4 ms·

Wha the point of paying for order flow if you "execute at market price or better"? Are you suggesting Citadel is a charity?

• gruez 4y ago
  >Wha the point of paying for order flow if you "execute at market price or better"? 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... tl;dr: adverse selection. retail traders are less risky to deal with, so market makers can offer better prices to them. >If the retail trades are random. If retail traders usually buy before the stock goes up, and sell before the stock goes down, the wholesaler would consistently lose money on price risk. (This is called “adverse selection.”) But they don’t. Even now, retail traders tend to be small, dispersed and uninformed. If you sell stock to a retail trader for $58.15, you have no particular reason to think it will go up (or down). The retail traders are trading randomly, which is what allows you to treat this problem as though you were matching them up with each other at a fixed price and collecting a spread. In reality you are matching them up with each other over time, not simultaneously, and the price moves while you are doing it, but the randomness of their trading means that this difference doesn’t matter too much. >Meanwhile market makers on the public exchange are doing something similar, but with institutional traders who tend to be informed and trade large lots of stock, so their trading does carry a lot more risk of adverse selection. If a big institution buys some stock, that does mean the stock is somewhat more likely to go up, so if you sell them the stock you are somewhat more likely to lose money. This is why the spread on the public exchange—the difference between the $58 best bid to buy the stock and the $58.25 best offer to sell the stock—is so much wider than the 5 cents that the wholesaler charges. The wholesaler is just matching up small pleasant random orders and clipping a spread; the stock-exchange market maker is facing a real risk of being run over by an informed trader.
  • qaq 4y ago
    show me a liquid stock with .25 spread
    • gruez 4y ago
      The numbers are given as examples, not as real figures. If you look at the document from my prior comment the price improvement (and therefore spreads that citadel makes) is on the order of pennies or less.
• kortilla 4y ago
  Because they are paying for a supply of (on average) uneducated morons with no edge. Can you imagine how much a professional poker player would pay to be in a tournament with amateurs?
  • qaq 4y ago
    At market or better than market rate you have unlimited supply of trades without paying for order flow
    • kortilla 4y ago
      But the people with the edge are there who can steamroll you. Better to just pay to not have them if you’re trying to make a market.
      • qaq 4y ago
        You have an example of market maker being steam rolled?
• colinmhayes 4y ago
  This isn’t even that complicated. Come on, like think for 15 seconds. Why oh why would a trader pay to play against a degenerate retail gambler?
  • qaq 4y ago
    Expand why would you give retail gambler "better than market" execution?