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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 mone

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.
  - camgunz 5y ago
    Sure, sorry, by NBBO I mean "this broker isn't overcharging me". Robinhood was.

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.
- camgunz 5y ago
  Sure, sorry, by NBBO I mean "this broker isn't overcharging me". Robinhood was.