4 ms·

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 hig

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).
- matthewdgreen 6y ago
  Terms like "fleecing" are subjective, and I wasn't claiming that RH necessary fleeced anyone in this instance. I was pointing out that opaque pricing models are problematic, since they make it much harder for customers to compare competing services and determine which offers more reasonable costs. In the extreme case, this can harm competition and make everyone worse off than they would be in a transparent regime, aka "people get fleeced". In this case the real questions are: (1) does RH's model result in some customers paying more for the same services than they would pay at competitors, and (2) can these customers realistically make the determination before they choose a service? We don't exactly know the answer to (1), and the reason we don't know the answer to that is because the answer to (2) is "almost certainly not". In fact the RH model is so opaque that even the SEC can't fully answer the question, and on top of this normal opacity RH added a layer of clear misrepresentation. Maybe in the end, it should be totally fine for brokerages to make all their money from order flow fees, in ways that are completely invisible and opaque to the customer, and regulators should just back off the whole thing as long as there are a few lines of text in a ToS somewhere. To me as a customer that seems kind of crummy, but I'm not a regulator.
  - tptacek 6y ago
    What I don't see in this comment is an acknowledgement that for all practical purposes (besides niche venues like IBKR Pro) all retail order flow is done through brokerages that do PFOF. Can you be more precise about what part of Robinhood's "model" you're talking about? Depending on what you mean, I might agree with you, or I might strongly disagree with you. Does your critique apply to all brokerages, or Robinhood in particular? If it applies to everyone, what does it matter what the SEC says? The SEC doesn't have any problem with Schwab.
    - matthewdgreen 6y ago
      Rather than asking me the question, you should read the article that summarizes the SEC investigation or the investigation report itself. The article directly addresses the “isn’t PFOF common practice” and “maybe PFOF was beneficial to the customer” arguments and provides fairly detailed evidence that RH did this at a different scale and with more significant detrimental effects on its customers than common practice. Maybe you’ve read both and you disagree with the evidence presented. That’s ok by me: but it would be more efficient for you to state your arguments for why this case didn’t harm customers, rather than asking me to (poorly) litigate the SEC’s case. My only point here is a simple one: that opaque pricing schemes seem like a recipe for anti-competitive behavior.
      - tptacek 6y ago
        I've read both and I'm not sure I know enough about your argument to challenge it directly, which is my critique of it. You're invoking these "isn't PFOF common practice" and "maybe PFOF was beneficial" questions as if they were controversies; of course, they are not. PFOF is practically universal, and it is universal because separating out non-toxic order flow is a win-win. If I had to summon a direct rebuttal to your argument, it would be this: I perceive you to be suggesting that the problem with Robinhood is that it uses PFOF, which means that customer outcomes are dependent on private deals Robinhood inks with companies like Citadel, which aren't transparent. The problem with that argument is that literally everybody, including, apparently, IBKR, inks private deals with companies like Citadel, which means you can't suggest that something is distinctively wrong with Robinhood for having done so. I perceive you to be suggesting that Robinhood would be more honest and transparent if they simply charged a commission that covered their expenses, rather than doing weird PFOF deals. Again: practically every brokerage does PFOF, because it would be dumb not to. Most brokerages charge commissions, but that doesn't make them transparent; they are still turning a private dial in their back office that trades off customer savings with brokerage profits based on PFOF deals. Robinhood, for what it's worth, is bad, and the badness does have something to do with "no commissions". But the problem isn't shady execution; it's that Robinhood is a gambling site, not an investment site.
- elliekelly 6y ago
  You are conflating Reg NMS NBBO with a broker-dealer’s duty of best execution. RH has a fiduciary duty to customers to (on balance) achieve best ex. And a fiduciary duty means they must act in the best interest of their customers — including putting customer interests ahead of their own. Here RH was clearly prioritizing their own interests ahead of their customers.
  - tptacek 6y ago
    I don’t think this is accurate, and I think a read of the SEC complaint rebuts it.
    - elliekelly 6y ago
      I've read the SEC's order and I am certain what I've said is accurate. This is about best execution, not Reg NMS. See paragraphs 5, 13-4, 43-44 and footnote 2. There are two violations in the order: (1) Securities Act Sec. 17(a) arising from Robinhood's failure to fulfill their duty (in this case, of best execution). (2) Exchange Act Sec. 17(a) arising from Robinhood's failure to keep adequate records which means that during the course of the investigation the SEC asked for one or documents and Robinhood, for whatever reason, failed to produce the requested document(s). Neither of those violations relate to Reg. NMS or NBBO which was promulgated under Exchange Act Sec. 11A and is not mentioned anywhere in the Order.
      - tptacek 6y ago
        You're right, of course. I think what happened here is that I jumped the gun on what I perceived your argument to be; that you were expressing something like the sentiment that Robinhood has to maximize customer outcomes on trades; that, for instance, if it has a dial that can go 80/20 -> 20/80 broker/customer on rebates, it actually is required to turn that dial to 0/100 if possible.
dcolkitt 6y ago
The original comment was criticizing payment-for-order-flow as a business model. Whereas you're merely making the point that other RH is delivering a worse customer experience than other payment-for-order-flow venues. That's an orthogonal criticism. But the point is the same regardless. Even if RH customers see smaller price improvement, they're still better off than at a hypothetical brokerage that eschews payment-for-order flow. Because in that case they'd see zero price improvement (plus pay public exchange fees and commissions).
- matthewdgreen 6y ago
  In real life, RH's competitors aren't hypothetical. They're actual brokerages that negotiate better price improvement for their customers. This is the problem.
likpok 6y ago
A club offers “ladies drink half off” to draw in women. Instead of actually charging $4 for and $8 drink, they charge $6. The customers are still better off, but not by as much as the advertising said.

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).

matthewdgreen 6y ago
Terms like "fleecing" are subjective, and I wasn't claiming that RH necessary fleeced anyone in this instance. I was pointing out that opaque pricing models are problematic, since they make it much harder for customers to compare competing services and determine which offers more reasonable costs. In the extreme case, this can harm competition and make everyone worse off than they would be in a transparent regime, aka "people get fleeced". In this case the real questions are: (1) does RH's model result in some customers paying more for the same services than they would pay at competitors, and (2) can these customers realistically make the determination before they choose a service? We don't exactly know the answer to (1), and the reason we don't know the answer to that is because the answer to (2) is "almost certainly not". In fact the RH model is so opaque that even the SEC can't fully answer the question, and on top of this normal opacity RH added a layer of clear misrepresentation. Maybe in the end, it should be totally fine for brokerages to make all their money from order flow fees, in ways that are completely invisible and opaque to the customer, and regulators should just back off the whole thing as long as there are a few lines of text in a ToS somewhere. To me as a customer that seems kind of crummy, but I'm not a regulator.
- tptacek 6y ago
  What I don't see in this comment is an acknowledgement that for all practical purposes (besides niche venues like IBKR Pro) all retail order flow is done through brokerages that do PFOF. Can you be more precise about what part of Robinhood's "model" you're talking about? Depending on what you mean, I might agree with you, or I might strongly disagree with you. Does your critique apply to all brokerages, or Robinhood in particular? If it applies to everyone, what does it matter what the SEC says? The SEC doesn't have any problem with Schwab.
  - matthewdgreen 6y ago
    Rather than asking me the question, you should read the article that summarizes the SEC investigation or the investigation report itself. The article directly addresses the “isn’t PFOF common practice” and “maybe PFOF was beneficial to the customer” arguments and provides fairly detailed evidence that RH did this at a different scale and with more significant detrimental effects on its customers than common practice. Maybe you’ve read both and you disagree with the evidence presented. That’s ok by me: but it would be more efficient for you to state your arguments for why this case didn’t harm customers, rather than asking me to (poorly) litigate the SEC’s case. My only point here is a simple one: that opaque pricing schemes seem like a recipe for anti-competitive behavior.
    - tptacek 6y ago
      I've read both and I'm not sure I know enough about your argument to challenge it directly, which is my critique of it. You're invoking these "isn't PFOF common practice" and "maybe PFOF was beneficial" questions as if they were controversies; of course, they are not. PFOF is practically universal, and it is universal because separating out non-toxic order flow is a win-win. If I had to summon a direct rebuttal to your argument, it would be this: I perceive you to be suggesting that the problem with Robinhood is that it uses PFOF, which means that customer outcomes are dependent on private deals Robinhood inks with companies like Citadel, which aren't transparent. The problem with that argument is that literally everybody, including, apparently, IBKR, inks private deals with companies like Citadel, which means you can't suggest that something is distinctively wrong with Robinhood for having done so. I perceive you to be suggesting that Robinhood would be more honest and transparent if they simply charged a commission that covered their expenses, rather than doing weird PFOF deals. Again: practically every brokerage does PFOF, because it would be dumb not to. Most brokerages charge commissions, but that doesn't make them transparent; they are still turning a private dial in their back office that trades off customer savings with brokerage profits based on PFOF deals. Robinhood, for what it's worth, is bad, and the badness does have something to do with "no commissions". But the problem isn't shady execution; it's that Robinhood is a gambling site, not an investment site.
elliekelly 6y ago
You are conflating Reg NMS NBBO with a broker-dealer’s duty of best execution. RH has a fiduciary duty to customers to (on balance) achieve best ex. And a fiduciary duty means they must act in the best interest of their customers — including putting customer interests ahead of their own. Here RH was clearly prioritizing their own interests ahead of their customers.
- tptacek 6y ago
  I don’t think this is accurate, and I think a read of the SEC complaint rebuts it.
  - elliekelly 6y ago
    I've read the SEC's order and I am certain what I've said is accurate. This is about best execution, not Reg NMS. See paragraphs 5, 13-4, 43-44 and footnote 2. There are two violations in the order: (1) Securities Act Sec. 17(a) arising from Robinhood's failure to fulfill their duty (in this case, of best execution). (2) Exchange Act Sec. 17(a) arising from Robinhood's failure to keep adequate records which means that during the course of the investigation the SEC asked for one or documents and Robinhood, for whatever reason, failed to produce the requested document(s). Neither of those violations relate to Reg. NMS or NBBO which was promulgated under Exchange Act Sec. 11A and is not mentioned anywhere in the Order.
    - tptacek 6y ago
      You're right, of course. I think what happened here is that I jumped the gun on what I perceived your argument to be; that you were expressing something like the sentiment that Robinhood has to maximize customer outcomes on trades; that, for instance, if it has a dial that can go 80/20 -> 20/80 broker/customer on rebates, it actually is required to turn that dial to 0/100 if possible.

dcolkitt 6y ago

The original comment was criticizing payment-for-order-flow as a business model. Whereas you're merely making the point that other RH is delivering a worse customer experience than other payment-for-order-flow venues. That's an orthogonal criticism. But the point is the same regardless. Even if RH customers see smaller price improvement, they're still better off than at a hypothetical brokerage that eschews payment-for-order flow. Because in that case they'd see zero price improvement (plus pay public exchange fees and commissions).

matthewdgreen 6y ago
In real life, RH's competitors aren't hypothetical. They're actual brokerages that negotiate better price improvement for their customers. This is the problem.

likpok 6y ago

A club offers “ladies drink half off” to draw in women. Instead of actually charging $4 for and $8 drink, they charge $6. The customers are still better off, but not by as much as the advertising said.