SEC charges Robinhood $65M for misleading customers about revenue sources • Hacker News Board

Re: SEC charges Robinhood $65M for misleading customers about revenue sources

#211

Post by notfbi » Thu, Dec 17, 2020, 6:03 PM UTC

jellicle wrote: post #168

sonotmyname wrote: post #158

> The order finds that Robinhood provided inferior trade prices that in aggregate deprived customers of $34.1 million even after taking into account the savings from not paying a commission. $65M penalty for $35M in misbehavior. That is how you get Wall Street to pay attention. More like this please!

No, much more than $34M in misbehavior. Hurt customers by $34M over what they would have been charged if they had paid commissions. So Robinhood took money from its customers to this extent: all the cash as if its customers were paying commissions, and also $34M, and for that they're being fined $65M, which will probably be negotiated down to $2M or something like that.

The 34 million calculation is only for "certain" orders. I think this means some trades would be advantageous under the RH model (small trades where a $5 fixed commission would overwhelm any percentage), some trades would be disadvantageous under the RH model (very large value trades), and they only summed the comparative fees on the disadvantageous trades.

This might make sense: if users were knowledgeable and had multiple brokers, they may execute at the better trade-specific broker for each trade, so adding up just the potential bads gives some perspective. But on the other hand, it's not a perfect indicator for Robinhood's net gain as its omitting trades where Robinhood's structure leads to lower commission.

Re: SEC charges Robinhood $65M for misleading customers about revenue sources

#212

Post by smabie » Thu, Dec 17, 2020, 6:04 PM UTC

bagacrap wrote: post #95

_cs2017_ wrote: post #88

ELI5: why exactly did the clients get bad execution? Does sending order flow to trading firms in itself cause unfavorable execution? Or did the trading firms treat order flow from RH differently than from other sources? Or is it something else? And does the fact that RH was receiving large payments for order flow impact the quality of execution?

Payment for order flow trade never helps the consumer. RH accepted unusually large amounts of it. They harmed the consumers to the tune of $34m relative to normal practices. They lied about what they were doing.

payment for order flow helps the consumer a lot. By separating toxic from non-toxic order flows, retail traders get much better price improvements than institutional traders.

Re: SEC charges Robinhood $65M for misleading customers about revenue sources

#213

Post by arcticbull » Thu, Dec 17, 2020, 6:07 PM UTC

tptacek wrote: post #203

vslira wrote: post #184

Earlier quoted context omitted.

In order words: if I want to buy something that costs 100, the broker is free to get me a price of 95, but they were colluding with the players able to offer this discount to offer me 97 instead and pocket the extra 2, something like that?

There is a notional standard "best price", the NBBO, that a broker-dealer has to meet; you can't take payment to route an order somewhere that doesn't meet the NBBO. But the NBBO captures pricing from all kinds of traders. Retail traders are cheaper to trade with than institutional traders, because retail traders aren't moving gigantic blocks of stock that are going to blow up the market makers that are facilitating…

FWIW InteractiveBrokers, in their Pro accounts (the one you pay albeit very low commission fees for) doesn't accept payment for order flow. Their Lite accounts (the one they launched to compete with RobinHood) do accept PFOF. [1, 2]

[1] https://www.reuters.com/article/us-usa-brokers-fees-idUSKBN1...

[2] https://gdcdyn.interactivebrokers.com/Universal/servlet/Regi...

Re: SEC charges Robinhood $65M for misleading customers about revenue sources

#214

Post by Stupulous » Thu, Dec 17, 2020, 6:08 PM UTC

brookshalladay wrote: post #64

I always wondered about the name 'Robinhood' since it applies taking from the rich and giving to the poor. Maybe it could be renamed to Sheriff of Nottingham.

I believe the idea is that they are taking access to finance from the rich and giving it to the poor. Commissions are often flat dollar amounts, so the more money you have, the less significant they are. Charging a percentage (which this is effectively doing) benefits small trades and hurts large ones. And I believe they still meet or beat market rates, they just find savings that they don't pass along to the traders. No doubt the Robin Hood of myth turned a profit as well.

Re: SEC charges Robinhood $65M for misleading customers about revenue sources

#215

Post by blueblisters » Thu, Dec 17, 2020, 6:09 PM UTC

tptacek wrote: post #203

vslira wrote: post #184

Earlier quoted context omitted.

In order words: if I want to buy something that costs 100, the broker is free to get me a price of 95, but they were colluding with the players able to offer this discount to offer me 97 instead and pocket the extra 2, something like that?

There is a notional standard "best price", the NBBO, that a broker-dealer has to meet; you can't take payment to route an order somewhere that doesn't meet the NBBO. But the NBBO captures pricing from all kinds of traders. Retail traders are cheaper to trade with than institutional traders, because retail traders aren't moving gigantic blocks of stock that are going to blow up the market makers that are facilitating…

Why don't brokers place orders directly with the exchange? Is it more efficient to do it via market makers?

Re: SEC charges Robinhood $65M for misleading customers about revenue sources

#216

Post by andylynch » Thu, Dec 17, 2020, 6:20 PM UTC

Shivetya wrote: post #153

gamerDude wrote: post #6

If the SEC has gone through and has accounted for the 34 million in cost to consumers, why are they not having robinhood reimburse the customers for their lost money on the trades and then charging the additional 30 million on top for lying? Why does the SEC take all the money?

What would be a really good law. Anytime a company is fined by the SEC it has to post that at the top of their home page similar to how restaurants have t display health scores. Of course it would need to have a plain English requirement. Bonus points for having web browsers flag such sites as well similar to how they can flag sites for being breached

Kind of done by brokercheck, eg https://brokercheck.finra.org/firm/summary/165998

Most SEC and similar sanctions are well covered in the media and especially financial press, as we see here.

Re: SEC charges Robinhood $65M for misleading customers about revenue sources

#217

Post by jjtheblunt » Thu, Dec 17, 2020, 6:20 PM UTC

willdearden wrote: post #197

vslira wrote: post #184

Earlier quoted context omitted.

In order words: if I want to buy something that costs 100, the broker is free to get me a price of 95, but they were colluding with the players able to offer this discount to offer me 97 instead and pocket the extra 2, something like that?

More like broker 1 offered it to me for 95 and to pay Robinhood 1. Broker 2 offered it to me for 97 and to pay Robinhood 2. Robinhood took the offer from broker 2. No collusion necessary but they weren’t acting in the best interests of their customers according to stated offers.

I always thought that Robinhood's customers were not folks with the Robinhood app, but rather the association of their traffic with clearing houses like Citadel?

Re: SEC charges Robinhood $65M for misleading customers about revenue sources

#218

Post by jjeaff » Thu, Dec 17, 2020, 6:23 PM UTC

SilasX wrote: post #206

VWWHFSfQ wrote: post #31

Earlier quoted context omitted.

SEC doesn't work on behalf of consumers, it works on behalf of the federal government. Robinhood customers are still free to bring lawsuits against the company and those would be heard in courts.

That ... seems like a pointlessly inefficient way to do things.

It's more about deterrent than returning the money.

The amount of money per customer is probably a few dollars at most. It wouldn't be efficient to return that money and would probably be better used for future cases and prevention.

Re: SEC charges Robinhood $65M for misleading customers about revenue sources

#219

Post by smogcutter » Thu, Dec 17, 2020, 6:24 PM UTC

smabie wrote: post #207

tptacek wrote: post #203

Earlier quoted context omitted.

There is a notional standard "best price", the NBBO, that a broker-dealer has to meet; you can't take payment to route an order somewhere that doesn't meet the NBBO. But the NBBO captures pricing from all kinds of traders. Retail traders are cheaper to trade with than institutional traders, because retail traders aren't moving gigantic blocks of stock that are going to blow up the market makers that are facilitating…

I work at a market maker, and what you say is mostly correct. However, I would like to add that retail customers get better prices not primarily because they move less volume (though this is certainly a factor), but because their order flow is significantly less toxic. Retail traders don't really know anything and their order flow contains less alpha, so market makers can quote better prices to them without getting r…

Just to check my own understanding...

So roughly, the idea is that if I’m smart money (say a big hedge fund or institutional trader), behind any of my trades is an implication that I know something worthwhile. So my trades will move the market, and this can leave market makers holding the bag if prices move quickly.

But if I‘m the proverbial dentist, my trades are just noise that don’t signal anything real about the market. I can get better execution because market makers aren’t worried about my trades moving the price out from under them.

Am I in the right neighborhood here?

Re: SEC charges Robinhood $65M for misleading customers about revenue sources

#220

Post by tptacek » Thu, Dec 17, 2020, 6:28 PM UTC

blueblisters wrote: post #215

tptacek wrote: post #203

Earlier quoted context omitted.

There is a notional standard "best price", the NBBO, that a broker-dealer has to meet; you can't take payment to route an order somewhere that doesn't meet the NBBO. But the NBBO captures pricing from all kinds of traders. Retail traders are cheaper to trade with than institutional traders, because retail traders aren't moving gigantic blocks of stock that are going to blow up the market makers that are facilitating…

Why don't brokers place orders directly with the exchange? Is it more efficient to do it via market makers?

(1) There are lots of different exchanges and trading venues, not just one.

(2) Electronic market makers have expertise in order execution and have invested huge amounts of money in software platforms to automate it, which they're effectively renting out to broker-dealers.

(3) Some of these firms have other sources of inventory they can clear trades against.

There are probably 10 other more important reasons I just don't know about.

What I think it comes down to is that order execution is a big job, and being able to effectively answer the phone and run the right billboards and TV ads is also a big job, and firms like Citadel and Virtu are good at the former and firms like Ameritrade are good at the latter.