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There's an argument that it artificially increases spreads in lit markets, since you have segregated the least toxic flow to only go to a few select players (la
by vgatherps 4y ago
There's an argument that it artificially increases spreads in lit markets, since you have segregated the least toxic flow to only go to a few select players (largely Citadel and Virtu). Further, these increased spreads mean that the 'price improvement' is only price-improved against a spread that's being quoted against only the most toxic flow. However, many spreads are still close to a single tick, although this is less true as individual ticker prices have generally gotten higher.
The tick size changes are interesting as well in the context of auctions. If a claim is "you can't have an auction with sub-penny pricing so there's no improvement", well then make the tick size smaller.
- TOR_USER_01 4y agoAnother argument against PFOF is that brokers could (and Robinhood has been caught doing it) be incentivized to route orders to the highest PFOF rather than executing at the best real price.
- adrr 4y agoAs a retail investor, I’d rather have PFOF and free trading instead of paying $5 to $10 a trade which is more expensive than spread improvements. That’s what PFOF has brought to retail investors. It’s not like retail investors was ever put onto the public exchanges prior to robinhood and PFOF, they were sent to dark pools for institutional investors to trade against but retail investor never got the benefit.
- vgatherps 4y agoPFOF isn't gigantic revenue driver for many retail brokerages, including some that offer zero commission trading (like Schwab). Robinhood may have started the price war while making most of its money from PFOF, but you can have low to zero commission trading without PFOF. The payments per share tend to be extremely small - on most symbols the broker isn't making $5-10 per trade from the MM, for reasonably sized trades. Even if payment for flow was costing you that much, paying for an order vs giving more price improvement are indistinguishable. Payment for order flow just means that price improvement definitely goes to the broker instead of back to you.
- adrr 4y agoRobinhood forced the discount brokers to adopt zero commissions. Robinhood only exists because of PFOF. Being on Schwab you indirectly benefited from PFOF and Robinhood because you don’t pay commissions. I personally don’t use Robinhood but I recognize that they have been beneficial to me.