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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

by 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.
jiggybling 6y ago
I thought Interactive Brokers also sold its flow.
- azmenak 6y ago
  Yes and no. They have details here: https://gdcdyn.interactivebrokers.com/Universal/servlet/Registration_v2.formSampleView?formdb=3074 https://gdcdyn.interactivebrokers.com/Universal/servlet/Regi... But essentially if you are using their “pro” service, which charges commissions then no. If you are using their “lite” service with zero-commission then maybe.
pdovy 6y ago
The economics don't quite work the way you describe. The brokerage is forwarding your flow to one of it's partner broker-dealers who is providing the actual execution service. Those BD's would happily take this flow for free (as evidenced by the fact that they now _mostly_ pay for it). The executing BD, not the brokerage, is on the hook for trading fees _if_ they need to execute the order in the public market - which is rare as they mostly internalize that flow. The executing BD's business model is based on the assumption that the flow is not particularly toxic and that at scale, the profit margin per share exceeds any execution costs. The larger point stands though: from the perspective of the executing BD the payment for order flow + price improvement are both costs, which they want to cap. If you dial up PFOF, you naturally get less price improvement.

by fny 6y ago

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.

jiggybling 6y ago

I thought Interactive Brokers also sold its flow.

azmenak 6y ago
Yes and no. They have details here: https://gdcdyn.interactivebrokers.com/Universal/servlet/Registration_v2.formSampleView?formdb=3074 https://gdcdyn.interactivebrokers.com/Universal/servlet/Regi... But essentially if you are using their “pro” service, which charges commissions then no. If you are using their “lite” service with zero-commission then maybe.

pdovy 6y ago

The economics don't quite work the way you describe. The brokerage is forwarding your flow to one of it's partner broker-dealers who is providing the actual execution service. Those BD's would happily take this flow for free (as evidenced by the fact that they now _mostly_ pay for it). The executing BD, not the brokerage, is on the hook for trading fees _if_ they need to execute the order in the public market - which is rare as they mostly internalize that flow. The executing BD's business model is based on the assumption that the flow is not particularly toxic and that at scale, the profit margin per share exceeds any execution costs. The larger point stands though: from the perspective of the executing BD the payment for order flow + price improvement are both costs, which they want to cap. If you dial up PFOF, you naturally get less price improvement.