4 ms·

Your use of the word "trade" versus "invest" perfect encapsulates the nuance of Robinhood. What exactly is Robinhood's product? It's certainly not the newly-m

Your use of the word "trade" versus "invest" perfect encapsulates the nuance of Robinhood. What exactly is Robinhood's product? It's certainly not the newly-minted traders -- their orders are "free". If you follow the money, it looks like it's mostly Pay For Order Flow (PFOF). I wonder why giant market-making hedge funds would pay for that order flow... Another tech faustian bargain.

gruez 5y ago
> I wonder why giant market-making hedge funds would pay for that order flow... Another tech faustian bargain. It really isn't. They're making money off the spread (eg. $105.01 bid vs $105.02 ask), which exists regardless of PFOF (regulation NMS mandates that the price be better or equal to NBBO). The reason why they want retail flow is that it's mostly "uninformed" and they're less likely to get run over. matt levine explains this in detail: https://www.bloomberg.com/opinion/articles/2021-01-29/reddit-traders-on-robinhood-are-on-both-sides-of-gamestop https://www.bloomberg.com/opinion/articles/2021-01-29/reddit... >I like to tell a fairly textbook version of that story. Market makers stand ready to buy or sell stock from or to customers; they try to buy for a bit less than they sell at, and pocket the spread. If you go out into the market and say “hey I’ll buy anyone’s stock for $10,” and a really smart hedge fund comes to you and sells you stock for $10, that’s probably bad. You’ve probably made a mistake. The hedge fund is selling you the stock for $10 because it knows it’s worth $8. This is called “adverse selection.” >More subtly, if a really big mutual fund comes to you and sells you stock for $10, that also may be bad. The mutual fund is probably selling lots of stock, because it’s so big; it sells you a little, then sells a little more, then a little more, until it pushes the price down to $8. The mutual fund isn’t necessarily smart, but by virtue of being big and doing big trades, it moves the price; if you are on the other side of its trades, you get run over. This is also a kind of adverse selection: You buy at $10 and are stuck selling at $8. Part of the spread that market makers earn in public markets—the difference between their buying and selling prices—compensates them for adverse selection, the risk of being run over by a counterparty who knows something they don’t. >Market makers, the textbook theory goes, would much rather trade with retail orders. Retail investors generally don’t know much, so if you buy stock from them you’re probably not making a mistake. And retail orders are generally small and uncorrelated: One investor buys a little, another comes along a moment later and sells a little, it’s all pretty random, and you’re not facing an avalanche of steady sell orders that push the price down. Trading with retail is so nice that market makers—wholesalers—will both give retail orders a tighter spread (pay more to buy their stock, charge less to sell stock to them) and pay their broker for the privilege of doing it.
- beambot 5y ago
  What you are describing is market makers, not Robinhood. Quoting directly from the S-1: > Our PFOF and Transaction Rebate arrangements with market makers are a matter of practice and business understanding and not documented under binding contracts. For the three months ended March 31, 2021, 59% of our total revenues came from four market makers. So 59% of Robinhood's revenue comes from selling PFOF to market makers. I promise you that there isn't some magic altruism on the part of market makers buying the PFOF and then routing 40-60% of trades off-exchange. If it was simple matter of profiting off bid-ask spread: Force those orders through the exchanges instead of through dark pools. This is precisely why there's an entire section dedicated to PFOF regulatory risk in their S-1. It's increasingly a rigged game and rightfully deserves deep Congressional intervention.
  - gruez 5y ago
    > What you are describing is market makers, not Robinhood. Quoting directly from the S-1: Did i claim that robinhood is a market maker and/or participates in market making? I simply explained how market makers are making money in a non-nefarious way and why they might pay robinhood for order flow. > I promise you that there isn't some magic altruism on the part of market makers As explained in my prior comment there's no altruism involved. Retail orders are valuable because they're uninformed/non-toxic >and then routing 40-60% of trades off-exchange. If it was simple matter of profiting off bid-ask spread: Force those orders through the exchanges instead of through dark pools. Why bring in dark pools and "off-exchange"? The whole point of buying orderflow is to execute it yourself rather than letting anyone execute them.
  - FabHK 5y ago
    > If it was simple matter of profiting off bid-ask spread: Force those orders through the exchanges instead of through dark pools. When the broker gives the order to a market maker directly, they can't offer a worse price than the exchanges (national best bid offer). Typically, they offer a better price (=price improvement, a "discount"). Robinhood takes a cut of that discount (and a larger cut than other brokers). The other poster explained why the market maker gives a discount on "uninformed" retail flow compared to the NBBO. I agree that HFT is just a silly game of being faster, and is largely rent seeking and even destroying value. But market making per se is valuable, and pretty competitive, and the spread constitutes the necessary and benign payment for that service. Here's a suggestion: 1. Restrict trading to, say, 4 hours a day, 2 in the morning, 2 in the evening. You could maybe make it such that time zones have partial overlap. 2. During these hours, have an auction every minute, instead of continuous trading. Maybe with stochastic end time (to negate HFT techniques/sniping). 3. Impose a Tobin tax of, dunno, 1 basis point on every trade. Measures such as those might limit the opportunity for profit from silly HFT (like replacing the cable from Chicago to NY by a slightly straighter cable to shave off a few milliseconds).

gruez 5y ago

> I wonder why giant market-making hedge funds would pay for that order flow... Another tech faustian bargain. It really isn't. They're making money off the spread (eg. $105.01 bid vs $105.02 ask), which exists regardless of PFOF (regulation NMS mandates that the price be better or equal to NBBO). The reason why they want retail flow is that it's mostly "uninformed" and they're less likely to get run over. matt levine explains this in detail: https://www.bloomberg.com/opinion/articles/2021-01-29/reddit-traders-on-robinhood-are-on-both-sides-of-gamestop https://www.bloomberg.com/opinion/articles/2021-01-29/reddit... >I like to tell a fairly textbook version of that story. Market makers stand ready to buy or sell stock from or to customers; they try to buy for a bit less than they sell at, and pocket the spread. If you go out into the market and say “hey I’ll buy anyone’s stock for $10,” and a really smart hedge fund comes to you and sells you stock for $10, that’s probably bad. You’ve probably made a mistake. The hedge fund is selling you the stock for $10 because it knows it’s worth $8. This is called “adverse selection.” >More subtly, if a really big mutual fund comes to you and sells you stock for $10, that also may be bad. The mutual fund is probably selling lots of stock, because it’s so big; it sells you a little, then sells a little more, then a little more, until it pushes the price down to $8. The mutual fund isn’t necessarily smart, but by virtue of being big and doing big trades, it moves the price; if you are on the other side of its trades, you get run over. This is also a kind of adverse selection: You buy at $10 and are stuck selling at $8. Part of the spread that market makers earn in public markets—the difference between their buying and selling prices—compensates them for adverse selection, the risk of being run over by a counterparty who knows something they don’t. >Market makers, the textbook theory goes, would much rather trade with retail orders. Retail investors generally don’t know much, so if you buy stock from them you’re probably not making a mistake. And retail orders are generally small and uncorrelated: One investor buys a little, another comes along a moment later and sells a little, it’s all pretty random, and you’re not facing an avalanche of steady sell orders that push the price down. Trading with retail is so nice that market makers—wholesalers—will both give retail orders a tighter spread (pay more to buy their stock, charge less to sell stock to them) and pay their broker for the privilege of doing it.

beambot 5y ago
What you are describing is market makers, not Robinhood. Quoting directly from the S-1: > Our PFOF and Transaction Rebate arrangements with market makers are a matter of practice and business understanding and not documented under binding contracts. For the three months ended March 31, 2021, 59% of our total revenues came from four market makers. So 59% of Robinhood's revenue comes from selling PFOF to market makers. I promise you that there isn't some magic altruism on the part of market makers buying the PFOF and then routing 40-60% of trades off-exchange. If it was simple matter of profiting off bid-ask spread: Force those orders through the exchanges instead of through dark pools. This is precisely why there's an entire section dedicated to PFOF regulatory risk in their S-1. It's increasingly a rigged game and rightfully deserves deep Congressional intervention.
- gruez 5y ago
  > What you are describing is market makers, not Robinhood. Quoting directly from the S-1: Did i claim that robinhood is a market maker and/or participates in market making? I simply explained how market makers are making money in a non-nefarious way and why they might pay robinhood for order flow. > I promise you that there isn't some magic altruism on the part of market makers As explained in my prior comment there's no altruism involved. Retail orders are valuable because they're uninformed/non-toxic >and then routing 40-60% of trades off-exchange. If it was simple matter of profiting off bid-ask spread: Force those orders through the exchanges instead of through dark pools. Why bring in dark pools and "off-exchange"? The whole point of buying orderflow is to execute it yourself rather than letting anyone execute them.
- FabHK 5y ago
  > If it was simple matter of profiting off bid-ask spread: Force those orders through the exchanges instead of through dark pools. When the broker gives the order to a market maker directly, they can't offer a worse price than the exchanges (national best bid offer). Typically, they offer a better price (=price improvement, a "discount"). Robinhood takes a cut of that discount (and a larger cut than other brokers). The other poster explained why the market maker gives a discount on "uninformed" retail flow compared to the NBBO. I agree that HFT is just a silly game of being faster, and is largely rent seeking and even destroying value. But market making per se is valuable, and pretty competitive, and the spread constitutes the necessary and benign payment for that service. Here's a suggestion: 1. Restrict trading to, say, 4 hours a day, 2 in the morning, 2 in the evening. You could maybe make it such that time zones have partial overlap. 2. During these hours, have an auction every minute, instead of continuous trading. Maybe with stochastic end time (to negate HFT techniques/sniping). 3. Impose a Tobin tax of, dunno, 1 basis point on every trade. Measures such as those might limit the opportunity for profit from silly HFT (like replacing the cable from Chicago to NY by a slightly straighter cable to shave off a few milliseconds).