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To clarify how this works: There is a public book of buy/sell orders. HFTs would prefer not to put their orders on these books for various legitimate reasons

To clarify how this works: There is a public book of buy/sell orders. HFTs would prefer not to put their orders on these books for various legitimate reasons (including fees). If (and only if) HFTs (or other trading firms) are willing to offer the user a better price than the best available price on the market, Robin Hood will just give the order to them instead of placing the order on the public market. So if the market price is $10, and an HFT is willing to sell for $9.95, then Robin Hood might give the user an execution price of $9.97 and keep the 2 cents to themselves. The user gets a better price than they would have on the open market, and a better price than they were expecting.

babyshake 6y ago
Does Citadel use this data for anything besides HFT front running? For example, I would think not just knowing price and volume or a stock but knowing who exactly is buying it and in what quantities would end up being a far more valuable source of alpha. I'd love to learn more about the potential techniques they are using.
- wocram 6y ago
  They are not allowed to use it for very much at all, but Citadel has regularly been fined for breaking rules.
- mason55 6y ago
  It’s not front running. It’s reducing the chance of adverse selection in market making. Front running is highly illegal.
- PaulHoule 6y ago
  Citadel gets first dibs on trades from Robinhood users. If they want the trade they take it, otherwise they send it on to some place else. Fidelity does this also and runs ads on TV that explain the trading process that are factually correct if not clear on why exactly the HFT is paying for order flow. Basically the HFT is "making the market"; somebody wants to buy 5 shares of this stock, a moment later somebody wants to sell 6, the HFT is a buffer between all of those people. With exclusive order flow from Robinhood, Fidelity or somebody like that they have a big pool of liquidity if all of a sudden their trading strategy says they should buy or sell that.
  - ummonk 6y ago
    Fidelity is explicit that it does not take payment for order flow.
- kchr 6y ago
  Not a user of RH, but I cannot imagine they aren't gathering these kind of analytics on their users as well as the order flow data.
wocram 6y ago
It's worth pointing out that the HFT pays robinhood $.02 to receive the order, and then may or may not fill the order at <= $10. These are separate happenings, and robinhood does not ever receive part of the variable price improvement. Edit: And it is possible for the HFT to lose money when doing this, if they pay the $.02 PFOF and then pay the same price as the market.
shock-value 6y ago
Seems that the user is worse off than the situation where the HFT had to play by everyone else's rules and list publicly at $9.95 though.
devops000 6y ago
why the HFT should sell for $9.95 if the market price is $10 ?
- danpalmer 6y ago
  Because they know that the market price is _actually_ $9.93, but that just hasn't reached everyone yet, hence the "high frequency" in "high frequency trading".
- Traster 6y ago
  Becuase the market price isn't $10. There is a price people are willing to buy and a price that people are willing to sell- which makes sense because if there's a price in the market someone is willing to sell at and I'm willing to buy at that price I won't put an order in the market at all - I'll just trade against their order. So there's a difference between the bid and the ask. So in the market you'll have people willing to buy at $9.90 and sell for $10. Now in reality the true value is somewhere in that range. But if I think the real value is $9.93 I might not want to put an offer in the market for $9.95 because the price might move, and if the price moves I'm stuck paying $9.95 for something that just dropped to $9.70. For the offers I put into the market, I have to add some extra margin to account for risk. Whereas if you come directly to me and say you want to $9.95 - well I know you're not going to move the market, so maybe I'm willing to trade with you for a smaller margin, safe in the knowledge I'm not taking on a very risky trade.
molszanski 6y ago
How is HFT making money? It seems like they should make some kind of an arbitrage.
utkun 6y ago
Is that like a dark pool? Where do HFTs make this available?

babyshake 6y ago

Does Citadel use this data for anything besides HFT front running? For example, I would think not just knowing price and volume or a stock but knowing who exactly is buying it and in what quantities would end up being a far more valuable source of alpha. I'd love to learn more about the potential techniques they are using.

wocram 6y ago
They are not allowed to use it for very much at all, but Citadel has regularly been fined for breaking rules.
mason55 6y ago
It’s not front running. It’s reducing the chance of adverse selection in market making. Front running is highly illegal.
PaulHoule 6y ago
Citadel gets first dibs on trades from Robinhood users. If they want the trade they take it, otherwise they send it on to some place else. Fidelity does this also and runs ads on TV that explain the trading process that are factually correct if not clear on why exactly the HFT is paying for order flow. Basically the HFT is "making the market"; somebody wants to buy 5 shares of this stock, a moment later somebody wants to sell 6, the HFT is a buffer between all of those people. With exclusive order flow from Robinhood, Fidelity or somebody like that they have a big pool of liquidity if all of a sudden their trading strategy says they should buy or sell that.
- ummonk 6y ago
  Fidelity is explicit that it does not take payment for order flow.
kchr 6y ago
Not a user of RH, but I cannot imagine they aren't gathering these kind of analytics on their users as well as the order flow data.

wocram 6y ago

It's worth pointing out that the HFT pays robinhood $.02 to receive the order, and then may or may not fill the order at <= $10. These are separate happenings, and robinhood does not ever receive part of the variable price improvement. Edit: And it is possible for the HFT to lose money when doing this, if they pay the $.02 PFOF and then pay the same price as the market.

shock-value 6y ago

Seems that the user is worse off than the situation where the HFT had to play by everyone else's rules and list publicly at $9.95 though.

devops000 6y ago

why the HFT should sell for $9.95 if the market price is $10 ?

danpalmer 6y ago
Because they know that the market price is _actually_ $9.93, but that just hasn't reached everyone yet, hence the "high frequency" in "high frequency trading".
Traster 6y ago
Becuase the market price isn't $10. There is a price people are willing to buy and a price that people are willing to sell- which makes sense because if there's a price in the market someone is willing to sell at and I'm willing to buy at that price I won't put an order in the market at all - I'll just trade against their order. So there's a difference between the bid and the ask. So in the market you'll have people willing to buy at $9.90 and sell for $10. Now in reality the true value is somewhere in that range. But if I think the real value is $9.93 I might not want to put an offer in the market for $9.95 because the price might move, and if the price moves I'm stuck paying $9.95 for something that just dropped to $9.70. For the offers I put into the market, I have to add some extra margin to account for risk. Whereas if you come directly to me and say you want to $9.95 - well I know you're not going to move the market, so maybe I'm willing to trade with you for a smaller margin, safe in the knowledge I'm not taking on a very risky trade.

molszanski 6y ago

How is HFT making money? It seems like they should make some kind of an arbitrage.

utkun 6y ago

Is that like a dark pool? Where do HFTs make this available?