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Since everyone in this thread seems determined to dismiss this take entirely due to who is saying it, perhaps people would prefer this article by Matt Lavine ex

Since everyone in this thread seems determined to dismiss this take entirely due to who is saying it, perhaps people would prefer this article by Matt Lavine explaining much the same thing? 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... Hint: PFOF is fine.

unmole 5y ago
You want me to take a Goldman Sachs alum's word when he says whatever Wall Street is doing to retail investors is fine? /s
camgunz 5y ago
From that article: > Now of course I am oversimplifying. For one thing, the wholesalers don’t have to fill every order out of inventory; they will do that with some orders and pass others on to the exchange to execute. They do not provide price improvement on 100% of orders, though they do compete to provide price improvement and are evaluated by brokers based on how much they provide. They will often lay off risk on the public markets rather than trading exclusively with retail customers; often they will be in the business of market making on the exchanges too, and will manage that business and the retail business in some interacting way. Anyone who trades a lot of stock benefits from having information about order flow, and a wholesaler who sees a lot of retail orders will have some informational advantages in its public trading. Or TL;DR: the NBBO benefit pointed to by OP isn't absolute, order flow is valuable information, and rather than being some kind of exchange utility wholesalers are actually trying to maximize their own profits. I'm fine with this? I'm not fine with how OP characterizes them, which doesn't seem aligned.
- smabie 5y ago
  Of course market makers are trying to maximize profit: they are trading firms just like any others. However, retail order flow is (pretty much by definition) not particularly valuable information: if it was, wholesalers would be unwilling to consistently take the other side at such good prices. Of course order flow in general is highly valuable information, it's just that retail order flow isn't because it's very non-toxic (there is little to no predictive signal in the flow).
  - camgunz 5y ago
    Sure, but then why doesn't every exchange just warehouse? This is the same principle as Bitcoin's Lightning network: the layer 1 network (the exchange) is too slow, so we have a layer 2 network (the warehouse) that buffers it. OP dismisses this out of hand because it would be a "monopoly" and jack fees. But has that been the case for the NYSE in other areas? I bet it hasn't been. What it seems like is that these trading houses are padding their percentages by being market makers, and padding their models with order flow. Retail investors can do neither, so I think it's reasonable to say this isn't super fair.
    - smabie 5y ago
      I dont work for a wholesaler so can't comment about how/if retail flow is used as a signal but if it is, I really don't think the information is super important (atleast 99% of the time). Of course trading isn't fair for a multitude of reasons, but I wouldn't say wholesaling even makes the top 10 reasons. What is much more relavent is the large balance sheet, access to cheap debt, top tier talent, world class technology infra, etc. Also most trading firms are market makers. it's not really a hard and fast line, anyone can provide liquidity and (try to) collect the bid ask spread (it's not easy/free money)
      - camgunz 5y ago
        > Of course trading isn't fair for a multitude of reasons, but I wouldn't say wholesaling even makes the top 10 reasons. What is much more relavent is the large balance sheet, access to cheap debt, top tier talent, world class technology infra, etc. That's an excellent point yeah. I do buy that this is a tempest in a tea cup relative to all that. > anyone can provide liquidity and (try to) collect the bid ask spread (it's not easy/free money) Yeah I buy that too I mean, we can refer to it as "the modeling" but, I'm sure it's pretty complicated. I learned a lot in our little thread! Thanks for talking w/ me :)

unmole 5y ago

You want me to take a Goldman Sachs alum's word when he says whatever Wall Street is doing to retail investors is fine? /s

camgunz 5y ago

From that article: > Now of course I am oversimplifying. For one thing, the wholesalers don’t have to fill every order out of inventory; they will do that with some orders and pass others on to the exchange to execute. They do not provide price improvement on 100% of orders, though they do compete to provide price improvement and are evaluated by brokers based on how much they provide. They will often lay off risk on the public markets rather than trading exclusively with retail customers; often they will be in the business of market making on the exchanges too, and will manage that business and the retail business in some interacting way. Anyone who trades a lot of stock benefits from having information about order flow, and a wholesaler who sees a lot of retail orders will have some informational advantages in its public trading. Or TL;DR: the NBBO benefit pointed to by OP isn't absolute, order flow is valuable information, and rather than being some kind of exchange utility wholesalers are actually trying to maximize their own profits. I'm fine with this? I'm not fine with how OP characterizes them, which doesn't seem aligned.

smabie 5y ago
Of course market makers are trying to maximize profit: they are trading firms just like any others. However, retail order flow is (pretty much by definition) not particularly valuable information: if it was, wholesalers would be unwilling to consistently take the other side at such good prices. Of course order flow in general is highly valuable information, it's just that retail order flow isn't because it's very non-toxic (there is little to no predictive signal in the flow).
- camgunz 5y ago
  Sure, but then why doesn't every exchange just warehouse? This is the same principle as Bitcoin's Lightning network: the layer 1 network (the exchange) is too slow, so we have a layer 2 network (the warehouse) that buffers it. OP dismisses this out of hand because it would be a "monopoly" and jack fees. But has that been the case for the NYSE in other areas? I bet it hasn't been. What it seems like is that these trading houses are padding their percentages by being market makers, and padding their models with order flow. Retail investors can do neither, so I think it's reasonable to say this isn't super fair.
  - smabie 5y ago
    I dont work for a wholesaler so can't comment about how/if retail flow is used as a signal but if it is, I really don't think the information is super important (atleast 99% of the time). Of course trading isn't fair for a multitude of reasons, but I wouldn't say wholesaling even makes the top 10 reasons. What is much more relavent is the large balance sheet, access to cheap debt, top tier talent, world class technology infra, etc. Also most trading firms are market makers. it's not really a hard and fast line, anyone can provide liquidity and (try to) collect the bid ask spread (it's not easy/free money)
    - camgunz 5y ago
      > Of course trading isn't fair for a multitude of reasons, but I wouldn't say wholesaling even makes the top 10 reasons. What is much more relavent is the large balance sheet, access to cheap debt, top tier talent, world class technology infra, etc. That's an excellent point yeah. I do buy that this is a tempest in a tea cup relative to all that. > anyone can provide liquidity and (try to) collect the bid ask spread (it's not easy/free money) Yeah I buy that too I mean, we can refer to it as "the modeling" but, I'm sure it's pretty complicated. I learned a lot in our little thread! Thanks for talking w/ me :)