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> Considering that trades are now free at major brokerages Those "free" trades may be costing people more than having a 'traditional' fee, and claiming otherwi

> Considering that trades are now free at major brokerages Those "free" trades may be costing people more than having a 'traditional' fee, and claiming otherwise will get you fined for false advertising as Robinhood found out: > The Securities and Exchange Commission today charged Robinhood Financial LLC for repeated misstatements that failed to disclose the firm’s receipt of payments from trading firms for routing customer orders to them, and with failing to satisfy its duty to seek the best reasonably available terms to execute customer orders. Robinhood agreed to pay $65 million to settle the charges. * https://www.sec.gov/news/press-release/2020-321 https://www.sec.gov/news/press-release/2020-321 Further, I'm not sure 'free' trades may not be a good thing: it's long been observed that the more active a person is in trading, the less they tend to generally make compared to market averages. Some friction in trading seems to be a good idea as it forces one to actually consider the action you're about to take and whether it's actually a good move.

nightpool 5y ago
PFOF is one of those things that sounds obviously sketchy, but in reality it's just a simple consequence of "information is worth money". You're not losing money from payment for order flow—Robinhood can provide both price improvement over the national exchanges and get paid for it. PFOF isn't "coming out of" the bid/ask spread, it's a reflection of the fact that getting more retail users onto the stock market is valuable for those who want to bid against them.
- camgunz 5y ago
  PFOF is valuable, and warehouses collect market maker fees. Just this alone gives them a huge advantage against retail investors, but combined with equipment, infra, and hiring capability it's basically no contest. The thing retail is supposed to get out of the deal is NBBO, but Robinhood was fined millions for not even providing that. The dynamic here is to pull in tons more retail investors, all of whom are at a disadvantage compared to firms. Robinhood is a gambling app marketed as an investment app, and we should start regulating it as such.
  - skybrian 5y ago
    This “disadvantage” is overrated. If I sell some stock today because I need the money, that means I’m a “noise trader.” Whether my timing is good or bad based on short-term considerations is essentially random. Random is not actually all that bad! I got what I wanted. Professional traders will prefer to trade against random traders because trading against someone who actually knows what’s going to happen is bad for them. This means trades by random traders get sufficiently subsidized that trades are free for us. When buying or selling we often pay for convenience, and when the cost is very low, it’s not worth worrying about. In just about every other business, the prices we pay for convenience are a lot higher.
    - camgunz 5y ago
      I mean the entire disadvantage, not just what PFOF would provide.
  - nightpool 5y ago
    > The thing retail is supposed to get out of the deal is NBBO, but Robinhood was fined millions for not even providing that Is this true? My understanding is that Robinhood was fined millions for taking more PFOF (vs price improvement) than they disclosed. At no time were they below NBBO for the vast majority of their trades—the difference was just that they were only giving consumers 20% of the better then NBBO prices they were getting, which was lower then many other broker-dealers, and taking the other 80% of the spread for themselves. From the SEC order: For most orders of more than 100 shares, the analysis concluded that Robinhood customers would be better off trading at another broker-dealer because the additional price improvement that such orders would receive at other broker-dealers would likely exceed the approximately $5 per-order commission costs that those broker-dealers were then charging. The analysis further determined that the larger the order, the more significant the price improvement losses for Robinhood customers—for orders over 500 shares, the average Robinhood customer order lost over $15 in price improvement compared to Robinhood’s competitors, with that comparative loss rising to more than $23 per order for orders over 2,000 shares. However, the broker-dealers that analysis was comparing Robinhood to charged around $5 for per-order commissions. Whether $15 of price improvement for trades of tens of thousands of dollars is worth $5 of commission fees for small trades is not, to me, an obvious call for Robinhood to make. In total, the SEC determined that Robinhood traders lost $34MM over 2.67 years (or $13 million per year) vs using another brokerage firm, but that that loss was almost certainly concentrated in those doing big trades, and customers trading under 100 shares of stock per transaction were benefitted by Robinhood's policy.
bushbaba 5y ago
Say robinhood gives me a price that’s 10 cents worse than the brokerage that charges 10$ per trade. I’d need to be buying and selling over 100 shares per transaction for it the $10 fee to be the better option. 99% of people are coming out ahead with robinhood.

nightpool 5y ago

PFOF is one of those things that sounds obviously sketchy, but in reality it's just a simple consequence of "information is worth money". You're not losing money from payment for order flow—Robinhood can provide both price improvement over the national exchanges and get paid for it. PFOF isn't "coming out of" the bid/ask spread, it's a reflection of the fact that getting more retail users onto the stock market is valuable for those who want to bid against them.

camgunz 5y ago
PFOF is valuable, and warehouses collect market maker fees. Just this alone gives them a huge advantage against retail investors, but combined with equipment, infra, and hiring capability it's basically no contest. The thing retail is supposed to get out of the deal is NBBO, but Robinhood was fined millions for not even providing that. The dynamic here is to pull in tons more retail investors, all of whom are at a disadvantage compared to firms. Robinhood is a gambling app marketed as an investment app, and we should start regulating it as such.
- skybrian 5y ago
  This “disadvantage” is overrated. If I sell some stock today because I need the money, that means I’m a “noise trader.” Whether my timing is good or bad based on short-term considerations is essentially random. Random is not actually all that bad! I got what I wanted. Professional traders will prefer to trade against random traders because trading against someone who actually knows what’s going to happen is bad for them. This means trades by random traders get sufficiently subsidized that trades are free for us. When buying or selling we often pay for convenience, and when the cost is very low, it’s not worth worrying about. In just about every other business, the prices we pay for convenience are a lot higher.
  - camgunz 5y ago
    I mean the entire disadvantage, not just what PFOF would provide.
- nightpool 5y ago
  > The thing retail is supposed to get out of the deal is NBBO, but Robinhood was fined millions for not even providing that Is this true? My understanding is that Robinhood was fined millions for taking more PFOF (vs price improvement) than they disclosed. At no time were they below NBBO for the vast majority of their trades—the difference was just that they were only giving consumers 20% of the better then NBBO prices they were getting, which was lower then many other broker-dealers, and taking the other 80% of the spread for themselves. From the SEC order: For most orders of more than 100 shares, the analysis concluded that Robinhood customers would be better off trading at another broker-dealer because the additional price improvement that such orders would receive at other broker-dealers would likely exceed the approximately $5 per-order commission costs that those broker-dealers were then charging. The analysis further determined that the larger the order, the more significant the price improvement losses for Robinhood customers—for orders over 500 shares, the average Robinhood customer order lost over $15 in price improvement compared to Robinhood’s competitors, with that comparative loss rising to more than $23 per order for orders over 2,000 shares. However, the broker-dealers that analysis was comparing Robinhood to charged around $5 for per-order commissions. Whether $15 of price improvement for trades of tens of thousands of dollars is worth $5 of commission fees for small trades is not, to me, an obvious call for Robinhood to make. In total, the SEC determined that Robinhood traders lost $34MM over 2.67 years (or $13 million per year) vs using another brokerage firm, but that that loss was almost certainly concentrated in those doing big trades, and customers trading under 100 shares of stock per transaction were benefitted by Robinhood's policy.

bushbaba 5y ago

Say robinhood gives me a price that’s 10 cents worse than the brokerage that charges 10$ per trade. I’d need to be buying and selling over 100 shares per transaction for it the $10 fee to be the better option. 99% of people are coming out ahead with robinhood.