3 ms·

Former CBOE market maker here. You and the person you're responding to both have valid arguments. The problem is you are choosing only to present the ones that

by kolbe 5y ago

Former CBOE market maker here. You and the person you're responding to both have valid arguments. The problem is you are choosing only to present the ones that make this situation look good, and he's only insinuating the bad ones. The fact is that this "spread" you speak of is a much more theoretical concept than Matt Levine understands. There is ample liquidity between the bid-ask in 99.9% of markets, and by selling order flow to someone who will internalize it at the worst legal price possible, they are intentionally failing to fill an order at the best possible price. RobinHood also features various dark patterns that are designed to remove money from the pockets of their users and put it into their own pockets. Off the top of my head, I can list the following: (a) Very difficult access to bis-ask spread information across multiple options. This keeps users ignorant of the fact that some options may be better priced than others, and gives market makers more opportunity to make more than a fair market spread on the transaction. (b) Forced close-outs for reasons that no other legitimate brokerages use. Even worse than being ill-infomed about what to trade is to have all of your agency removed. It's situations like these where the gap between a fair market edge and the edge that market makers take becomes offensive. (c) Disallowing option exercise before expiration. There are many situations where an option owner should exercise his option prior to expiry. Not only does RobinHood keep its users ignorant of this fact, they actually don't even allow their users to do it. In some circumstances, this can give market makers a massive arbitrage opportunity. While you are right that one thing that makes RH flow more valuable is the smaller average account money size, this is actually far less of an issue than just the average account financial IQ size. Citadel loves trading with pensions just as much as RH users (i.e. similar financial IQ, but far different sizes). It's just that the type of trading that happens with each is a little different. Add in the aforementioned reasons for keeping them not only ignorant, but handcuffed, then the more market makers will pay RH for access.

gruez 5y ago
>and by selling order flow to someone who will internalize it at the worst legal price possible, they are intentionally failing to fill an order at the best possible price. AFAIK they have duty of best execution, so they're supposed get the best price irrespective of PFOF. Obviously this conflicts with their own incentives, but that's what the laws are for. >RobinHood also features various dark patterns that are designed to remove money from the pockets of their users and put it into their own pockets. Off the top of my head, I can list the following: I'm not a user so I didn't know any of these. Thanks for bringing these up. Informed complaints like these are far better than the "they're front running you!" complaints that people seem to repeat endlessly.
- kolbe 5y ago
  > AFAIK they have duty of best execution, so they're supposed get the best price irrespective of PFOF. Obviously this conflicts with their own incentives, but that's what the laws are for. There is a duty of best execution. I honestly don't even know if its a crime or a licensing requirement or what. Reg NMS seemed to have obviated it, and judging by the failures to execute properly on the parts of major banks (e.g. my family had a major bank execute a bond trade for them that another bond trader friend of mine said was 10% below a competitive market price. That is, they paid 90, when you could have paid 100 in the competitive market), my impression is this law is totally unenforced. Also, it looks like no one will be able to see my criticisms because YC wants to protect their investment going into the IPO by crushing this comment thread
SilasX 5y ago
>The fact is that this "spread" you speak of is a much more theoretical concept than Matt Levine understands. There is ample liquidity between the bid-ask in 99.9% of markets, and by selling order flow to someone who will internalize it at the worst legal price possible, they are intentionally failing to fill an order at the best possible price. I remember reading about this (can't find the original source) and I thought there was a subtle distinction here, where the regulation only requires you to fill at a price at or better than the best quoted price, which isn't the same as the best possible price. Which does allow a broker to make their money (directly or indirectly) from the difference.
- kolbe 5y ago
  And this is an interesting little wrinkle, but one reason for the proliferation of high-frequency trading is to make the quoted spread to be wider than it needs to be. In the presence of predatory HFT techniques people who just want to provide honest liquidity (but who cannot afford 30 FPGA engineers) are forced to either leave the market all together or to provide quotes extremely wide to prevent the HFTs from picking them off (i.e. using information that everyone acknowledges will changes the prices, but doing it half a miscrosecond before you can, and thus forcing you to make a trade at a bad price).

by kolbe 5y ago

gruez 5y ago

>and by selling order flow to someone who will internalize it at the worst legal price possible, they are intentionally failing to fill an order at the best possible price. AFAIK they have duty of best execution, so they're supposed get the best price irrespective of PFOF. Obviously this conflicts with their own incentives, but that's what the laws are for. >RobinHood also features various dark patterns that are designed to remove money from the pockets of their users and put it into their own pockets. Off the top of my head, I can list the following: I'm not a user so I didn't know any of these. Thanks for bringing these up. Informed complaints like these are far better than the "they're front running you!" complaints that people seem to repeat endlessly.

kolbe 5y ago
> AFAIK they have duty of best execution, so they're supposed get the best price irrespective of PFOF. Obviously this conflicts with their own incentives, but that's what the laws are for. There is a duty of best execution. I honestly don't even know if its a crime or a licensing requirement or what. Reg NMS seemed to have obviated it, and judging by the failures to execute properly on the parts of major banks (e.g. my family had a major bank execute a bond trade for them that another bond trader friend of mine said was 10% below a competitive market price. That is, they paid 90, when you could have paid 100 in the competitive market), my impression is this law is totally unenforced. Also, it looks like no one will be able to see my criticisms because YC wants to protect their investment going into the IPO by crushing this comment thread

SilasX 5y ago

>The fact is that this "spread" you speak of is a much more theoretical concept than Matt Levine understands. There is ample liquidity between the bid-ask in 99.9% of markets, and by selling order flow to someone who will internalize it at the worst legal price possible, they are intentionally failing to fill an order at the best possible price. I remember reading about this (can't find the original source) and I thought there was a subtle distinction here, where the regulation only requires you to fill at a price at or better than the best quoted price, which isn't the same as the best possible price. Which does allow a broker to make their money (directly or indirectly) from the difference.

kolbe 5y ago
And this is an interesting little wrinkle, but one reason for the proliferation of high-frequency trading is to make the quoted spread to be wider than it needs to be. In the presence of predatory HFT techniques people who just want to provide honest liquidity (but who cannot afford 30 FPGA engineers) are forced to either leave the market all together or to provide quotes extremely wide to prevent the HFTs from picking them off (i.e. using information that everyone acknowledges will changes the prices, but doing it half a miscrosecond before you can, and thus forcing you to make a trade at a bad price).