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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?
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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.
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,…
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…
Isn'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 capa…
Interactive Brokers does not sell your order flow
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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.…
There is no market out there that lets you trade slower in return for providing a smaller margin for market makers. It is possible to build one, but it would look so different from existing markets that it would be an uphill battle to get people to adopt it.
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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.
That's a good point. It's hard to compare a crowdfunded company with a one burning through more than 500 mln USD in VC funding. But I see no reason why people shouldn't be increasing their passive portfolios every month if they can. And with many brokers, $10 is around a minimum commission for a single trade.
I 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 sligh…
> Equity options $0.01 or more in the money will be automatically exercised for you unless you instruct us not to exercise them.
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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 Pa…
Internalizers want the entire order. If RH splits a order across multiple internalizers they will not be happy. So RH allocates in a Pareto-optimal way. As the order creator, you cannot earn that $2.40, you can only save by getting a better price.