinctly above-average enthusiasm. Those other brokerages charge trading fees (these days, just for options trading), so of course their proportion of revenue from order flow will be lower.

deleted 6y ago
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lucisferre 6y ago
They do address that concern in the article.
dehrmann 6y ago
On the revenue share breakdown, this is a guess, but I suspect Robinhood users trade more and have lower account balances than Schwab customers.

rabbut 6y ago

> This tale also illustrates the point that you can move companies from Wall Street to Silicon Valley, and replace cynical baby boomers with optimistic millennials (Robinhood’s co-founders are in their mid-30s) who issue rousing mission statements, such as Robinhood’s promise to “democratize finance for all,” but ultimately the underlying math does not change. Sometimes, a business decides that its fortunes may diverge from those of its customers. Caveat emptor. This was completely unnecessary, but true. And now, please permit me a hearty laugh at the expense of millennials... LOLOLOL However, I know people that have used robinhood, I’m upset that they were affected, and I don’t blame millennials.

saalweachter 6y ago
I'm honestly just thrilled they correctly labeled millennials (as opposed to conflating them with Gen Z).

aphextron 6y ago

I don't think most people see Robinhood as a competitor to Schwab or eTrade. It's a competitor to mobile games. The millenial/zoomer cohort that primarily uses it are not investing for their retirements with it. It's a casino app used for entertainment.

oxymoran 6y ago
Yea that’s what 401k and IRAs are for. Whether you like it or not, Robinhood has lowered the barriers to entry for actual investing. Sure, there are people that use it like a casino. But the lack of fees per trade and the ability to buy fractional shares opens the door for anyone to be able to start investing with even a small amount of capital. Go yell at clouds somewhere else.
JKCalhoun 6y ago
You're right. But they're probably learning a thing or two and will be better investors when it actually matters — when it's real money. Seems like the big brokerages should encourage Robinhood "gaming". Speaking of which — would love to see a game (does it exist?) where you can play at an investor with pretend money and real market day to say numbers drive your winnings.
- aphextron 6y ago
  >Speaking of which — would love to see a game (does it exist?) where you can play at an investor with pretend money and real market day to say numbers drive your winnings. Paper trading is definitely a thing, and there's plenty of apps that support it. The problem is people will never act the same with paper as they do with real money. It doesn't correlate at all. This is why Vegas odds tend to be far more reliable than polling numbers.
- skinnymuch 6y ago
  Yeah it is sometimes called fantasy stocks. Paper trading. However no one treats that remotely the same as real money. Good chance whatever you do with fake money won’t matter much the second you have a big loss with your real money.

lucraft 6y ago

In the UK, Morning Star is the name of the Communist newspaper (not throwing shade, it was founded by the Communist Party of Great Britain in 1930). So whenever I see a link to this site I wonder what I'm about to read.

dbt00 6y ago
In the US, they're a boring respectable investment analysis service. Originally focused on mutual funds.

cwhiz 6y ago

Practically no one was harmed by this. A penny or two per trade. It’s more the principle of the matter than the actual costs. The fact that Robinhood was clearly lying is the most concerning thing.

alwayseasy 6y ago
SEC doesn't look at direct investor harm to litigate so you won't find them trying to build such a case either. They want a fair market that's about it.
frockington1 6y ago
Agreed. Its even worse as it fits into their entire business model to capture young unsophisticated investors. An experienced investor would make one trade and notice the order execution was off, however when you specifically target an inexperienced investor its easier to get away with the con
- IfOnlyYouKnew 6y ago
  An "experienced investor" would neither care nor, most likely, notice anything about this. Mostly because "experienced investors" aren't in the business of day trading. But also because nothing was "off" here. It isn't the Robinhood customer that is harmed by this, but institutional investors who, by this mechanisms, are excluded from the services of these market makers because they present a different risk profile.
- kasey_junk 6y ago
  I worked in HFT building trading platforms and it would be virtually impossible for me to see order execution being off using retail tooling. In fact it takes incredibly sophisticated infrastructure to do it. The kind of infrastructure you build if you are a market maker who would like to pay for order flow. Even the SEC doesn’t have the capabilities to check execution rates for every order. They rely on audits of smaller subsets of the orders in historical reports.
IshKebab 6y ago
I agree. I used Freetrade and they delay all free trades until 3pm the next day. Obviously they are doing some nonsense to make a tiny bit of money from that, but it doesn't really matter to me any more than the 0.5% duty does because I'm not idiotic enough to make short-term trades. Just put the money in, forget about it and take it out years later. 0.5% will be irrelevant.

rwmurrayVT 6y ago

This article isn't exactly convincing. The SEC identified $34mm in poor execution. If you did 65c each way per option contract & free stock trades that would only be 52.3m option trades. That's miniscule. That's over 5 years. It would take a whole lot of unidentified trades for that to be substantial. The spread on most trades is probably in the range of 50c on low liquidity shares and $1 on low liquidity options. Perhaps the reason RH collects more in revenue from order flow is because they: 1) get paid more for their order flow on a per trade basis 2) they don't collect any fees from options driving down revenue 3) they charge less for margin fees with less users using margin There are any number of reasons, but to say that you're getting royally screwed is a massive stretch in my mind. Prior to RH fees were outrageous. The fees are still outrageous on my self-directed 401k. I'm not getting $10 in losses from bad execution.

ceejayoz 6y ago
The article mentions that may just be the amount the SEC can actually prove. > Overall, Robinhood’s investors may not have been harmed by their decision. The SEC identified $34 million that Robinhood customers lost by not receiving best execution, which is much less than the money they saved by forgoing trading commissions. (That said, their losses might also be much higher. That $34 million comes only from “certain” transactions, which might be the tip of the iceberg that the SEC possessed the ability to measure.) They were, however, duped.
- elliekelly 6y ago
  I think the author has misunderstood the SEC Order. The article says (emphasis added): > The SEC identified $34 million that Robinhood customers lost by not receiving best execution, which is much less than the money they saved by forgoing trading commissions. But paragraph 42 of the Order[1] says (emphasis added): > ... certain Robinhood orders lost a total of approximately $34.1 million in price improvement compared to the price improvement they would have received had they been placed at competing retail broker-dealers, even after netting the approximately $5 per-order commission costs those broker-dealers were charging at the time. [1]https://www.sec.gov/litigation/admin/2020/33-10906.pdf https://www.sec.gov/litigation/admin/2020/33-10906.pdf

docflabby 6y ago

I though the whole "con" with Robinhood is where they front-run the retail trades

rybosworld 6y ago
That's basically what the article says.
- harryh 6y ago
  That is not at all what it says.
- smabie 6y ago
  That's not how it works, and that's not what the article says. Why do people keep saying this
  - tptacek 6y ago
    Because they're not doing the reading, and it's a lot more fun to talk about "front-running" than about what's actually happening, and "fun" has a lot of power on message boards.
deleted 6y ago
[deleted]

ForHackernews 6y ago

Wait, you're telling me the company that implemented the Infinite Money Cheat Code isn't entirely legit? https://banyanhill.com/robinhood-infinite-leverage-money-cheat-code/ https://banyanhill.com/robinhood-infinite-leverage-money-che... https://www.bloomberg.com/news/articles/2019-11-05/robinhood-has-a-glitch-that-gives-traders-infinite-leverage https://www.bloomberg.com/news/articles/2019-11-05/robinhood...

drcode 6y ago

Is this just another piece of data confirming that it is a bad idea to place market orders? With a market order you are essentially saying to the broker "I want this stock right now, you can decide what the price is". With a limit order, it seems much harder to pull any tricks. It seems like market orders are, and always have been, for chumps. Robinhood is just being more shameless about abusing them than previous brokers.

Bostonian 6y ago
I agree with placing limit orders instead of market orders, but if an illiquid stock is quoted at 20.00 to 20.10, placing a limit order to buy at 20.10 is not much different from a market order, at least for a small number of shares. It's possible some brokers will offer more price improvement than others in this trade, filling you at less than 20.10.
- drcode 6y ago
  Agreed
- hef19898 6y ago
  Thinking about it, I never used anything else than limit orders. Not saying much, so, as I maybe used that to sell like 4 times in tha last one year and half.
  - dboreham 6y ago
    Jim Cramer has been advising never to use market orders for several years.
Dirlewanger 6y ago
How much does this actually matter for the casual retail investor? I'll typically buy 5-10 shares of some ETFs every couple months via market orders (not on Robinhood), am I really getting bilked that bad?
- 6y ago

dmurray 6y ago

The SEC decision seems a little harsh on Robinhood. If RH had executed all of its customers orders on the public exchanges, instead of routing any to brokers, it would be in the clear (and a lot of people would be saying how great it was that RH didn't take payment for order flow). Directed orders are absolutely fine. But because they chose to shop around for better prices than they could have achieved with directed orders, they had an obligation to pass on more of that price improvement to the customer. How much more? It's not clear. Seems like the SEC is hinting at "roughly as much as everyone else does" - brokers shouldn't be allowed a business model that subsidises low trading fees with high PFOF. Other brokers subsidise their low or zero trading fees by collecting interest on their customers' cash balances. This only works when the balances are relatively large. The SEC's approach arguably encourages transparency, but I don't find either business model particularly transparent - the bigger effect is to discourage brokers targeting smaller clients.

SpicyLemonZest 6y ago
As a matter of law, brokers have a duty to seek what’s called “best execution”, meaning they’re required to both shop around for better prices and pass all of the price improvement they can find onto their customers. Payment for order flow is still kosher in many circumstances; there's no clear duty to go to the people offering it and demand price improvement instead. But what you definitely can’t do is accept a worse deal (or stop trying to find better deals) in order to protect your payment for order flow revenue stream. It’s fair to say that this rule cuts off some interesting business models which might better serve different market segments, but that’s largely the point. In the SEC’s judgment, the potential for abuse is too high if stock brokers start acting like retail stores.
- dmurray 6y ago
  > As a matter of law, brokers have a duty to seek what’s called “best execution”, meaning they’re required to both shop around for better prices and pass all of the price improvement they can find onto their customers. That's the definition of best execution as it applies to undirected orders. But you can also offer your clients direct execution on the exchange, in which case you don't have to (and must not) shop the order around. If RH had done that, they'd be in the clear. Yes, I understand that retail brokers aren't usually in the business of directed orders (because shopping round the orders is in the interest of both them and the client).

oldgradstudent 6y ago

The more important question is why is no one going to jail? These were specific actions approved by specific people. Why hasn't the SEC file criminal referrals against the people involved?

wpietri 6y ago
Seems like a reasonable question to me. Leandro Andrade got 25-to-life for stealing $150 worth of kids' video tapes from K-Mart. But if some guys in suits steal (at least!) $34 million and they get a sternly worded letter from the SEC telling them to be best. Lawyer Ken White, aka Popehat, regularly points out that laws about crimes appear to vary quite a bit based on how much a lawmaker can imagine that they might see the sharp end of the law. Seems like that's in play here.
- smabie 6y ago
  No one stole anything, this is about an incorrect FAQ page.
  - wpietri 6y ago
    The SEC appears to disagree with you, and given that they're the experts, I'm going with them. Robinhood ended up with at least tens of millions of dollars of customer money that they shouldn't have, and were covering it up with lies.
    - smabie 6y ago
      No, literally the SEC is fining them about an inaccurate FAQ page. If their FAQ page was different, they would not have been fined.
      - wpietri 6y ago
        Yes, it was inaccurate in the same sense that it was inaccurate for 7-year-old me said the candy bar must have accidentally fallen into my pocket at the store. A false statement that covers up one party gaining at another's expense is something that I'm going to presume is a lie. Especially when that false statement is made prominently, over and over. Calling that an inaccuracy strikes me as another convenient inaccuracy.

inthewoods 6y ago

"The SEC’s order officially censures Robinhood for its actions, fines the firm $65 million, and requires that the company work with an independent consultant to ensure that henceforth it will satisfy its duty of best execution." So, could this mean that Robinhood's business model just went bust? If they are getting the majority of their revenue from, and they will now be required to provide, presumably, some form of execution that is closer to best execution, then the other firms they are trading with will lower the money that RH receives, no? Naturally it may not matter - they are a SV darling and have quickly made Schwab et al look like dinosaurs.

ludamad 6y ago
Probably not. It looks like overall, they can make the same amount as a normal firm, just indirect instead of direct, and still have "best execution"
frockington1 6y ago
Their interface pales to anything else. Download TDAs think or swim platform for a look at what could be. The only piece Robinhood does better is the SV gamification that lures investors who won't notice their orders are off
- dQw4w9WgXcQ 6y ago
  As a huge ToS fan, Robinhood did the gamification so well it forced TD/ToS to add better (simpler) PnL features to their apps. And there really wasn't anything special about their main graph either, it's just simple.

phillc73 6y ago

I was completely surprised by this story and website. For me, the Morning Star is a British socialist newspaper[1] and I thought the story would be about debunking the myth of the outlaw Robin Hood. Quite an irony that this Morning Star website seems to be an investment and stock market news site. [1] https://morningstaronline.co.uk/ https://morningstaronline.co.uk/

QuesnayJr 6y ago
This Morningstar provides information and analysis to investors, and predates the web by a decade (it was founded in 1984). It is most famous for rating mutual funds.
- phillc73 6y ago
  The Morning Star newspaper I referred to was founded in 1930 as the Daily Worker, and renamed to the Morning Star in 1966.[1] [1] https://en.wikipedia.org/wiki/Morning_Star_(British_newspaper) https://en.wikipedia.org/wiki/Morning_Star_(British_newspape...

TedDoesntTalk 6y ago

> you can move companies from Wall Street to Silicon Valley, and replace cynical baby boomers with optimistic millennials (Robinhood’s co-founders are in their mid-30s) who issue rousing mission statements, such as Robinhood’s promise to “democratize finance for all,” but ultimately the underlying math does not change.

ikeboy 6y ago

Robinhood closed out an option spread I had deep in the money with no notice, citing some kind of risk. I get a notification that "my" order executed two minutes before market closed, I immediately contact Robinhood saying that I didn't place the order. It took a week for them to tell me that they had put the order in on my behalf. Cost me $1800 vs the value held to expiration (which was a month out.) Seriously considering taking them to small claims court. No notification beforehand, and even afterwards it took a week to find out what happened.

notyourwork 6y ago
Their support is beyond unacceptable as far as I’m concerned. I left them as quickly as I joined.
anonu 6y ago
Research this a bit more. It may be within their risk parameters or guidelines. But if you think theres a breach here, you should raise a FINRA complaint.
- ikeboy 6y ago
  They pointed me to an obscure page on their site that implies but doesn't directly say that this might happen. I don't know the laws, have to do more research.
  - gamblor956 6y ago
    Doesn't matter. Raise a FINRA complaint now. You don't need to be an expert in the rules and try to determine on your own whether it's a violation of FINRA's rules. FINRA will do that for you. Even if Robinhood technically disclosed that they might do it, violating a customer's express orders without documenting appropriate reasons for doing so is generally a violation of FINRA's rules. Brokers have lost their licenses for shenanigans like that.
    - ikeboy 6y ago

oxymoran 6y ago

As a Robinhood user with a finance degree, I have never experienced any issues with order execution or misrepresented prices that are passed on to the investor. In fact, I use the TD Ameritrade Think or Swim app for charts and research and I regularly compare the spreads between Robinhood and Ameritrade. Robinhood regularly has lower spreads that are actually executable. Quite honestly, I feel like the old school brokers are padding their spreads so that they can offer “free trades” like Robinhood. This article feels like a smear to me. As a knowledgeable investor, I can say that however Robinhood makes their money, hasn’t had any significant impact on the performance of my investments. Quite the opposite. By not incurring fees per trade and by allowing fractional shares, I was able to start with a much smaller amount of capital.

smabie 6y ago
What does RH offer that Schwab doesn't, for example? As far as I can tell, nothing really?
- dred_prte_rbrts 6y ago
  A mobile user interface that actually is designed for a mobile device?

daniel957 6y ago

Doesn’t this also mean that, depending on the market, Robinhood’s actions could have benefited investors?

NovemberWhiskey 6y ago
No; why would you think that?
- daniel957 6y ago
  Person A places a trade which ends up executing at a certain time that causes the person to lose money. Person B places a trade, then there’s some breaking news about the COVID vaccines and the market fluctuates, and then the trade is executed. Person B makes more money than expected because it took longer for the trade to execute and there was time for the market to change.
  - NovemberWhiskey 6y ago
    This is not about timing; it's about the proportion of price improvement that benefits the customer vs the broker.
    - daniel957 6y ago
      I see. I assumed that order flow implied something about timing (i.e. we send these orders to this broker who executes the order in an untimely fashion causing an inferior execution price).
      - NovemberWhiskey 6y ago
        It's more like this: the NBBO bid for a stock may be $10.00, which is effectively a worst-case for "best execution", which is what a broker is obligated to provide if I place a market sell order. The broker may be able to route order that to a venue that will execute at $10.05; this is potential price improvement for the seller. The potential price improvement is split between the broker and the customer. This is what "payment for order flow" really means. The broker routes the order to a particular trading venue in exchange for a cut of the potential price improvement, with the rest going to the customer. What's worth knowing about Robinhood is a) they did not disclose that they were being paid for order flow and b) that they contracted to receive a much larger cut of the potential price improvement than was typical; e.g. other brokers might take $0.01 of that improvement, whereas Robinhood was taking $0.04.

oxymoran 6y ago

Legitimate criticism of Robinhood: -the app crashes at the worst possible times -they gamify the investing process too much -they have no customer service Everything else is pretty much just sour grapes or outright smears.

jkhdigital 6y ago
I agree to some extent, but only because I think most SEC regulations have the effect of creating walled gardens for established players rather than protecting investors. But you can always apply Godel’s incompleteness theorems (capital markets edition).

totaldude87 6y ago

can anyone put this on layman terms, from what I understood 1) a robin hood trader submits order 2) robin hood routes it to principal trading firm for a small amount 3) principal trading firm executes trades and makes profit by selling or matching order on other end? (this i got from a high frequency trading book ) so robin hood was fined because, they got more money for this? or customers have to pay more for a stock since it goes via robin hood, how the customer was affected ?

CarelessExpert 6y ago
> or customers have to pay more for a stock since it goes via robin hood, how the customer was affected ? That one. It's a bit complicated but the gist is the price Robinhood customers pay for their securities is worse than it could be due to the deals RH has with their trading partners.

humbleMouse 6y ago

I posted on here saying they were selling order flow months ago and got heavily downvoted

IfOnlyYouKnew 6y ago
They've openly said they were selling order flow since the very beginning, so I can sort-of understand the downvotes. Read any second post by Matt Levine over at Bloomberg as to why selling of order flow isn't necessarily bad, and probably quite ok, for retail customers. But the gist is: fulfilling retail customer orders is lucrative for market-makers because they do not run the risk of fulfilling some order that is part of a larger, institutional, trade that will make the market move against them a short time later.
toast0 6y ago
Everybody knew they were selling order flow. Almost all brokerages are selling order flow, and it's not a problem per se. The difference is Robinhood is taking a larger percentage of the payment than most others. If you provided that information months ago, it may have been a worthy comment.

LatteLazy 6y ago

You always pay your broker. You pay commission. If you don't pay commission, you pay in bigger spreads they offer. If the spreads aren't bigger then you're getting worse execution. All anyone can do is understand HOW they are paying and use that information to minimise what they ultimately pay. "Free" isn't a thing.

tachyonbeam 6y ago
I wish there was a way to democratize direct access to the exchanges and their APIs. As it is, it's really an insider's club.
- birdsbirdsbirds 6y ago
  Make your own exchange.
- frockington1 6y ago
  What does democratize mean in this use case? Running direct access to exchanges isn't cheap, someone has to pay. Most "democratizing" seems to end up being opaque fees that naive customers don't realize (i.e. Robinhood)
- iav 6y ago
  Interactive Brokers offers a cost plus commission structure, where your trades pay the exchange commission (or collect the rebate, if you are providing liquidity) and they just take on a ~$1 fee per trade on top. Very few "regular Joes" actually want that - what you don't realize is that exchange fees vary a LOT, each exchange easily has dozens of different rates depending on security, time of trade execution, the state of the order book at the time, and order type. Placing a market buy order when the book is sell-heavy? The exchange will actually pay you for that. Going the other way? That's a very expensive order. What if you take the order to a different exchange where the book is more balanced but the price is worse for you? It might make sense when you factor in the difference in commissions. This is why online brokerages exist, to abstract all of this complexity away.
  - 6y ago

nkohari 6y ago

I don't think I understand what's wrong with this model. If I wanted to actively trade, I'd still prefer Robinhood's zero commission model, even if it meant that my buy price was slightly higher. $10 a trade vs. pennies? Sign me up, we both win. What am I missing?

_lazlo 6y ago
I was looking to see if anyone caught this. It seems that Robinhood would be better for someone not investing a lot of money. If I execute a trade for $1,000,000 a small difference in stock price makes a difference and its better to pay a straight $5.00 commission with the lowest price possible. However, if I buy a single share for $50, that $5 commission is now substantial. This seems like a very clever way to compete and offer a better service to poorer people. Unless I'm missing something the boomer either didn't catch that, or chose not to acknowledge it. As a millennial I'll assume his best intentions and that this isn't an attack on a successful company business model that he's receiving a kickback for to de-legitimizing Robinhood.
greenshackle2 6y ago
There is nothing wrong with the Payment For Order Flow model. Virtually every retail broker does it. What you're missing is that Robinhood is not the only commission-free brokerage. I'm sure you'd rather have no commissions and 80% of the price improvement instead of no commissions and 20% of the price improvement. The real problem is that Robinhood advertised they have THE BEST EXECUTION compared to other brokers, set up a Committee to ensure they have THE BEST EXECUTION, and then that Committee somehow failed to notice that Robinhood clearly doesn't have THE BEST EXECUTION because they're taking an 80% cut of price improvement, instead of 20% like everyone else.

mcherm 6y ago

The article says: "investors greatly prefer paying indirect fees, through opaque arrangements, to paying explicit costs". This is not true. Investors prefer paying indirect, opaque fees to paying explicit fees AND indirect, opaque fees. They simply assume that they are being charged the opaque fees no matter what. As this article demonstrates, they are generally correct about that.

gifnamething 6y ago

>That, regrettably, is what it discovered. The SEC’s investigation revealed the secret behind Robinhood’s high order-flow revenues: The company charged principal trading firms much more than the going rate. Typically, the SEC found, payments for order flow equal about 20% of the average price improvement that investors realize on their trades. But Robinhood insisted on receiving what amounted to 80% of the improvement: 4 times the customary level. >When Robinhood made that demand, the principal trading firms with which it was negotiating informed the company that something had to give. If Robinhood were to take that much of the proceeds for itself, then “there would be less money available for the principal trading firms to provide price improvement for Robinhood’s customers.” In other words, Robinhood explicitly was informed that more for it meant less for its customers. The company accepted those terms. There's a missing logical step here: if 80% fees mean there is less money available, so will 20% fees. So is it just that payment for order flow is inherently bad for the customer, and RH are the worst of a bad bunch?

qaq 6y ago

There are brokers like interactive brokers that give you all options e.g. "free" or fixed price passing on full amount of rebates to you.

asidiali 6y ago

Robinhood’s own documentation for the greater part of last year explicitly stated they would automatically sell or execute your options within a 1 hour window of expiry. I lost thousands when Robinhood prematurely executed my position ~100 minutes before market close. I was waiting for right before the hour window. Of course, 10 minutes after they sold my position, it quadrupled in value. I even already had had a limit sell order on the books! They cancelled my order, and executed their own, without any notice, outside of their own documented window. When I contacted support and pointed them to the docs, their reply was that it could be “anywhere from 60-90 minutes before close.” Here is their email [1]. I asked them to provide a link to where their documentation says such - they never responded. I followed up twice. Such utter bullshit. Immediately switched to ETrade and have had a great experience. There is a nice representative who’s direct phone number I can call and always reach, she always answers, and gives me any info or help I need. She called me within a week of me opening the account just to say hi and walk me through my account settings. Also, sure, ETrade will auto sell your position too - within 10 minutes of market close. That sounds a lot more like protecting my investment, than a 60-90min window used to drain retail investors of their expiring options. Edit: this page [2] still says "about an hour" to define the auto-exercise window. Click on the "What happens" dropdown under the first header. [1] https://imgur.com/1jfkZNG https://imgur.com/1jfkZNG [2] https://robinhood.com/us/en/support/articles/expiration-exercise-and-assignment/ https://robinhood.com/us/en/support/articles/expiration-exer...

ptero 6y ago
Robinhood does not have the same weight as larger brokerages, like Schwab, ETrade or Fidelity, so I would definitely expect it to perform worse on time-critical trades. By the same token, those large consumer and pension-fund focused brokerages would fare worse than internal trading desks and shops focusing on the HFT traders. I would not use Robinhood for HFT or in general where I would care about the speed of trade execution.
- sidlls 6y ago
  There's no good reason for any company putting itself up as a brokerage to have a 60-90 minutes window for any equity or options trade. They most definitely have the ability to cap that window, and cap it to a much smaller range. They just choose not to--probably so they have some plausible deniability or wiggle room to fleece people like the OP.

luc_ 6y ago

"how do they even make money?" .. reads FAQ .. "yeah they're probably selling your data"

fny 6y ago

I think Robinhood is total trash, but this is exactly what every single other free brokerage does. If you don't pay for your trades, someone else has to pay for them. This is true for ETrade, TDA, Schwab, TradeStation, TastyWorks, and friends. Your order flow must be sold to give you free trades. It's operationally impossible to be any other way since everyone, at minimum, is required to pay fees to the exchanges. Someone needs to pay for you, and a broker sure as hell isn't doing that for free. - CME Fees: https://www.cmegroup.com/company/clearing-fees.html https://www.cmegroup.com/company/clearing-fees.html - NYSE Fees: https://www.nyse.com/markets/nyse/trading-info/fees https://www.nyse.com/markets/nyse/trading-info/fees - NASDAQ Fees: http://www.nasdaqtrader.com/trader.aspx?id=pricelisttrading2 http://www.nasdaqtrader.com/trader.aspx?id=pricelisttrading2 Robinhood, for example, waives all of these somehow only charging for certain regulatory fees: - Robinhood: https://robinhood.com/us/en/support/articles/trading-fees-on-robinhood/ https://robinhood.com/us/en/support/articles/trading-fees-on... Robinhood also miraculously waives these mandatory fees for small transactions. How? By selling your order flow just like everyone else. If you really care about good executions and your order flow not being sold, you should use a service like Interactive Brokers.

klipt 6y ago
> this is exactly what every single other free brokerage does Kind of, but the article specifically mentions that Robinhood is getting 4x more money than the industry average, in exchange for giving users worse prices: > Typically, the SEC found, payments for order flow equal about 20% of the average price improvement that investors realize on their trades. But Robinhood insisted on receiving what amounted to 80% of the improvement: 4 times the customary level. > When Robinhood made that demand, the principal trading firms with which it was negotiating informed the company that something had to give. If Robinhood were to take that much of the proceeds for itself, then “there would be less money available for the principal trading firms to provide price improvement for Robinhood’s customers.” In other words, Robinhood explicitly was informed that more for it meant less for its customers. The company accepted those terms.
devmunchies 6y ago
> Someone needs to pay for you yeah they have VC money. you can offload the cost as a consumer until they change their business model.

RcouF1uZ4gsC 6y ago

I am starting to become convinced that most VC backed companies either are scammy from the start or quickly become scammy. Basically they are given a lot of money to “disrupt” a market. So they first have to have to show a lot of growth. The easiest way to do that is to offer for free (or deeply discounted) what used to cost money. So the growth numbers go up. Eventually, they need to be able to start showing a profit. However, the original, most obvious way of monetizing customers is gone, so then the company begins doing shady stuff to try to boost revenue.

Below_The_Line 6y ago

If you dig a layer deeper on payments for order flow, the majority of that revenue comes from options trading. Because they're more opaque, options carry fatter margins versus stock. Not surprisingly, Robinhood makes it very easy for users to trade options. Lucrative for Robinhood, but potentially risky for investors. More thoughts on that below. https://kjlabuz.substack.com/p/57-robinhood-traders-anonymous https://kjlabuz.substack.com/p/57-robinhood-traders-anonymou...

anonu 6y ago

I've stated this before and got downvoted in other posts: RobinHood is a gambling platform. It is run fast and loose by its managers. I am glad the SEC came down on it. This is actually a very minor penalty and more like a slap on the wrist than anything else. But it shows at least that there is some scrutiny of what RH tells its customers. I have raised FINRA complaints in the past about this company for their poor order handling. I encourage anyone else to do the same when they see something wrong with RH or any other trading platform. RH needs to massively increase its controls as well as investor education. I think this penalty is also a massive day of reconing for their business model. They need to move to more of a full service broker - like all the other old-school firms. There's no money in order routing such as this. They need to boost their account size and attract higher quality users focused on investing - not gambling.

daniel-cussen 6y ago
> They need to boost their account size and attract higher quality users focused on investing - not gambling. This seems like one of those companies that can't both carry out their business and say what that business actually is. In any industry there's the official story of how it makes money--obsessing with quality is a common stated goal--and then there's the actual nitty gritty of how it gets the impression of that quality without going to all the expense.
oarabbus_ 6y ago
>Overall, Robinhood’s investors may not have been harmed by their decision. The SEC identified $34 million that Robinhood customers lost by not receiving best execution, which is much less than the money they saved by forgoing trading commissions. (That said, their losses might also be much higher. That $34 million comes only from “certain” transactions, which might be the tip of the iceberg that the SEC possessed the ability to measure.) They were, however, duped. This seems like the financial equivalent of Facebook/Google. Free to use, but you are the product the company profits off of. I'm not really seeing an issue if there is no measurable _net_ harm to the investors.
- gnopgnip 6y ago

JohnJamesRambo 6y ago

Time for me to trot out my Margin Call quote again- “There are three ways to make a living in this business: be first, be smarter, or cheat.” I constantly wish for the new Silicon Valley startups to do the first two and I usually only get the last one.

chews 6y ago

PFOF or paying for order flow is a strange way to make money. There are other attempts at normalizing this sort of behavior, free trades and apis over at alpaca.markets is another example of it.

newdude116 6y ago

I always get downvoted here, but again, what did you expect? There is no free lunch. Use a decent broker like Interactive Brokers, Thinkorswim or Schwab. Schwab comes with a decent bank account. And I am neither a big fan of day traiding nor trading on the phone with an app.

optimalsolver 6y ago

From what I could find after a quick Google, you can't trade commodities on Robinhood. Is there any demand for this? I would've thought the self-styled "retards" of WSB would love the high-volatility, high-return nature of the commodities market.

kevinventullo 6y ago

By deriving revenue from order flow rather than a per-transaction fee, they’ve effectively made trading fees progressive. That is, a college student getting their wet buying a few shares of Apple pays less than someone moving around $100k‘s worth of equity from one index fund to another. Kinda fits the Robinhood moniker, right?

Veminder 6y ago

Someone tell Prof Galloway!