7 ms·

So new entrant joins industry, ruins pricing by giving product away for free, nearly goes under because it over extended itself, and then blames the rules. Yeah

by u678u 6y ago

So new entrant joins industry, ruins pricing by giving product away for free, nearly goes under because it over extended itself, and then blames the rules. Yeah I'm sure everyone else wants to do what RH says.

JumpCrisscross 6y ago
> new entrant joins industry, ruins pricing by giving product away for free, nearly goes under because it over extended itself, and then blames the rules Credit where it's due: ripping off the commission band-aid was overdue, and Robinhood single handedly caused it. And abridging T+2 is probably a good idea. (Though real-time settlement and clearing is probably not.) What's missing in their communications is the mea culpa. We got into this to make big changes. We made them. One thing we overlooked was this weird bit of the financial system. Here is why we missed it, here is why it is obscure, and here are our tabula rasa suggestions on how it could be improved.
- ashtonkem 6y ago
  Getting rid of commission was actually probably a bad idea. It creates an expectation that a very complicated service should be free, and puts a lot of pressure on now free brokerages to find a new revenue source. There's a reason why RH is accused of helping Citadel front run their own customers. This seems to me a lot like when VC backed startups artificially suppress prices below break even to push out competitors, with the intent to raise prices even more later. It's good for the consumer while they can get VC subsidized goods and services, then very bad for the consumer once the VC funds dry up.
  - KMag 6y ago
    > There's a reason why RH is accused of helping Citadel front run their own customers. Are there serious accusations of front-running (a serious financial crime) and collusion to facilitate that crime? Or are you referring to people with a poor understanding of the interactions here making complaints that really boil down to privacy concerns, not actual front-running? I haven't seen anyone post any evidence of actual front-running. For why Citadel would pay for retail flow, if they're not committing financial crimes, market making is essentially profiting from separating pricing signal ("alpha") from pricing noise. If the prices are jumping around randomly, you make money by holding prices steady against that noise. If the prices are moving in one direction because new information ("alpha") has become available, you lose money if you try and hold prices steady against those moves. Empirically, in aggregate, retail flow has a lower signal-to-noise ratio (lower alpha) than the market as a whole, so market making on just that flow is more profitable, even though Reg NMS[0] requires Citadel to give RH customers' round-lot orders prices at least one cent per share better than available in the open market (price improvement over NBBO, combined with no sub-penny pricing). By paying to exclusively trade against a low-alpha channel and damp out some of that noise before it affects the market as a whole, Citadel makes more money, at the expense of other market makers who would normally have exposure to that noise. Also, there's a bias in execution called adverse selection: bad trades tend to get filled faster than good trades. For their non-market-making strategies, crossing against low-alpha flow has less adverse selection than trading those strategies on the public markets. Here too, RH customers trading round lots get prices at least 1 cent better per share than NBBO, unless the orders are passed through and placed on a regular public venue. Disclosure: I work in financial services, but have never worked for Citadel. [0] https://www.investopedia.com/terms/r/regulation-nms.asp https://www.investopedia.com/terms/r/regulation-nms.asp
swampthing 6y ago
"nearly goes under because it over extended itself" is not really accurate. They took the steps necessary to prevent that from happening, by blocking the behavior that would have led to that. Unfortunately, those steps, in combination with poor communication on Robinhood's part, and emotion, ignorance, and paranoia on the part of the general public, has led to a PR crisis for them.
- JumpCrisscross 6y ago
  It's as accurate as it is inaccurate. Had Robinhood not been able to find hundreds of millions of dollars of cash that day, they would have been declared insolvent.
  - swampthing 6y ago
    I don't think that's true. They raised the additional capital so that their customers could continue buying shares of those 8-50 companies. Had they not raised that capital, they would have just had to keep blocking those buys, but they would have been fine otherwise.
    - JumpCrisscross 6y ago
      > Had they not raised that capital, they would have just had to keep blocking those buys, but they would have been fine otherwise This is not my understanding. The 3AM phone call was a collateral call. That covers existing trades. As a clearing broker, when they sent in the trade they created the liability.
      - swampthing 6y ago
        That sounds plausible, but even then, if Robinhood couldn't meet the new deposit requirements, I think the existing trades just wouldn't settle (and obviously they wouldn't be accepting new ones)? I'm not seeing how Robinhood would have gone bankrupt in such a situation.

by u678u 6y ago

JumpCrisscross 6y ago

> new entrant joins industry, ruins pricing by giving product away for free, nearly goes under because it over extended itself, and then blames the rules Credit where it's due: ripping off the commission band-aid was overdue, and Robinhood single handedly caused it. And abridging T+2 is probably a good idea. (Though real-time settlement and clearing is probably not.) What's missing in their communications is the mea culpa. We got into this to make big changes. We made them. One thing we overlooked was this weird bit of the financial system. Here is why we missed it, here is why it is obscure, and here are our tabula rasa suggestions on how it could be improved.

ashtonkem 6y ago
Getting rid of commission was actually probably a bad idea. It creates an expectation that a very complicated service should be free, and puts a lot of pressure on now free brokerages to find a new revenue source. There's a reason why RH is accused of helping Citadel front run their own customers. This seems to me a lot like when VC backed startups artificially suppress prices below break even to push out competitors, with the intent to raise prices even more later. It's good for the consumer while they can get VC subsidized goods and services, then very bad for the consumer once the VC funds dry up.
- KMag 6y ago
  > There's a reason why RH is accused of helping Citadel front run their own customers. Are there serious accusations of front-running (a serious financial crime) and collusion to facilitate that crime? Or are you referring to people with a poor understanding of the interactions here making complaints that really boil down to privacy concerns, not actual front-running? I haven't seen anyone post any evidence of actual front-running. For why Citadel would pay for retail flow, if they're not committing financial crimes, market making is essentially profiting from separating pricing signal ("alpha") from pricing noise. If the prices are jumping around randomly, you make money by holding prices steady against that noise. If the prices are moving in one direction because new information ("alpha") has become available, you lose money if you try and hold prices steady against those moves. Empirically, in aggregate, retail flow has a lower signal-to-noise ratio (lower alpha) than the market as a whole, so market making on just that flow is more profitable, even though Reg NMS[0] requires Citadel to give RH customers' round-lot orders prices at least one cent per share better than available in the open market (price improvement over NBBO, combined with no sub-penny pricing). By paying to exclusively trade against a low-alpha channel and damp out some of that noise before it affects the market as a whole, Citadel makes more money, at the expense of other market makers who would normally have exposure to that noise. Also, there's a bias in execution called adverse selection: bad trades tend to get filled faster than good trades. For their non-market-making strategies, crossing against low-alpha flow has less adverse selection than trading those strategies on the public markets. Here too, RH customers trading round lots get prices at least 1 cent better per share than NBBO, unless the orders are passed through and placed on a regular public venue. Disclosure: I work in financial services, but have never worked for Citadel. [0] https://www.investopedia.com/terms/r/regulation-nms.asp https://www.investopedia.com/terms/r/regulation-nms.asp

swampthing 6y ago

"nearly goes under because it over extended itself" is not really accurate. They took the steps necessary to prevent that from happening, by blocking the behavior that would have led to that. Unfortunately, those steps, in combination with poor communication on Robinhood's part, and emotion, ignorance, and paranoia on the part of the general public, has led to a PR crisis for them.

JumpCrisscross 6y ago
It's as accurate as it is inaccurate. Had Robinhood not been able to find hundreds of millions of dollars of cash that day, they would have been declared insolvent.
- swampthing 6y ago
  I don't think that's true. They raised the additional capital so that their customers could continue buying shares of those 8-50 companies. Had they not raised that capital, they would have just had to keep blocking those buys, but they would have been fine otherwise.
  - JumpCrisscross 6y ago
    > Had they not raised that capital, they would have just had to keep blocking those buys, but they would have been fine otherwise This is not my understanding. The 3AM phone call was a collateral call. That covers existing trades. As a clearing broker, when they sent in the trade they created the liability.
    - swampthing 6y ago
      That sounds plausible, but even then, if Robinhood couldn't meet the new deposit requirements, I think the existing trades just wouldn't settle (and obviously they wouldn't be accepting new ones)? I'm not seeing how Robinhood would have gone bankrupt in such a situation.