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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

#41

Post by VRay »

tptacek wrote: post #38
anonu wrote: post #35

Earlier quoted context omitted.

Typical internalizer trade is: 1. RH user wants to buy 1000 shares of XYZ. Offer price is $10.00 2. RH forwards the full order to their execution venue partner. They get paid (assuming SeekingAlpha story is true) $260/$1mm traded, or $2.60. 3. Executor takes the order and immediately sends 900 shares to the market, lifting the offers. Now best offer is $10.10 4. Executor facilitates the tail of the order, 100 shares,…

That's how you're saying the internalizer made money on it. Obviously, they make money on the order flow. The question is how they cost you anything. What could you have done differently to capture the $2.40 in hypothetical profits here?

He's saying if you spent a few weeks getting hooked up to the exchange directly, you possibly could have gotten your order filled for $10 a share

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

#42

Post by anonu »

tptacek wrote: post #38
anonu wrote: post #35

Earlier quoted context omitted.

Typical internalizer trade is: 1. RH user wants to buy 1000 shares of XYZ. Offer price is $10.00 2. RH forwards the full order to their execution venue partner. They get paid (assuming SeekingAlpha story is true) $260/$1mm traded, or $2.60. 3. Executor takes the order and immediately sends 900 shares to the market, lifting the offers. Now best offer is $10.10 4. Executor facilitates the tail of the order, 100 shares,…

That's how you're saying the internalizer made money on it. Obviously, they make money on the order flow. The question is how they cost you anything. What could you have done differently to capture the $2.40 in hypothetical profits here?

So, first off, I am not saying internalizers are all evil and that pfof is bad. That $2.40 your retail trade earned the internalizer is the price you pay for convenience and immediacy. You let someone else handle the order and they do what they want with it - within certain guidelines.

You could have saved the hypothetical $2.40 had you traded differently, albeit slower, and caused less market impact with your order. Of course, trading slower comes with its own slippage risk or opportunity cost that the market moves out of your favor. But it could also move in your favor... However, if you let a greedy HFT use your order to impact the market - it will always be out of your favor.

For a small retail guy, you are powerless unless there is a RobinHood 2.0 that decides to offer comm-free trades + does not sell your orders + makes money doing something else ... stock loan maybe?

EDIT: Also the HFTs hate limit orders because it reduces the amount they can internalize. They also generally have a contractual obligation to always execute your order. So you can always use a limit at or inside the offer if youre buying, and potentially save on that cost.

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

#43

Post by colinbartlett »

nodesocket wrote: post #32

ProTip: use LIMIT/STOP orders when buying and selling. Sending MARKET orders to Robinhood guarantees you going to get a "worse" price compared to the spot price.

Does this apply to an ordinary low-level retirement investor like me? If I am buying, let's say $500 a week, in some fund as part of my IRA, what does a LIMIT/STOP order do for me? I'm buying it no matter what, the share price is meaningless to me, I will just get more or less shares.

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

#44

Post by krn »

kasey_junk wrote: post #39
krn wrote: post #33

Earlier quoted context omitted.

Their entire business model seems to be extremely transparent[1], and they treat their users as customers, not products. I don't know what they are doing now, but I think that farming retail orders out is not something they would be focused on in the long run. It's more like "mobile-first Interactive Brokers for equity trading". [1] https://freetrade.io/pricing/

If you read their order-execution statement they are very clearly doing things that are going to have bad execution. Their 'default' order price is a market order that they promise will not clear until after hours or the next day. https://freetrade.io/order-execution/ This is quite possibly the worst way a retail investor could send in an order.

> Their 'default' order price is a market order that they promise will not clear until after hours or the next day.

Isn't this only true for the non-paying users, who are not subscribers of their premium plan? That's probably their entire (freemium) business model. It's the same with Revolut: free users might lose more money in foreign exchange and withdrawal fees, which pushes them to upgrade[1].

[1] https://www.revolut.com/pricing

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

#45

Post by tptacek »

anonu wrote: post #42
tptacek wrote: post #38

Earlier quoted context omitted.

That's how you're saying the internalizer made money on it. Obviously, they make money on the order flow. The question is how they cost you anything. What could you have done differently to capture the $2.40 in hypothetical profits here?

So, first off, I am not saying internalizers are all evil and that pfof is bad. That $2.40 your retail trade earned the internalizer is the price you pay for convenience and immediacy. You let someone else handle the order and they do what they want with it - within certain guidelines. You could have saved the hypothetical $2.40 had you traded differently, albeit slower, and caused less market impact with your order.…

I don't understand the outline of your argument. If what you're saying is true, then you can non-hypothetically save that $2.40 by... trading slower and with less impact on the market.

This is why I asked for specificity. Yes, we agree, internalizers pay for order flow because they can make money on it. The question is: can you make that money on your own order flow, or is the allocation of orders to internalizers Pareto-optimal?

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

#47

Post by tptacek »

krn wrote: post #44
kasey_junk wrote: post #39

Earlier quoted context omitted.

If you read their order-execution statement they are very clearly doing things that are going to have bad execution. Their 'default' order price is a market order that they promise will not clear until after hours or the next day. https://freetrade.io/order-execution/ This is quite possibly the worst way a retail investor could send in an order.

> Their 'default' order price is a market order that they promise will not clear until after hours or the next day. Isn't this only true for the non-paying users, who are not subscribers of their premium plan? That's probably their entire (freemium) business model. It's the same with Revolut: free users might lose more money in foreign exchange and withdrawal fees, which pushes them to upgrade[1]. [1] https://www.rev…

Even if you pay them $10/mo (whether you trade or don't, and keeping in mind that most people shouldn't be trading most months!), they still charge you for "instant" orders (the kind they don't delay purposely) in the one market they actually execute orders in.

Robinhood seems like a better deal.

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

#48

Post by nodesocket »

colinbartlett wrote: post #43
nodesocket wrote: post #32

ProTip: use LIMIT/STOP orders when buying and selling. Sending MARKET orders to Robinhood guarantees you going to get a "worse" price compared to the spot price.

Does this apply to an ordinary low-level retirement investor like me? If I am buying, let's say $500 a week, in some fund as part of my IRA, what does a LIMIT/STOP order do for me? I'm buying it no matter what, the share price is meaningless to me, I will just get more or less shares.

> what does a LIMIT/STOP order do for me?

For example buying a LIMIT says the highest price I am willing to pay per share is X. So you can be confident you'll get a price at least equal to or below the limit price.

> the share price is meaningless to me

??? Confused. Do you like buying high and selling low?

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

#49

Post by kasey_junk »

colinbartlett wrote: post #43
nodesocket wrote: post #32

ProTip: use LIMIT/STOP orders when buying and selling. Sending MARKET orders to Robinhood guarantees you going to get a "worse" price compared to the spot price.

Does this apply to an ordinary low-level retirement investor like me? If I am buying, let's say $500 a week, in some fund as part of my IRA, what does a LIMIT/STOP order do for me? I'm buying it no matter what, the share price is meaningless to me, I will just get more or less shares.

It’s virtually free protection against flash crashes & other market oddities.

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

#50

Post by pazimzadeh »

I'm not sure I completely understand this article, but I'd like to take this opportunity to rant about my recent experience using Robinhood. Two weeks ago I noticed that Tesla stock dropped significantly after the SEC's investigation into Elon Musk's "funding secured" tweet led to Elon being ousted as chairman of the board. I thought the stock would recover from this, so I placed a market price order for TSLA shares on Sunday night (September 30th). Indeed, on Monday the stock rose +17% but lo and behold, my order never went through. The reason given was that the stock price had supposedly changed by at least 5% by the time the market opened. I suspect this is because Robinhood prioritizes orders from high speed trading firms over its own customers. Is this common practice, and can anyone recommend a service that doesn't do this? Thanks in advance.
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