Dumb money for sale.
would you like to take the opposite position on a portfolio of retail investors trading for free on their mobile phones...HFTs, like ummm yes please!
Robinhood Gets Almost Half Its Revenue from Bargain with High-Speed Traders
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Re: Robinhood Gets Almost Half Its Revenue from Bargain with High-Speed Traders
#12I was under the impression that retail order flow is mostly useless to HFT and they make money on large institutional moves - retail investors just don't affect the market enough for it to matter. Is that a wrong assumption? If not, seems like maybe RH is just taking advantage of the rebate for not much benefit to Citadel?
It's the other way around. Retail flow is uninformed. Many crossing opportunities as well. It's extremely valuable to hft folks.
On the other hand if you're trading against a hedge fund... You don't know what info they have. You also don't know when they'll stop buying or selling. Their orders could come across multiple days. You don't want to touch that stuff
Re: Robinhood Gets Almost Half Its Revenue from Bargain with High-Speed Traders
#13I was under the impression that retail order flow is mostly useless to HFT and they make money on large institutional moves - retail investors just don't affect the market enough for it to matter. Is that a wrong assumption? If not, seems like maybe RH is just taking advantage of the rebate for not much benefit to Citadel?
> retail order flow is mostly useless to HFT and they make money on large institutional moves
This is incorrect. Retail volumes are smaller. (This also makes them less risky to fill and offload.) But spreads are wider.
I worked on an algorithmic derivatives desk many years ago. We paid a well-known national broker lots of money to get their options flow. Their customers were notorious for forgetting to exercise slightly in-the-money options, putting in misplaced limit orders, putting in market orders for illiquid names, et cetera.
Robinhood has its hands on the money of a generation that was too young to lose money in the last crisis.
Re: Robinhood Gets Almost Half Its Revenue from Bargain with High-Speed Traders
#14As someone that paid $25,000 in options commissions in 2015 even after negotiating down to 50 cents/contract and no ticket charge, free options trading in exchange for my trade data is a fair trade Now if only they'd give the option of Portfolio Margining instead of just Reg-T margining, I'd let the HFT's pair-program with me in person.
It's never free. You're always paying somewhere. If not explicitly, you're paying via spreads or rich options valuations when you're buying...
Re: Robinhood Gets Almost Half Its Revenue from Bargain with High-Speed Traders
#15This is called pfof. Pay for order flow. It's very common practice to sell retail flow or exhaust flow to the likes of citadel and a dozen others.
The buyers make money by either taking the spread on an order, reducing risk in their own portfolio or using the order to create impact and internalizing the tail.
Re: Robinhood Gets Almost Half Its Revenue from Bargain with High-Speed Traders
#16Once again: if the product is free it usually means you are the product.
Re: Robinhood Gets Almost Half Its Revenue from Bargain with High-Speed Traders
#17This is called pfof. Pay for order flow. It's very common practice to sell retail flow or exhaust flow to the likes of citadel and a dozen others. The buyers make money by either taking the spread on an order, reducing risk in their own portfolio or using the order to create impact and internalizing the tail.
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Re: Robinhood Gets Almost Half Its Revenue from Bargain with High-Speed Traders
#18This is called pfof. Pay for order flow. It's very common practice to sell retail flow or exhaust flow to the likes of citadel and a dozen others. The buyers make money by either taking the spread on an order, reducing risk in their own portfolio or using the order to create impact and internalizing the tail.
According to this analysis https://seekingalpha.com/article/4205379-robinhood-making-mi... HFTs pay Robinhood significantly more for their order flow than other brokerage firms i.e. claiming almost 12x more than E-Trade makes ($260 per $1m in orders vs $22 per $1m). If this is true (I haven't independently verified but these fees must be published publicly by law), then clearly HFTs are getting something more from RH than they are from other brokerages.
The author goes on to say "Robinhood is well on their way to making hundreds of millions of dollars in cash income by selling their customers' orders to the HFT meat grinder. High-frequency traders are not charities. The only reason high-frequency traders would pay Robinhood tens to hundreds of millions of dollars is that they can exploit the retail customers for far more than they pay Robinhood."
Re: Robinhood Gets Almost Half Its Revenue from Bargain with High-Speed Traders
#19Isn't this the entire idea behind Robinhood? Obviously, they make money elsewhere (from interests on deposits?) but hasn't it been clear for years that they were getting paid by internalizers for order flow?
Whoever you use to place stock market orders is also getting paid the same way. People have a funny idea of what a retail brokerage does. They do not execute orders on exchanges for you; that's a specialized capability that long ago became its own kind of company. Retail brokerages specialize in picking up the phone when you call with a complaint or request, and in advertising to acquire users.
You shouldn't care. The reason your order flow is valuable isn't that Citadel is trying to screw you. Rather, they can (occasionally) quote you better prices than they do the market as a whole, because they know you're not a giant investment bank or hedge fund about to roll over them like a freight train with a giant block order that will demolish every level of the order book. Internalizers can essentially arbitrage the difference. They're required by law to meet or improve the NBBO.
Re: Robinhood Gets Almost Half Its Revenue from Bargain with High-Speed Traders
#20This is called pfof. Pay for order flow. It's very common practice to sell retail flow or exhaust flow to the likes of citadel and a dozen others. The buyers make money by either taking the spread on an order, reducing risk in their own portfolio or using the order to create impact and internalizing the tail.
According to this analysis https://seekingalpha.com/article/4205379-robinhood-making-mi... HFTs pay Robinhood significantly more for their order flow than other brokerage firms i.e. claiming almost 12x more than E-Trade makes ($260 per $1m in orders vs $22 per $1m). If this is true (I haven't independently verified but these fees must be published publicly by law), then clearly HFTs are getting something more from RH…
I read that analysis when it came out. I'm not sure how accurate it is... in the end Robinhood still needs to make money since they aren't charging the typical per trade commissions.
You can probably back out what the HFTs margin is on this stuff by looking at public financials... KCG was public for a while.