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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

#21

Post by dawhizkid »

anonu wrote: post #20
dawhizkid wrote: post #18

Earlier quoted context omitted.

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.

Why would HFTs pay so much more for order flow from Robinhood vs other online brokerages?

Re: Robinhood Gets Almost Half Its Revenue from Bargain with High-Speed Traders

#22

Post by tptacek »

dawhizkid wrote: post #21
anonu wrote: post #20

Earlier quoted context omitted.

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.

Why would HFTs pay so much more for order flow from Robinhood vs other online brokerages?

Because individual retail traders are (a) generally uninformed and (b) relative to institutions, have very small positions they want to move in the market. Those orders are intrinsically more valuable, because they aren't risky to make markets for.

Essentially, your trades have a lower cost basis than those of institutions. But the markets are generally priced assuming institutional traders. So if firms know you're not an exchange they can save some money on you, and Robinhood literally passes some of those savings to you.

(I don't love Robinhood or anything, but the model makes perfect sense.)

Re: Robinhood Gets Almost Half Its Revenue from Bargain with High-Speed Traders

#23

Post by physguy1123 »

394549 wrote: post #4
kasey_junk wrote: post #3

Earlier quoted context omitted.

This is true, but it uses an unfortunate industry term that is more pejorative sounding than it actually is. When people in the industry talk about 'dumb money' they aren't talking about how informed or intelligent the order flow is. They are talking about how likely the order relates to market structure. An individual investor who has looked at their portfolio and decided that the best move for their investment hori…

> They are talking about how likely the order relates to market structure. What do you mean by "market structure?"

In this specific case, it means that retail flow is much less likely to immediately move the market than flow from an informed (knows the market will move soon) or large (will trade so much that it will move the market) player, and is much more valuable to market makers who try to capture the spread on that order (and usually improve it) and hedge/trade out of that risk relatively soon.

Re: Robinhood Gets Almost Half Its Revenue from Bargain with High-Speed Traders

#24

Post by [deleted] »

dawhizkid wrote: post #18
anonu wrote: post #15

This 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…

[deleted]

Re: Robinhood Gets Almost Half Its Revenue from Bargain with High-Speed Traders

#25

Post by kasey_junk »

MistaEd wrote: post #11
ForHackernews wrote: post #2

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!

I don't have any inside information about Robinhood's infrastructure, but I'd be willing to bet the mobile phone thing is a red herring.

HFT will take that bet on the other side of every retail investor they can get their hands on, including those with very sophisticated trading terminals. For that matter they will take the other side for very sophisticated non-retail investors so long as its non-directional flow.

Re: Robinhood Gets Almost Half Its Revenue from Bargain with High-Speed Traders

#27

Post by tptacek »

anonu wrote: post #14
gammateam wrote: post #6

As 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...

Exactly how do you think you're paying it here? Be specific.

Later: to be clear, my subtext is that Robinhood customers aren't actually paying anything and are sort of getting a free lunch here. The money Robinhood pockets from your trades isn't available to you in any form, at least until someone starts the brokerage that pays you to trade.

Re: Robinhood Gets Almost Half Its Revenue from Bargain with High-Speed Traders

#28

Post by tptacek »

krn wrote: post #26

Freetrade[1] is a crowdfunded European alternative to Robinhood. [1] https://freetrade.io/

Does Freetrade say somewhere that they don't pay for execution services from some other company? If they don't, is that a good thing? Doesn't that imply that they think they can outcompete Citadel and Two Sigma on execution? Because, like, they can't? Right?

Re: Robinhood Gets Almost Half Its Revenue from Bargain with High-Speed Traders

#29

Post by krn »

tptacek wrote: post #28
krn wrote: post #26

Freetrade[1] is a crowdfunded European alternative to Robinhood. [1] https://freetrade.io/

Does Freetrade say somewhere that they don't pay for execution services from some other company? If they don't, is that a good thing? Doesn't that imply that they think they can outcompete Citadel and Two Sigma on execution? Because, like, they can't? Right?

> A year in the making, Freetrade has built a bona-fide “challenger broker,” including obtaining the required license from the FCA (the U.K. regulator), rather than simply partnering with an established broker as it is understood Revolut initially plans to do. This, Dodds explained on a call, has enabled the startup to plug directly into the capital markets “piping,” with as few intermediaries as possible. It means Freetrade can execute trades on its own behalf and ultimately be much more in control of its own destiny. It should also help the startup maintain a lower cost-base as the app scales.

https://techcrunch.com/2018/10/02/freetrade/

Re: Robinhood Gets Almost Half Its Revenue from Bargain with High-Speed Traders

#30

Post by tptacek »

krn wrote: post #29
tptacek wrote: post #28

Earlier quoted context omitted.

Does Freetrade say somewhere that they don't pay for execution services from some other company? If they don't, is that a good thing? Doesn't that imply that they think they can outcompete Citadel and Two Sigma on execution? Because, like, they can't? Right?

> A year in the making, Freetrade has built a bona-fide “challenger broker,” including obtaining the required license from the FCA (the U.K. regulator), rather than simply partnering with an established broker as it is understood Revolut initially plans to do. This, Dodds explained on a call, has enabled the startup to plug directly into the capital markets “piping,” with as few intermediaries as possible. It means F…

I saw that, but that just says they have (in some circumstances) the option to place their orders. I'm unclear why that would necessarily be a good thing, but either way: have they made a clear statement that they're not farming retail orders out to other firms? If they are, they're going to get paid for them.
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