5 ms·

So if I understand this correctly, they assume they are going to make profit purely based on rebates? I don't think this kind of business model has been tested

by mikkom 12y ago

So if I understand this correctly, they assume they are going to make profit purely based on rebates? I don't think this kind of business model has been tested yet so this is quite interesting.

falsestprophet 12y ago
They are going to sell their uninformed customer's order flow to market makers (edit: I assume) and internalize trades. That's a circuitous way to mark up the prices their customers are paying for securities. It is structurally different from but conceptually similar to the mark up you pay when you exchange currency. No free lunches, as they say. edit: See http://en.wikipedia.org/wiki/Payment_for_order_flow http://en.wikipedia.org/wiki/Payment_for_order_flow and http://www.sec.gov/answers/payordf.htm http://www.sec.gov/answers/payordf.htm
- kasey_junk 12y ago
  I'm reasonably certain there is a legal requirement to disclose this to their customers. Has this disclosure happened or are you just assuming they are selling order flow (it was the first thing I assumed when I saw their original business plan). I don't know how they are going to make money any other way, but their vague handwaving about it sure is suspicious. If they are going to make most of their money from rebates are they going to prevent people from taking liquidity? [edit] chollida1 confirms that they are selling order flow: https://news.ycombinator.com/item?id=8358217 https://news.ycombinator.com/item?id=8358217
- fleitz 12y ago
  Yup, in the market, you're either screwing the other guy, or you're the one getting screwed. This app is like throwing buckets of chum in the water. I bet the market is salivating for the day people start making protest sales based on whatever the rage is on Twitter. I can just imagine it now, a week after some viral video knocking a company, they find out it was orchestrated by some Wall St types to make their quarterlies. A 'no fee' app called Robinhood, something tells me it's not the banks that are getting robbed. Can't wait til they open this up to pink sheets.
- deleted 12y ago
  [deleted]
- esMazer 12y ago
  I read the introduction of the wiki article, but I'm still at a lost.. the third party pays back the broker because it "wants to influence how the broker routes client orders" what? so if I were the broker I would deny or allow my customers transactions based on a third party? I'm sure is not like this and the broker won't deny any transaction if I were the broker I would just get a commission on some transactions by third parties but I don't see what I could change in order to get a greater commission. could you elaborate please, I'm at a lost.
  - kasey_junk 12y ago
    The third party doesn't pay back the broker, they flat out pay them a fee to send transactions through their systems. The broker doesn't allow or deny any transactions, just in the absence of contradictory routing instructions they send their default orders through the third party. The customer is usually none the wiser as they are being charged the same fee from their broker typically regardless of the routing. The only way a customer would know is if the broker discloses it to them. In the US equities markets that disclosure is a legal requirement.
    - esMazer 12y ago
      ohh I get it! Basically there's a market of third party companies and the broker has the liberty to choose to who give all its "traffic"/transactions, but the broker is choosing the company based on the fee it gets instead of other factors (which I'm sure there are many) in this case the choice might not be the best for the customers just to the broker. Definitely nothing is free!
- yummyfajitas 12y ago
  ...mark up the prices their customers are paying for securities. Are you suggesting the customer's orders will not be filled at the NBBO? Or something else? Can you state explicitly (i.e., describe the timeline) of what you think is happening?
  - falsestprophet 12y ago
    There is a quantifiable value to retail order flow [1], which is realized either by selling the order flow or internalizing trades (or by other means unfamiliar to me). ...mark up the prices their customers are paying for securities. It would have been much more accurate to say that the broker is benefiting from part of the spread. Of course, one expects a service provider to benefit from providing a service. This is also true of exchanging currencies and everything else in the capitalist circle of life -- so it was very possibly not a useful comment. [1] What is the opposite of adverse selection? Advantageous selection?
    - yummyfajitas 12y ago
      The broker is benefiting - in the case of Robinhood he is sharing that benefit with the customer. The customer will get the exact same price as if his order went to the public exchanges. The only difference is that instead of selling to anonymous person on BATS, he'll sell to anonymous HFT on the broker's internal dark pool.
chollida1 12y ago
They get paid to sell your orders to Knight Capital, Lava and Credit Suisse.. I actually wrote about the selling of flow this morning here: https://news.ycombinator.com/item?id=8355210 https://news.ycombinator.com/item?id=8355210 They make it hard to find but the trail goes like this: From here: https://www.robinhood.com/legal/ https://www.robinhood.com/legal/ Open this document: https://brokerage-static.s3.amazonaws.com/assets/robinhood/legal/RHF%20PFO%20Disclosure.pdf https://brokerage-static.s3.amazonaws.com/assets/robinhood/l... Which links to this document, which contains the details.... http://public.s3.com/rule606/apex/APEX_2Q2014_Rule606.pdf http://public.s3.com/rule606/apex/APEX_2Q2014_Rule606.pdf Note this: > 1 Apex receives payment from Knight Capital Americas LLC. (Knight) for directing order flow. Payment varies based upon a number of factors including but not limited to: Size of the order, time of order placement, whether an order is marketable at the time of order entry, the underlying price of the security and any special handling instructions. Payments received from Knight averaged less than $0.0025 per share for the period 2Q2014. > 2 Apex receives payment from LavaFlow ECN for orders that add liquidity to LavaFlow and are subsequently executed. The rate for adding liquidity to LavaFlow was $0.0032 per share. APEX is charged for removing liquidity from LavaFlow The rate for removing liquidity from LavaFlow was up to $0.0035 per share. > 3 Apex receives payment from Credit Suisse for directing order flow to Credit Suisse. Payment varies based upon a number of factors including but not limited to: Size of the order, time of order placement, whether an order is marketable at the time of order entry, the underlying price of the security and any special handling instructions. Payments received from Credit Suisse averaged less than $0.0025 per share for the period 2Q2014. Holy shit, their order flow is 70% market orders? That cant' be right. Funds must be throwing money at these guys to buy their flow. I don't want to sound like Jim Cramer but people please don't use market orders!!!! It happens alot, and since these guys came from the industry it wouldn't be a large logical jump to conclude they are taking money from a fund that wants to trade against their uninformed flow they generate. Its scummy if true, but it happens. If you aren't a hedge fund then your trades are being sold:) Heck half the time if you are a fund your flow is also being sold:) Alternatively they have some sketchy fees which you can see here: https://brokerage-static.s3.amazonaws.com/assets/robinhood/legal/RHF%20Retail%20Commisions%20and%20Fees%20Schedule.pdf https://brokerage-static.s3.amazonaws.com/assets/robinhood/l... No fee to transfer money into them but a fee to get your money out is a big red flag. Hello Hotel California! EDIT to explain scummy, its because it allows the big funds to "jump the queue" if you will. Scummy may have been a poor choice of words. Rather than having to be active in the market with a quote on the NBBO, this allows the big funds to look at each order and say, pass, pass , take, pass, take, etc. If there is money in filling the order they will, if not they will pass it onto the market where it will either sit or get filed by those who actually participate in the market.

by mikkom 12y ago

So if I understand this correctly, they assume they are going to make profit purely based on rebates? I don't think this kind of business model has been tested yet so this is quite interesting.

falsestprophet 12y ago

They are going to sell their uninformed customer's order flow to market makers (edit: I assume) and internalize trades. That's a circuitous way to mark up the prices their customers are paying for securities. It is structurally different from but conceptually similar to the mark up you pay when you exchange currency. No free lunches, as they say. edit: See http://en.wikipedia.org/wiki/Payment_for_order_flow http://en.wikipedia.org/wiki/Payment_for_order_flow and http://www.sec.gov/answers/payordf.htm http://www.sec.gov/answers/payordf.htm

kasey_junk 12y ago
I'm reasonably certain there is a legal requirement to disclose this to their customers. Has this disclosure happened or are you just assuming they are selling order flow (it was the first thing I assumed when I saw their original business plan). I don't know how they are going to make money any other way, but their vague handwaving about it sure is suspicious. If they are going to make most of their money from rebates are they going to prevent people from taking liquidity? [edit] chollida1 confirms that they are selling order flow: https://news.ycombinator.com/item?id=8358217 https://news.ycombinator.com/item?id=8358217
fleitz 12y ago
Yup, in the market, you're either screwing the other guy, or you're the one getting screwed. This app is like throwing buckets of chum in the water. I bet the market is salivating for the day people start making protest sales based on whatever the rage is on Twitter. I can just imagine it now, a week after some viral video knocking a company, they find out it was orchestrated by some Wall St types to make their quarterlies. A 'no fee' app called Robinhood, something tells me it's not the banks that are getting robbed. Can't wait til they open this up to pink sheets.
deleted 12y ago
[deleted]
esMazer 12y ago
I read the introduction of the wiki article, but I'm still at a lost.. the third party pays back the broker because it "wants to influence how the broker routes client orders" what? so if I were the broker I would deny or allow my customers transactions based on a third party? I'm sure is not like this and the broker won't deny any transaction if I were the broker I would just get a commission on some transactions by third parties but I don't see what I could change in order to get a greater commission. could you elaborate please, I'm at a lost.
- kasey_junk 12y ago
  The third party doesn't pay back the broker, they flat out pay them a fee to send transactions through their systems. The broker doesn't allow or deny any transactions, just in the absence of contradictory routing instructions they send their default orders through the third party. The customer is usually none the wiser as they are being charged the same fee from their broker typically regardless of the routing. The only way a customer would know is if the broker discloses it to them. In the US equities markets that disclosure is a legal requirement.
  - esMazer 12y ago
    ohh I get it! Basically there's a market of third party companies and the broker has the liberty to choose to who give all its "traffic"/transactions, but the broker is choosing the company based on the fee it gets instead of other factors (which I'm sure there are many) in this case the choice might not be the best for the customers just to the broker. Definitely nothing is free!
yummyfajitas 12y ago
...mark up the prices their customers are paying for securities. Are you suggesting the customer's orders will not be filled at the NBBO? Or something else? Can you state explicitly (i.e., describe the timeline) of what you think is happening?
- falsestprophet 12y ago
  There is a quantifiable value to retail order flow [1], which is realized either by selling the order flow or internalizing trades (or by other means unfamiliar to me). ...mark up the prices their customers are paying for securities. It would have been much more accurate to say that the broker is benefiting from part of the spread. Of course, one expects a service provider to benefit from providing a service. This is also true of exchanging currencies and everything else in the capitalist circle of life -- so it was very possibly not a useful comment. [1] What is the opposite of adverse selection? Advantageous selection?
  - yummyfajitas 12y ago
    The broker is benefiting - in the case of Robinhood he is sharing that benefit with the customer. The customer will get the exact same price as if his order went to the public exchanges. The only difference is that instead of selling to anonymous person on BATS, he'll sell to anonymous HFT on the broker's internal dark pool.

chollida1 12y ago

They get paid to sell your orders to Knight Capital, Lava and Credit Suisse.. I actually wrote about the selling of flow this morning here: https://news.ycombinator.com/item?id=8355210 https://news.ycombinator.com/item?id=8355210 They make it hard to find but the trail goes like this: From here: https://www.robinhood.com/legal/ https://www.robinhood.com/legal/ Open this document: https://brokerage-static.s3.amazonaws.com/assets/robinhood/legal/RHF%20PFO%20Disclosure.pdf https://brokerage-static.s3.amazonaws.com/assets/robinhood/l... Which links to this document, which contains the details.... http://public.s3.com/rule606/apex/APEX_2Q2014_Rule606.pdf http://public.s3.com/rule606/apex/APEX_2Q2014_Rule606.pdf Note this: > 1 Apex receives payment from Knight Capital Americas LLC. (Knight) for directing order flow. Payment varies based upon a number of factors including but not limited to: Size of the order, time of order placement, whether an order is marketable at the time of order entry, the underlying price of the security and any special handling instructions. Payments received from Knight averaged less than $0.0025 per share for the period 2Q2014. > 2 Apex receives payment from LavaFlow ECN for orders that add liquidity to LavaFlow and are subsequently executed. The rate for adding liquidity to LavaFlow was $0.0032 per share. APEX is charged for removing liquidity from LavaFlow The rate for removing liquidity from LavaFlow was up to $0.0035 per share. > 3 Apex receives payment from Credit Suisse for directing order flow to Credit Suisse. Payment varies based upon a number of factors including but not limited to: Size of the order, time of order placement, whether an order is marketable at the time of order entry, the underlying price of the security and any special handling instructions. Payments received from Credit Suisse averaged less than $0.0025 per share for the period 2Q2014. Holy shit, their order flow is 70% market orders? That cant' be right. Funds must be throwing money at these guys to buy their flow. I don't want to sound like Jim Cramer but people please don't use market orders!!!! It happens alot, and since these guys came from the industry it wouldn't be a large logical jump to conclude they are taking money from a fund that wants to trade against their uninformed flow they generate. Its scummy if true, but it happens. If you aren't a hedge fund then your trades are being sold:) Heck half the time if you are a fund your flow is also being sold:) Alternatively they have some sketchy fees which you can see here: https://brokerage-static.s3.amazonaws.com/assets/robinhood/legal/RHF%20Retail%20Commisions%20and%20Fees%20Schedule.pdf https://brokerage-static.s3.amazonaws.com/assets/robinhood/l... No fee to transfer money into them but a fee to get your money out is a big red flag. Hello Hotel California! EDIT to explain scummy, its because it allows the big funds to "jump the queue" if you will. Scummy may have been a poor choice of words. Rather than having to be active in the market with a quote on the NBBO, this allows the big funds to look at each order and say, pass, pass , take, pass, take, etc. If there is money in filling the order they will, if not they will pass it onto the market where it will either sit or get filed by those who actually participate in the market.