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Not quite. Citadel is a very well known quant hedge fund. The main way Robinhood makes money (and can let people trade without commission) is by selling their c

Not quite. Citadel is a very well known quant hedge fund. The main way Robinhood makes money (and can let people trade without commission) is by selling their customers order flow (legally) to Citadel. Citadel (legally) uses this customer information to, in the milliseconds before the customer, front-run the trade, buy the shares and sell them to the Robinhood users at a marginal profit.

axlee 6y ago
That doesn't sound correct: https://robinhood.com/us/en/support/articles/how-robinhood-makes-money/ https://robinhood.com/us/en/support/articles/how-robinhood-m... - Rebates from market makers and trading venues - Robinhood Gold - Stock loan - Income generated from cash - Cash Management
- tylerhou 6y ago
  Payment for order flow falls under "rebates from market makers and trading venues." https://robinhood.com/us/en/support/articles/stock-order-routing/ https://robinhood.com/us/en/support/articles/stock-order-rou...
jrochkind1 6y ago
How much do you think Citadel has made off of GME in the last week?
- jcfrei 6y ago
  They have certainly profited from the increased options & equity trading. I'm also pretty certain it's less than the loss Melvin Capital suffered.
tylerhou 6y ago
This is missing the context that Robinhood is required to seek the "best" execution of trades [1]. So Citadel is making a profit yes, but the customer is not necessarily harmed in that profit as Citadel may still be delivering a better execution than other market makers or the actual exchange itself. [1] https://www.sec.gov/fast-answers/answersbestexhtm.html https://www.sec.gov/fast-answers/answersbestexhtm.html Robinhood publishes their execution numbers (as required by the SEC), along with other brokers. At a quick glance, there is nothing out of the ordinary. It's also worth noting that you cannot directly compare numbers as different platforms have different trading behavior. https://robinhood.com/us/en/about-us/our-execution-quality/ https://robinhood.com/us/en/about-us/our-execution-quality/ https://www.schwab.com/execution-quality https://www.schwab.com/execution-quality https://www.fidelity.com/trading/execution-quality/overview https://www.fidelity.com/trading/execution-quality/overview
- fomojola 6y ago
  Of note here: Robinhood recently (last month) settled charges that they actually weren't seeking best execution. https://www.sec.gov/news/press-release/2020-321 https://www.sec.gov/news/press-release/2020-321
  - tylerhou 6y ago
    (In 2018, and the actual charges they settled were not that they weren't seeking best execution. The charges that landed were that they falsely advertised that their execution matched or beat other brokers. In fact, they were still seeking "best" execution; they just didn't beat other brokerages because of high payments for order flow and misled customers about that.)
cpascal 6y ago
Can Citadel exercise any sort of discretion on what order-flow they'll fill? Can they legally tell Robinhood that they will no longer fill orders for GME?
- baybal2 6y ago
  > Can Citadel exercise any sort of discretion on what order-flow they'll fill? Can they legally tell Robinhood that they will no longer fill orders for GME? Legally not, illegally... yes, and try to prove that.
tomp 6y ago
You got things a bit mixed up. There's Citadel Asset Management, the quant hedge fund (which is probably the one that lent money to Melvin, though I'm not sure about that), and Citadel Securities the HFT / market-making show (they have the same owner). HFT market-making using retail order flow isn't front-running - the price the customers get is the same regardless ("Best Bid Offer" as brokers are legally required to provide in the US). The difference is, once that the HFT market maker holds the stock, they can get rid of it more easily (i.e. they can close the trade) because (the assumption is that) the retail flow is "noise" (uncorrelated with future price movements) as opposed to professional/institutional traders (e.g. other hedge funds executing their strategies), where a big problem is negative selection (i.e. you're more likely to execute a trade with someone that has better information than you).
im3w1l 6y ago
This is incorrect. To understand the business model you first have to understand the order book and how trades normally work. The order book consists of two sides. The bids (people who want to buy, how much and at what price), and the asks(people who want to sell, how much and at what price). For instance the bid side may say Alice wants to buy 50 shares at $20 (order added at 10:37) Bob wants to buy 30 shares at $20.1 (order added at 11:18) Citadel wants to buy 35 shares at $20.1 (order added at 11:17) David buy 10 shares at $20.1 (order added at 11:01) The bids are ordered by price, and ties are broken by who placed the order first. If Evelyn (Robinhood customer) shows up and wants to sell 5 shares at $20, then the exchange will say, oh nice 20 is less than $20.1, lets get some trades going! $20.1 is the highest prices, and of those orders David's were entered first. So Evelyn's sell order is matched with Davids buy order. The price is determined by the order which was in the book. So Evelyn will get a better price than she hoped for! If Evelyn had requested to sell 100 shares, then she will first sell to David for $20.1, then Citadel's for $20.1, then Bob's for $20.1 and finally some of Alice's shares for $20. Ok but what happens if Citadel is paying for order flow?? Now the order book (from Evelyn's perspective) looks like Alice wants to buy 50 shares at $20 (order added at 10:37) Bob wants to buy 30 shares at $20.1 (order added at 11:18) David buy 10 shares at $20.1 (order added at 11:01) Citadel wants to buy 35 shares at $20.1 (order added at 11:17) So if Evelyn (Robinhood customer) shows up, and again wants to sell 5 shares at $20, then she will sell to Citadel, even though their order is later than David's. So to sum it up Evelyn (Robinhood customer) is unaffected Citadel wins David loses.
swader999 6y ago
This and they have terrible spreads. So commission is included in the price.
gashad 6y ago
I just learned about the Citadel/Robinhood connection from this https://marketsweekly.ghost.io/what-happened-with-gamestop/ https://marketsweekly.ghost.io/what-happened-with-gamestop/, which the author https://twitter.com/alexisgoldstein/status/1354605363287486466 https://twitter.com/alexisgoldstein/status/13546053632874864... explained as "Why it's not Robinhood/Reddit vs. Hedge Funds. It's Hedge Funds vs. Hedge Funds vs. Wall Street, with Robinhood as a fig leaf". The sidebars in the article explain a lot of the lingo.

axlee 6y ago

That doesn't sound correct: https://robinhood.com/us/en/support/articles/how-robinhood-makes-money/ https://robinhood.com/us/en/support/articles/how-robinhood-m... - Rebates from market makers and trading venues - Robinhood Gold - Stock loan - Income generated from cash - Cash Management

tylerhou 6y ago
Payment for order flow falls under "rebates from market makers and trading venues." https://robinhood.com/us/en/support/articles/stock-order-routing/ https://robinhood.com/us/en/support/articles/stock-order-rou...

jrochkind1 6y ago

How much do you think Citadel has made off of GME in the last week?

jcfrei 6y ago
They have certainly profited from the increased options & equity trading. I'm also pretty certain it's less than the loss Melvin Capital suffered.

tylerhou 6y ago

This is missing the context that Robinhood is required to seek the "best" execution of trades [1]. So Citadel is making a profit yes, but the customer is not necessarily harmed in that profit as Citadel may still be delivering a better execution than other market makers or the actual exchange itself. [1] https://www.sec.gov/fast-answers/answersbestexhtm.html https://www.sec.gov/fast-answers/answersbestexhtm.html Robinhood publishes their execution numbers (as required by the SEC), along with other brokers. At a quick glance, there is nothing out of the ordinary. It's also worth noting that you cannot directly compare numbers as different platforms have different trading behavior. https://robinhood.com/us/en/about-us/our-execution-quality/ https://robinhood.com/us/en/about-us/our-execution-quality/ https://www.schwab.com/execution-quality https://www.schwab.com/execution-quality https://www.fidelity.com/trading/execution-quality/overview https://www.fidelity.com/trading/execution-quality/overview

fomojola 6y ago
Of note here: Robinhood recently (last month) settled charges that they actually weren't seeking best execution. https://www.sec.gov/news/press-release/2020-321 https://www.sec.gov/news/press-release/2020-321
- tylerhou 6y ago
  (In 2018, and the actual charges they settled were not that they weren't seeking best execution. The charges that landed were that they falsely advertised that their execution matched or beat other brokers. In fact, they were still seeking "best" execution; they just didn't beat other brokerages because of high payments for order flow and misled customers about that.)

cpascal 6y ago

Can Citadel exercise any sort of discretion on what order-flow they'll fill? Can they legally tell Robinhood that they will no longer fill orders for GME?

baybal2 6y ago
> Can Citadel exercise any sort of discretion on what order-flow they'll fill? Can they legally tell Robinhood that they will no longer fill orders for GME? Legally not, illegally... yes, and try to prove that.

tomp 6y ago

You got things a bit mixed up. There's Citadel Asset Management, the quant hedge fund (which is probably the one that lent money to Melvin, though I'm not sure about that), and Citadel Securities the HFT / market-making show (they have the same owner). HFT market-making using retail order flow isn't front-running - the price the customers get is the same regardless ("Best Bid Offer" as brokers are legally required to provide in the US). The difference is, once that the HFT market maker holds the stock, they can get rid of it more easily (i.e. they can close the trade) because (the assumption is that) the retail flow is "noise" (uncorrelated with future price movements) as opposed to professional/institutional traders (e.g. other hedge funds executing their strategies), where a big problem is negative selection (i.e. you're more likely to execute a trade with someone that has better information than you).

im3w1l 6y ago

This is incorrect. To understand the business model you first have to understand the order book and how trades normally work. The order book consists of two sides. The bids (people who want to buy, how much and at what price), and the asks(people who want to sell, how much and at what price). For instance the bid side may say Alice wants to buy 50 shares at $20 (order added at 10:37) Bob wants to buy 30 shares at $20.1 (order added at 11:18) Citadel wants to buy 35 shares at $20.1 (order added at 11:17) David buy 10 shares at $20.1 (order added at 11:01) The bids are ordered by price, and ties are broken by who placed the order first. If Evelyn (Robinhood customer) shows up and wants to sell 5 shares at $20, then the exchange will say, oh nice 20 is less than $20.1, lets get some trades going! $20.1 is the highest prices, and of those orders David's were entered first. So Evelyn's sell order is matched with Davids buy order. The price is determined by the order which was in the book. So Evelyn will get a better price than she hoped for! If Evelyn had requested to sell 100 shares, then she will first sell to David for $20.1, then Citadel's for $20.1, then Bob's for $20.1 and finally some of Alice's shares for $20. Ok but what happens if Citadel is paying for order flow?? Now the order book (from Evelyn's perspective) looks like Alice wants to buy 50 shares at $20 (order added at 10:37) Bob wants to buy 30 shares at $20.1 (order added at 11:18) David buy 10 shares at $20.1 (order added at 11:01) Citadel wants to buy 35 shares at $20.1 (order added at 11:17) So if Evelyn (Robinhood customer) shows up, and again wants to sell 5 shares at $20, then she will sell to Citadel, even though their order is later than David's. So to sum it up Evelyn (Robinhood customer) is unaffected Citadel wins David loses.

swader999 6y ago

This and they have terrible spreads. So commission is included in the price.

gashad 6y ago

I just learned about the Citadel/Robinhood connection from this https://marketsweekly.ghost.io/what-happened-with-gamestop/ https://marketsweekly.ghost.io/what-happened-with-gamestop/, which the author https://twitter.com/alexisgoldstein/status/1354605363287486466 https://twitter.com/alexisgoldstein/status/13546053632874864... explained as "Why it's not Robinhood/Reddit vs. Hedge Funds. It's Hedge Funds vs. Hedge Funds vs. Wall Street, with Robinhood as a fig leaf". The sidebars in the article explain a lot of the lingo.