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PFOF has to beat the best market price at execution time. How is Citadel taking robinhood consumers’ profit then? In case you’re wondering how this is even pos

PFOF has to beat the best market price at execution time. How is Citadel taking robinhood consumers’ profit then? In case you’re wondering how this is even possible to be a win-win, it’s because retail order flow is considered non-toxic, roughly meaning it’s OK to market-make against because it’s roughly symmetric and not backed by a market moving signal. So creating an arena for retail orders to fill each others’ orders can allow for legitimately better fills because it’s safer for the market maker. From what I understand PFOF is only problematically profitable in the options market where NBBO spreads can be quite wide, but I’m pretty sure Citadel is not even a major player there.

jjtheblunt 3y ago
> PFOF has to beat the best market price at execution time. What’s an example?
- helsinkiandrew 3y ago
  This article has a good explanation: 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... https://archive.is/ij2Q3 https://archive.is/ij2Q3
  - jjtheblunt 3y ago
    thanks
metaphor 3y ago
> ...but I’m pretty sure Citadel is not even a major player [in the options market]. A quick sanity check suggests Vanguard[1], Fidelity[2], Schwab[3], and TD Ameritrade[4] disagree with your assertion. [1] https://nms606.karngroup.com/vgrd/606a/2023Q1/588e3c62ff https://nms606.karngroup.com/vgrd/606a/2023Q1/588e3c62ff [2] https://clearingcustody.fidelity.com/trade-execution-quality/sec-rule-606 https://clearingcustody.fidelity.com/trade-execution-quality... [3] https://www.schwab.com/legal/order-routing-1 https://www.schwab.com/legal/order-routing-1 [4] https://www.tdameritrade.com/disclosure.html https://www.tdameritrade.com/disclosure.html
djtango 3y ago
> From what I understand PFOF is only problematically profitable in the options market where NBBO spreads can be quite wide, but I’m pretty sure Citadel is not even a major player there. Not sure if it's the same niche but bloomberg quotes Citadel at 25% market share[0] [0] https://www.bloomberg.com/news/articles/2020-02-25/citadel-securities-expands-an-already-dominant-options-business https://www.bloomberg.com/news/articles/2020-02-25/citadel-s...
basch 3y ago
its sort of a catch 22, feedback loop. the reverse of "Nobody goes there anymore. It's too crowded" - Yogi Berra. If all the trade volume on an exchange moves to a private room, because the private room is cheaper, because its cheaper cuz of the volume, and it has the volume cuz everyone moved there, because its cheaper ... Sure, they invested a lot of money to make technology that can beat the exchanges. But part of the reason they beat the exchanges is because they took all the trades and can match better not because of their tech but because of all the liquidity.
- smabie 3y ago
  I mean, they can beat the exchanges because retail flow is highly non toxic and taking the other side isn't risky. This is the essence of PROF price improvement.

jjtheblunt 3y ago

> PFOF has to beat the best market price at execution time. What’s an example?

helsinkiandrew 3y ago
This article has a good explanation: 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... https://archive.is/ij2Q3 https://archive.is/ij2Q3
- jjtheblunt 3y ago
  thanks

metaphor 3y ago

> ...but I’m pretty sure Citadel is not even a major player [in the options market]. A quick sanity check suggests Vanguard[1], Fidelity[2], Schwab[3], and TD Ameritrade[4] disagree with your assertion. [1] https://nms606.karngroup.com/vgrd/606a/2023Q1/588e3c62ff https://nms606.karngroup.com/vgrd/606a/2023Q1/588e3c62ff [2] https://clearingcustody.fidelity.com/trade-execution-quality/sec-rule-606 https://clearingcustody.fidelity.com/trade-execution-quality... [3] https://www.schwab.com/legal/order-routing-1 https://www.schwab.com/legal/order-routing-1 [4] https://www.tdameritrade.com/disclosure.html https://www.tdameritrade.com/disclosure.html

djtango 3y ago

> From what I understand PFOF is only problematically profitable in the options market where NBBO spreads can be quite wide, but I’m pretty sure Citadel is not even a major player there. Not sure if it's the same niche but bloomberg quotes Citadel at 25% market share[0] [0] https://www.bloomberg.com/news/articles/2020-02-25/citadel-securities-expands-an-already-dominant-options-business https://www.bloomberg.com/news/articles/2020-02-25/citadel-s...

basch 3y ago

its sort of a catch 22, feedback loop. the reverse of "Nobody goes there anymore. It's too crowded" - Yogi Berra. If all the trade volume on an exchange moves to a private room, because the private room is cheaper, because its cheaper cuz of the volume, and it has the volume cuz everyone moved there, because its cheaper ... Sure, they invested a lot of money to make technology that can beat the exchanges. But part of the reason they beat the exchanges is because they took all the trades and can match better not because of their tech but because of all the liquidity.

smabie 3y ago
I mean, they can beat the exchanges because retail flow is highly non toxic and taking the other side isn't risky. This is the essence of PROF price improvement.