4 ms·
the sell order flow to market makers who gobble up the other side of bad retail trades
by thefreeman 2y ago
the sell order flow to market makers who gobble up the other side of bad retail trades
- graemep 2y agoWhich means that your cost is market maker's spreads instead of fees. Still a cost to you.
- kortilla 2y agoNope, this is one of the counterintuitive things about people paying RH for order flow. Market makers can offer tighter spreads when they know it’s a pool of dumb money.
- graemep 2y agotighter spreads are not zero spreads
- kortilla 2y agoWhat’s your point? The spreads are tighter than you would get on the open market. NBBO requires that if there is something better that Robinhood gives it to you.
- eru 2y agoI think the point is that if you trade, you pay the spreads. Market makers can help you pay narrower spreads, but you still pay them. If you just hold your index fund, you don't pay these recurring spreads.
- xen0 2y agoI highly doubt market makers are in the business of betting against retail traders. I suspect they're in the business of collecting the spread on lots of small trades that they can assume are largely random.
- kortilla 2y agoWhat you described is how you bet against retail traders. The bet is that they have no edge so it’s safe to run tight spreads and nice pure market making algos that assume random behavior at volume.
- xen0 2y agoFeels weird to call it a 'bet against' when the other side can (potentially) benefit from the tighter spread you offer. But yes, the market maker doesn't run the risk of trading with someone with knowledge and a lot of capital to apply it.
- kortilla 2y agoYeah, I don’t like the phrase either, but market making in these pools is quite literally taking the other side of their trades.