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Anytime you move fees from a regime where they’re fully visible to the customer into one where they’re hidden, the customer is eventually going to get fleeced.

Anytime you move fees from a regime where they’re fully visible to the customer into one where they’re hidden, the customer is eventually going to get fleeced. It may not happen instantly, but it’s inevitable. You’re simply removing one of the only competitive metrics that customers have to choose between brokerage firms and replacing it with something opaque. (The fact that Robinhood even exists is proof that explicit-fee brokerage models produce competition from lower-fee competitors.) Unfortunately, the degree to which customers are getting fleeced is hard to know. Which, let me repeat, is exactly why this model exists. The article mentions it’s at least $34M but even the SEC seems unable to calculate the exact amount. And if they can’t determine it, then how in the world is the typical customer supposed to? At the end of the day, the degree to which customers are getting fleeced is probably exactly proportional to Robinhood’s revenue from order flow. If RH is receiving vastly less revenue-per-customer from that source than explicit-fee exchanges make from fees and order flow, then customers are getting a possible bargain. If RH is doing as well or even better with this model than competitors, their customers are probably getting screwed and don’t even realize it. (And if by some miracle RH isn’t abusing this, then other brokerages will abuse it and try to outcompete RH.)

gandutraveler 6y ago
I agree that it needs to be more transparent but RH isnt the only one hiding the back office deals. There needs to be a larger inquiry into all the trading platforms like Fidelity, Schwab. On the other hand price improvement is so hard to enforce. I'm not sure how SEC can even regulate it.
hinkley 6y ago
> then other brokerages will abuse it and try to outcompete RH. If you make higher margins but don’t lower your prices, the only other way to outcompete is to offer a broader array of services. Otherwise “outcompete” just turns into “save up more money and buy them out”.
- rlucas 6y ago
  There are an awful lot of businesses that charge huge margins and use that extra cash flow, plus their scale, to essentially fence out new entrants by a mix of sales/marketing, channel spiffery/bribery, and regulatory capture. It's often a fairly "bad for you"/"predatory" product, too, but the problem is that it's very hard to create a new entrant doing it the "good for you" way, because all that extra margin the bad guys make can be used to squeeze you out of the market. Legacy industry examples would include whole life insurance, title insurance, payday lending, and whatever it was that "Dun & Bradstreet Credibility Corp" was selling (not the historical D&B) a few years back. I consider it enough of a pattern of "bad money chases out good" that I identify it regularly among pitches I receive.
  - matthewdgreen 6y ago
    Premium credit cards, for example. The ones that give customers sweet points or cash-back deals, but then charge huge (invisible to the customer) merchant fees on the back end. https://thepointsguy.com/guide/guide-to-credit-card-merchant-fees/ https://thepointsguy.com/guide/guide-to-credit-card-merchant...
    - rwmurrayVT 6y ago
      This really hurts those of us that are unable to access these types of reward points. It pushes additional costs onto us all, but especially onto those without exceptional credit.
    - hinkley 6y ago
      Someone taught me long ago that if you're using a debit card in a store you actually like, you should chose the debit option rather than the credit option, as the fees are lower. I sometimes do the reverse when I'm in a shop that I don't have good things to say about, especially if I think they just cheated me in some legally defensible way. Like Captain Ahab trying to kill the whale with his pocket knife. Fuck you, I'm taking 1.5% of your life away!
nipponese 6y ago
So you would rather pay a commission fee AND have order-flow sold as opposed to no fee and just sold order-flow? No matter where you trade right now, all the brokerages are practicing this.
- valuearb 6y ago
  Except that other brokerages pass 80% of order flow savings to customers while Robinhood keeps 80% of it. Robinhood is more expensive than commissioned brokers, it just hides the charges better.
  - X6S1x6Okd1st 6y ago
    Has there been a study that shows that robinhood is more expensive than various commissioned brokers?
    - SpicyLemonZest 6y ago
      I don't know if there's been a study, but that's the substance of the SEC charges that the source article is describing. (It's not clear to me if the full details of the SEC's calculation are private or I just don't know how to find them.)
      - iandanforth 6y ago
        The linked article contradicts this point. On balance today Robinhood is not more expensive. The parent's point about the slippery slope still stands of course.
    - ashtonkem 6y ago
      Sounds like it’s about to be litigated in court.
  - boringg 6y ago
    Is it though? 80% of order flow savings ... 80% of exactly how much?
psanford 6y ago
How is doing at least as good as NBBO mean I'm getting fleeced?
dcolkitt 6y ago
> Anytime you move fees from a regime where they’re fully visible to the customer into one where they’re hidden, the customer is eventually going to get fleeced. I think you misunderstand the payment-for-order-flow business model. The revenue doesn't come from hidden fees to the users. It comes from third-party liquidity providers. They do so because liquidity providers overwhelmingly prefer to interact with retail order flow over the undifferentiated toxic flow in public exchanges. The best analogy is how Miami club promoters will get pretty girls free entry and drinks. The pretty girls aren't paying any sort of hidden fees, and in fact are getting a better deal than they would with general admission. Rather it's the venues that paying the fees, because they overwhelmingly prefer patrons who are pretty girls compared to the average person who shows up at the door.
- matthewdgreen 6y ago
  The article is very explicit about how price improvements aren’t being passed on to the customer to the same degree as other brokerages, because RH demanded higher payments for order flow. I don’t know how to map that to your club analogy, but it definitely does not seem to map to this situation. Maybe a club where there's no cover fee, but all the drinks are 20% more expensive?
  - tptacek 6y ago
    The premise of your argument seems to be that investors are entitled to the best possible price improvement, rather than the RegNMS NBBO, and that any sliver of a penny they get less than the best available price at any brokerage is a "fleecing". That argument doesn't make much sense to me. People trade slivers of pennies for all sorts of things across the economy. Literally just liking a UI color has a value you can denominate in some sliver of a penny. The SEC's problem with Robinhood isn't that they weren't offering the best available price improvement. It's that they knowingly weren't, but told customers otherwise. The implication is that if they'd simply been up front about it, and said "we don't charge commissions and have a snappy UI, and we make up for it by taking a bigger share of the rebates our upstreams offer to retail traders", they'd have been just fine. (Robinhood is bad, but the reasons have very little to do with PFOF).
baby 6y ago
I read your first paragraph and now I’m thinking of paying for something in the US where all the taxes and tips are clearly visible and added at the end for you to see, vs paying for something in Europe where what you see is what you pay. I think people overwhelmingly prefer the European system.
defen 6y ago
> Anytime you move fees from a regime where they’re fully visible to the customer into one where they’re hidden, the customer is eventually going to get fleeced. It would be interesting to apply this insight to "surveillance capitalism" industry. You get to use Google/Facebook/Twitter/etc for free, even though there is some fixed amount you would theoretically be willing to pay to use them. In exchange, the companies use your personal information to display ads to you, but you have no idea what that is worth to those companies. In other words, your personal info (which is used to sell ads) is by definition worth more than the cost to serve Google/Facebook/Twitter to you (otherwise those companies would make no money). But you have no way of knowing how much more.

gandutraveler 6y ago

I agree that it needs to be more transparent but RH isnt the only one hiding the back office deals. There needs to be a larger inquiry into all the trading platforms like Fidelity, Schwab. On the other hand price improvement is so hard to enforce. I'm not sure how SEC can even regulate it.

hinkley 6y ago

> then other brokerages will abuse it and try to outcompete RH. If you make higher margins but don’t lower your prices, the only other way to outcompete is to offer a broader array of services. Otherwise “outcompete” just turns into “save up more money and buy them out”.

rlucas 6y ago
There are an awful lot of businesses that charge huge margins and use that extra cash flow, plus their scale, to essentially fence out new entrants by a mix of sales/marketing, channel spiffery/bribery, and regulatory capture. It's often a fairly "bad for you"/"predatory" product, too, but the problem is that it's very hard to create a new entrant doing it the "good for you" way, because all that extra margin the bad guys make can be used to squeeze you out of the market. Legacy industry examples would include whole life insurance, title insurance, payday lending, and whatever it was that "Dun & Bradstreet Credibility Corp" was selling (not the historical D&B) a few years back. I consider it enough of a pattern of "bad money chases out good" that I identify it regularly among pitches I receive.
- matthewdgreen 6y ago
  Premium credit cards, for example. The ones that give customers sweet points or cash-back deals, but then charge huge (invisible to the customer) merchant fees on the back end. https://thepointsguy.com/guide/guide-to-credit-card-merchant-fees/ https://thepointsguy.com/guide/guide-to-credit-card-merchant...
  - rwmurrayVT 6y ago
    This really hurts those of us that are unable to access these types of reward points. It pushes additional costs onto us all, but especially onto those without exceptional credit.
  - hinkley 6y ago
    Someone taught me long ago that if you're using a debit card in a store you actually like, you should chose the debit option rather than the credit option, as the fees are lower. I sometimes do the reverse when I'm in a shop that I don't have good things to say about, especially if I think they just cheated me in some legally defensible way. Like Captain Ahab trying to kill the whale with his pocket knife. Fuck you, I'm taking 1.5% of your life away!

nipponese 6y ago

So you would rather pay a commission fee AND have order-flow sold as opposed to no fee and just sold order-flow? No matter where you trade right now, all the brokerages are practicing this.

valuearb 6y ago
Except that other brokerages pass 80% of order flow savings to customers while Robinhood keeps 80% of it. Robinhood is more expensive than commissioned brokers, it just hides the charges better.
- X6S1x6Okd1st 6y ago
  Has there been a study that shows that robinhood is more expensive than various commissioned brokers?
  - SpicyLemonZest 6y ago
    I don't know if there's been a study, but that's the substance of the SEC charges that the source article is describing. (It's not clear to me if the full details of the SEC's calculation are private or I just don't know how to find them.)
    - iandanforth 6y ago
      The linked article contradicts this point. On balance today Robinhood is not more expensive. The parent's point about the slippery slope still stands of course.
  - ashtonkem 6y ago
    Sounds like it’s about to be litigated in court.
- boringg 6y ago
  Is it though? 80% of order flow savings ... 80% of exactly how much?

psanford 6y ago

How is doing at least as good as NBBO mean I'm getting fleeced?

dcolkitt 6y ago

> Anytime you move fees from a regime where they’re fully visible to the customer into one where they’re hidden, the customer is eventually going to get fleeced. I think you misunderstand the payment-for-order-flow business model. The revenue doesn't come from hidden fees to the users. It comes from third-party liquidity providers. They do so because liquidity providers overwhelmingly prefer to interact with retail order flow over the undifferentiated toxic flow in public exchanges. The best analogy is how Miami club promoters will get pretty girls free entry and drinks. The pretty girls aren't paying any sort of hidden fees, and in fact are getting a better deal than they would with general admission. Rather it's the venues that paying the fees, because they overwhelmingly prefer patrons who are pretty girls compared to the average person who shows up at the door.

matthewdgreen 6y ago
The article is very explicit about how price improvements aren’t being passed on to the customer to the same degree as other brokerages, because RH demanded higher payments for order flow. I don’t know how to map that to your club analogy, but it definitely does not seem to map to this situation. Maybe a club where there's no cover fee, but all the drinks are 20% more expensive?
- tptacek 6y ago
  The premise of your argument seems to be that investors are entitled to the best possible price improvement, rather than the RegNMS NBBO, and that any sliver of a penny they get less than the best available price at any brokerage is a "fleecing". That argument doesn't make much sense to me. People trade slivers of pennies for all sorts of things across the economy. Literally just liking a UI color has a value you can denominate in some sliver of a penny. The SEC's problem with Robinhood isn't that they weren't offering the best available price improvement. It's that they knowingly weren't, but told customers otherwise. The implication is that if they'd simply been up front about it, and said "we don't charge commissions and have a snappy UI, and we make up for it by taking a bigger share of the rebates our upstreams offer to retail traders", they'd have been just fine. (Robinhood is bad, but the reasons have very little to do with PFOF).

baby 6y ago

I read your first paragraph and now I’m thinking of paying for something in the US where all the taxes and tips are clearly visible and added at the end for you to see, vs paying for something in Europe where what you see is what you pay. I think people overwhelmingly prefer the European system.

defen 6y ago

> Anytime you move fees from a regime where they’re fully visible to the customer into one where they’re hidden, the customer is eventually going to get fleeced. It would be interesting to apply this insight to "surveillance capitalism" industry. You get to use Google/Facebook/Twitter/etc for free, even though there is some fixed amount you would theoretically be willing to pay to use them. In exchange, the companies use your personal information to display ads to you, but you have no idea what that is worth to those companies. In other words, your personal info (which is used to sell ads) is by definition worth more than the cost to serve Google/Facebook/Twitter to you (otherwise those companies would make no money). But you have no way of knowing how much more.