4 ms·

Their duty should be to get the robinhood user the best execution price for their trade. But they make no money from the robinhood user, since there is no commi

by ffggvv 5y ago

Their duty should be to get the robinhood user the best execution price for their trade. But they make no money from the robinhood user, since there is no commission. Instead, they get paid by the market maker whose interests are to get the worst execution price possible for the robinhood user.

qeternity 5y ago
By law, Reg NMS guarantees NBBO execution. Internalizers are providing price improvement vs. dumping an order on a lit exchange. So by definition, the “worst price” would be routing via SIP and execution against NBBO.
- ffggvv 5y ago
  laws are one thing, that doesnt eliminate the conflict of interest, it just regulates the ability to act on it.
  - qeternity 5y ago
    Uh, so if a conflict of interest exists (rife in all markets) and laws prevent exploitation…what’s the issue?
    - toomuchtodo 5y ago
      The issue is PFOF is used by Robinhood to subsidize unsophisticated investors trading more to their own financial detriment. https://www.bloomberg.com/opinion/articles/2021-08-30/esg-accounting-requires-accountants https://www.bloomberg.com/opinion/articles/2021-08-30/esg-ac... (Control-F “gamification”) https://www.sec.gov/news/press-release/2021-167 https://www.sec.gov/news/press-release/2021-167 (SEC Requests Information and Comment on Broker-Dealer and Investment Adviser Digital Engagement Practices, Related Tools and Methods, and Regulatory Considerations and Potential Approaches; Information and Comments on Investment Adviser Use of Technology) https://www.sec.gov/rules/other/2021/34-92766.pdf https://www.sec.gov/rules/other/2021/34-92766.pdf It’s really no different then incentives and financial mechanisms casinos use to get folks in the door. Or, as the saying goes, “if you don’t know who is the sucker at the poker table, it’s you.”
      - qeternity 5y ago
        You’re moving the goalposts. Whether or not Robinhood gamifies trading, or encourages gambling, has absolutely nothing to do with PFOF. Ultimately people should be able to do with their money as they please, include gambling it away on risky options trades. Bad trading is naturally self correcting.
        toomuchtodo 5y ago
        You asked me what the inherent conflict of interest is top of thread. I stated it. The goal posts are firmly where they started. Robinhood is getting paid to bring a product (the user) to market makers. If you’re not paying for the product you’re the product, all the jazz. > Ultimately people should be able to do with their money as they please, include gambling it away on risky options trades. Bad trading is naturally self correcting. Agree to disagree. We regulate smoking, alcohol, pharmaceuticals, gambling, and other behaviors that have self harm. This is no different.
        qeternity 5y ago
        Yes, I said that within the context of this thread, which is PFOF… If you’re arguing that there’s a conflict of interest between Robinhood and its customers, then sure. But that’s got nothing to do with PFOF. > Agree to disagree. We regulate smoking, alcohol, pharmaceuticals, gambling, and other behaviors that have self harm. This is no different. Sure, I never said no regulation. You gotta stop with the strawman attacks. We regulate these industries, as we ought to do with finance, but we nonetheless allow people to drink/smoke themselves to death or gamble themselves into oblivion. I’d rather live in a society where a small number people do enormous bad to themselves, over one where the state makes decisions for everyone.
    - ffggvv 5y ago
      i never said there was an issue. the person was just asking what the conflict of interest was
- ctvo 5y ago
  I'm ignorant of this space. Can you share how Robinhood and others make money through order flow? The semantics of it (an order has to receive the best price at the time of execution for example) doesn't capture the N ways a fund could make money here and still be compliant. Instead of worrying about the incorrect definitions used, can you share how firms benefit from order flow instead?
  - gruez 5y ago
    >Instead of worrying about the incorrect definitions used, can you share how firms benefit from order flow instead? because there's a lower risk of being run over. https://www.bloomberg.com/opinion/articles/2021-02-05/robinhood-gamestop-saga-pressures-payment-for-order-flow https://www.bloomberg.com/opinion/articles/2021-02-05/robinh... The relevant 3 paragraphs start at "If the retail trades are random..."
  - qeternity 5y ago
    The exact mechanisms by which MMs monetize order flow is the strictly guarded secret sauce. But largely it’s because retail order flow is uninformed, versus institutional order flow (bank, hedge fund, etc) which might be “toxic”. Here’s an example with ridiculously huge spreads but just to help illustrate the issue (in reality, the spreads are fractions of a cent): let’s say the market for AAPL shares is 150 vs 151. A retail trader market sells 100 shares. Absent a dark pool or other internalizer, they will end up hitting the 150 bid. A market maker knows there is a buyer for AAPL shares and expects the 151 offer to trade. The market maker (MM) pays 10c to Robinhood for the order, and buys the shares at 10c better @ 150.10. The MM has paid 150.20 effectively (151.10 + 0.10) when the next best buyer in the market was 150.00. Why would they pay a 20c premium? Because of the buyer I mentioned earlier that the MM believes will buy their shares. The MM turns around and offers these 100 shares for 150.90 (which is 10c better than the best current offer of 151.00) and a hedge fund immediately snaps those shares up. So what’s the net outcome? In this case, the trader has gotten a better price, Robinhood has received revenue and can offer their service for free, the MM has made a 70c turn on the trade (150.90 - 150.20) and the hedge fund buyer got a 10c better price than was available to them in the first place. Win, win, win, win. (The real issue is that Robinhood forces market orders which make retail traders consumer of liquidity and makes all of this possible. But that’s a different issue and PFOF is not the bad guy.)

by ffggvv 5y ago

qeternity 5y ago

By law, Reg NMS guarantees NBBO execution. Internalizers are providing price improvement vs. dumping an order on a lit exchange. So by definition, the “worst price” would be routing via SIP and execution against NBBO.

ffggvv 5y ago
laws are one thing, that doesnt eliminate the conflict of interest, it just regulates the ability to act on it.
- qeternity 5y ago
  Uh, so if a conflict of interest exists (rife in all markets) and laws prevent exploitation…what’s the issue?
  - toomuchtodo 5y ago
    The issue is PFOF is used by Robinhood to subsidize unsophisticated investors trading more to their own financial detriment. https://www.bloomberg.com/opinion/articles/2021-08-30/esg-accounting-requires-accountants https://www.bloomberg.com/opinion/articles/2021-08-30/esg-ac... (Control-F “gamification”) https://www.sec.gov/news/press-release/2021-167 https://www.sec.gov/news/press-release/2021-167 (SEC Requests Information and Comment on Broker-Dealer and Investment Adviser Digital Engagement Practices, Related Tools and Methods, and Regulatory Considerations and Potential Approaches; Information and Comments on Investment Adviser Use of Technology) https://www.sec.gov/rules/other/2021/34-92766.pdf https://www.sec.gov/rules/other/2021/34-92766.pdf It’s really no different then incentives and financial mechanisms casinos use to get folks in the door. Or, as the saying goes, “if you don’t know who is the sucker at the poker table, it’s you.”
    - qeternity 5y ago
      You’re moving the goalposts. Whether or not Robinhood gamifies trading, or encourages gambling, has absolutely nothing to do with PFOF. Ultimately people should be able to do with their money as they please, include gambling it away on risky options trades. Bad trading is naturally self correcting.
      - toomuchtodo 5y ago
        You asked me what the inherent conflict of interest is top of thread. I stated it. The goal posts are firmly where they started. Robinhood is getting paid to bring a product (the user) to market makers. If you’re not paying for the product you’re the product, all the jazz. > Ultimately people should be able to do with their money as they please, include gambling it away on risky options trades. Bad trading is naturally self correcting. Agree to disagree. We regulate smoking, alcohol, pharmaceuticals, gambling, and other behaviors that have self harm. This is no different.
        qeternity 5y ago
        Yes, I said that within the context of this thread, which is PFOF… If you’re arguing that there’s a conflict of interest between Robinhood and its customers, then sure. But that’s got nothing to do with PFOF. > Agree to disagree. We regulate smoking, alcohol, pharmaceuticals, gambling, and other behaviors that have self harm. This is no different. Sure, I never said no regulation. You gotta stop with the strawman attacks. We regulate these industries, as we ought to do with finance, but we nonetheless allow people to drink/smoke themselves to death or gamble themselves into oblivion. I’d rather live in a society where a small number people do enormous bad to themselves, over one where the state makes decisions for everyone.
  - ffggvv 5y ago
    i never said there was an issue. the person was just asking what the conflict of interest was
ctvo 5y ago
I'm ignorant of this space. Can you share how Robinhood and others make money through order flow? The semantics of it (an order has to receive the best price at the time of execution for example) doesn't capture the N ways a fund could make money here and still be compliant. Instead of worrying about the incorrect definitions used, can you share how firms benefit from order flow instead?
- gruez 5y ago
  >Instead of worrying about the incorrect definitions used, can you share how firms benefit from order flow instead? because there's a lower risk of being run over. https://www.bloomberg.com/opinion/articles/2021-02-05/robinhood-gamestop-saga-pressures-payment-for-order-flow https://www.bloomberg.com/opinion/articles/2021-02-05/robinh... The relevant 3 paragraphs start at "If the retail trades are random..."
- qeternity 5y ago
  The exact mechanisms by which MMs monetize order flow is the strictly guarded secret sauce. But largely it’s because retail order flow is uninformed, versus institutional order flow (bank, hedge fund, etc) which might be “toxic”. Here’s an example with ridiculously huge spreads but just to help illustrate the issue (in reality, the spreads are fractions of a cent): let’s say the market for AAPL shares is 150 vs 151. A retail trader market sells 100 shares. Absent a dark pool or other internalizer, they will end up hitting the 150 bid. A market maker knows there is a buyer for AAPL shares and expects the 151 offer to trade. The market maker (MM) pays 10c to Robinhood for the order, and buys the shares at 10c better @ 150.10. The MM has paid 150.20 effectively (151.10 + 0.10) when the next best buyer in the market was 150.00. Why would they pay a 20c premium? Because of the buyer I mentioned earlier that the MM believes will buy their shares. The MM turns around and offers these 100 shares for 150.90 (which is 10c better than the best current offer of 151.00) and a hedge fund immediately snaps those shares up. So what’s the net outcome? In this case, the trader has gotten a better price, Robinhood has received revenue and can offer their service for free, the MM has made a 70c turn on the trade (150.90 - 150.20) and the hedge fund buyer got a 10c better price than was available to them in the first place. Win, win, win, win. (The real issue is that Robinhood forces market orders which make retail traders consumer of liquidity and makes all of this possible. But that’s a different issue and PFOF is not the bad guy.)