Robinhood raises $323M at a $7.6B valuation • Hacker News Board

Re: Robinhood raises $323M at a $7.6B valuation

#101

Post by anonu » Tue, Jul 23, 2019, 1:12 AM UTC

mattferderer wrote: post #21

I'm curious if anyone with knowledge can speak to how Robinhood sells data to high frequency traders? This seems to result in a large percentage of their revenue which of course makes sense due to not having commission revenue. I've also heard some people argue if you're investing a decent amount, you're better off with commissions over market orders on Robinhood. The arguments were the above & that orders can take a…

Robinhood sells their order flow to the likes of Citadel, Virtu, etc.. These are called "internalizers" and they will often "Pay for Order Flow" or pfof. pfof flow is certainly profitable, because its "retail" and bi-directional. But it's not THAT profitable. For the big guys, it might be a few $10s of millions of dollars in revenue/years. But that revenue is significantly defrayed by the cost to purchase the flow - which is easily in the $10s of millions/year as well. Net net, its still a drop in the bucket compared to money being made in other strategies.

Typically, these pfof arrangements require price improvement from the bid-ask. So the retail guy benefits a negligible amount on their trade (1/10th of a penny for example). This may be good for the retail guys in aggregate. There is also some immediacy to an order getting filled (also a requirement) that may not be there if the internalizers didnt exist.

Robinhood's valuation comes from the net interest (borrowing short and lending long) and from the upsell of services.

https://news.ycombinator.com/item?id=20276551 Where attention should be turned is whether RobinHood is investing or gambling. More money is lost punting on the markets than through any arrangements to hi-freq guys.

Re: Robinhood raises $323M at a $7.6B valuation

#102

Post by robjan » Tue, Jul 23, 2019, 1:44 AM UTC

hakanito wrote: post #63

throwaway5752 wrote: post #30

Earlier quoted context omitted.

Is there a way to allow shorts without having to manage margin and having to carry risk on the balance sheet? They have to deal with two counterparties (you, and whomever is lending you the shares). I am not sure how they could economically offer free short trades.

On BitMEX you can make leveraged short/long bitcoin trades without the downside of owing more than you put in. Max you can lose is 100%. It’s powered by a purpose-built stoploss liquidation engine

Stoploss only works under fairly stable market conditions. If the sell orderbook suddenly starts to get a lot bigger than the buy side then it's likely that the price will fall below your limit price before the order fills.

Re: Robinhood raises $323M at a $7.6B valuation

#103

Post by vasilipupkin » Tue, Jul 23, 2019, 1:48 AM UTC

jackmodern wrote: post #97

raiyu wrote: post #96

Earlier quoted context omitted.

So this isn't about moving the market itself with the orders. There are numerous exchanges on which shares are bought and sold. They aren't just traded on the NYSE and NASDAQ. In fact most large investor institutions have their own Dark Pool exchanges. What Robin Hood does is sell the orders to high frequency traders, which then front run these orders and can great a small incremental disparity per trade. It's not ev…

I disagree with a lot of this comment, but the largest most glaring mistake is around the perception that robinhood is without fees. Robinhood takes their cut by creating a larger than normal bid/ask spread. I promise you their cut is more than $.50 and most likely > $7 (at least in Crypto land where I have witnessed this behavior). To think that HFT firms are using this data to only front run orders also feels prett…

It’s sctually the opposite: retail orders have no information about direction of market, so the profitable thing is not to “front run”, but to trade in the opposite direction of the retail order. If the retail order is selling the bid price, you want to buy the bid because you know on average those retail orders don’t indicate that market is going in any direction

Re: Robinhood raises $323M at a $7.6B valuation

#104

Post by Kranar » Tue, Jul 23, 2019, 1:51 AM UTC

jackmodern wrote: post #97

raiyu wrote: post #96

Earlier quoted context omitted.

So this isn't about moving the market itself with the orders. There are numerous exchanges on which shares are bought and sold. They aren't just traded on the NYSE and NASDAQ. In fact most large investor institutions have their own Dark Pool exchanges. What Robin Hood does is sell the orders to high frequency traders, which then front run these orders and can great a small incremental disparity per trade. It's not ev…

I disagree with a lot of this comment, but the largest most glaring mistake is around the perception that robinhood is without fees. Robinhood takes their cut by creating a larger than normal bid/ask spread. I promise you their cut is more than $.50 and most likely > $7 (at least in Crypto land where I have witnessed this behavior). To think that HFT firms are using this data to only front run orders also feels prett…

What you're describing is illegal in most regulated markets around the world and certainly illegal on U.S. markets [1]. Brokers are legally required as per Reg NMS to offer the best quote to their customers.

https://en.wikipedia.org/wiki/Regulation_NMS

Re: Robinhood raises $323M at a $7.6B valuation

#105

Post by Kranar » Tue, Jul 23, 2019, 1:55 AM UTC

elamje wrote: post #56

mattferderer wrote: post #21

I'm curious if anyone with knowledge can speak to how Robinhood sells data to high frequency traders? This seems to result in a large percentage of their revenue which of course makes sense due to not having commission revenue. I've also heard some people argue if you're investing a decent amount, you're better off with commissions over market orders on Robinhood. The arguments were the above & that orders can take a…

TLDR; question answer: An HFT makes money because they see you want to buy 100 shares of Apple. Their servers are located in the exchanges, so they can buy the 100 shares of Apple for $99.99 each quickly, then flip them to you for $100 each, effectively giving them a risk free profit of $1. The HFT then gives Robinhood a small reward for sending them the order data. Multiply that times millions of trades a day. If yo…

What you're describing is illegal activity and no brokerage engages in anything remotely close to it.

It's quite frustrating since I actually work for an HFT firm and the amount of misinformation about it in this comment thread is absolutely overwhelming. I don't even know where to start to debunk so many of the claims being made about front-running, or how paying for order flow works... all I can say is that reading through these comments really reinforces the point that plenty of people without any experience or background in a topic will talk about it as if they are experts in that field and there's no way to know who is and isn't knowledgeable on certain technically sophisticated topics.

Basically, take a topic that you're an expert in, find a discussion about that topic on the Internet and see just how much misinformation there is out there about it. Now consider all the topics you're not an expert in but read about on Internet discussion forums and you have to conclude that most of what people say is basically conjecture, speculation, and rumors with no sensible way to discern who is who.

It's kind of depressing.

Re: Robinhood raises $323M at a $7.6B valuation

#106

Post by Lazare » Tue, Jul 23, 2019, 2:00 AM UTC

jackmodern wrote: post #97

raiyu wrote: post #96

Earlier quoted context omitted.

So this isn't about moving the market itself with the orders. There are numerous exchanges on which shares are bought and sold. They aren't just traded on the NYSE and NASDAQ. In fact most large investor institutions have their own Dark Pool exchanges. What Robin Hood does is sell the orders to high frequency traders, which then front run these orders and can great a small incremental disparity per trade. It's not ev…

I disagree with a lot of this comment, but the largest most glaring mistake is around the perception that robinhood is without fees. Robinhood takes their cut by creating a larger than normal bid/ask spread. I promise you their cut is more than $.50 and most likely > $7 (at least in Crypto land where I have witnessed this behavior). To think that HFT firms are using this data to only front run orders also feels prett…

> I promise you their cut is more than $.50 and most likely > $7

For stocks? Absolutely not. You get the National Best Bid or Offer (NBBO), as required by law, ie, the best spread available on the public stock markets.

> at least in Crypto land

Well, maybe there's your mistake.

> To think that HFT firms are using this data to only front run orders

They're not using it to front run orders. Not only is that illegal, but it's also in this case impossible by definition. You front run an order that might move the market by trading in advance of it, but in this case the internalisers are paying for retail order flow because it won't move the market. That's the only reason it has value to them. And because it won't move the market, you (obviously) can't get out in front of that market movement.

I'd suggest doing a bit more research.

Re: Robinhood raises $323M at a $7.6B valuation

#107

Post by Lazare » Tue, Jul 23, 2019, 2:02 AM UTC

elamje wrote: post #88

tomp wrote: post #75

Earlier quoted context omitted.

> Their servers are located in the exchanges, so they can buy the 100 shares of Apple for $99.99 each quickly, then flip them to you for $100 each, effectively giving them a risk free profit of $1. I don't know a lot about trading US equities, but this sounds wrong. Brokers are required by law to give their customers the best price ($99.99 in your example). https://en.wikipedia.org/wiki/National_best_bid_and_offer

Brokers are required to, yes. But Robinhood doesn’t submit orders directly to exchanges, it always passes through a middle man who has to collect some fee for their service.

> Brokers are required to, yes.

Correct. And Robinhood is a broker, so it is also required to.

> Robinhood doesn’t submit orders directly to exchanges

Correct, but irrelevent.

> it always passes through a middle man

Correct.

> who has to collect some fee for their service.

Incorrect. They are not charging Robinhood (or their customers) a fee.

Robinhood's clients get the NBBO, as required by law, full stop. There's no trick here.

Re: Robinhood raises $323M at a $7.6B valuation

#108

Post by Lazare » Tue, Jul 23, 2019, 2:05 AM UTC

raiyu wrote: post #96

mattferderer wrote: post #21

I'm curious if anyone with knowledge can speak to how Robinhood sells data to high frequency traders? This seems to result in a large percentage of their revenue which of course makes sense due to not having commission revenue. I've also heard some people argue if you're investing a decent amount, you're better off with commissions over market orders on Robinhood. The arguments were the above & that orders can take a…

So this isn't about moving the market itself with the orders. There are numerous exchanges on which shares are bought and sold. They aren't just traded on the NYSE and NASDAQ. In fact most large investor institutions have their own Dark Pool exchanges. What Robin Hood does is sell the orders to high frequency traders, which then front run these orders and can great a small incremental disparity per trade. It's not ev…

Internalisers do not "front run" retail orders. That's not even a thing you can do; the idea of front running is to get ahead of a trade that will move the market, but the internalisers are buying retail order flow because it won't. If the order isn't moving the market, you can't "get in front of it".

If front running happens at all (and by strict definitions, it really doesn't), it certainly isn't happening to Robinhood customers (or the custoemrs of any other discount brokerage).

Re: Robinhood raises $323M at a $7.6B valuation

#109

Post by elamje » Tue, Jul 23, 2019, 2:40 AM UTC

Kranar wrote: post #105

elamje wrote: post #56

Earlier quoted context omitted.

TLDR; question answer: An HFT makes money because they see you want to buy 100 shares of Apple. Their servers are located in the exchanges, so they can buy the 100 shares of Apple for $99.99 each quickly, then flip them to you for $100 each, effectively giving them a risk free profit of $1. The HFT then gives Robinhood a small reward for sending them the order data. Multiply that times millions of trades a day. If yo…

What you're describing is illegal activity and no brokerage engages in anything remotely close to it. It's quite frustrating since I actually work for an HFT firm and the amount of misinformation about it in this comment thread is absolutely overwhelming. I don't even know where to start to debunk so many of the claims being made about front-running, or how paying for order flow works... all I can say is that reading…

I appreciate your comment. Can you clarify how Robinhood gets compensated for Payment for Order flow?

Additionally why is it that they get a better rate than most retail brokerage houses with much more volume?

Re: Robinhood raises $323M at a $7.6B valuation

#110

Post by [deleted] » Tue, Jul 23, 2019, 3:08 AM UTC

SergeAx wrote: post #94

rolltiide wrote: post #72

Earlier quoted context omitted.

well the money is clean now and Sequoia followed the lead, so nobody important cares about that, lets stop spending resources on whitelisting monetary transactions to begin with. the audacity to try to limit capital flows based on owner behavior was always misguided. if you disagree with something Alisher did, then you have to indict the people that actually did it. vilifying money is just lazy.

Of course the money is clean now, that's the sole purpose of DST Global.

[deleted]