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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 p

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.

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.