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

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

#221

Post by kolbe »

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?

This is a great question, and one that SCOTUS ruled on [1] earlier this year. I had hoped that the decision would result in the people who were wronged getting their money back, but it would seem not.

[1] https://www.scotusblog.com/2020/06/opinion-analysis-justices...

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

#222

Post by tptacek »

smogcutter wrote: post #219
smabie wrote: post #207

Earlier quoted context omitted.

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…

You are putting it almost exactly how Matt Levine puts it.

I would just sneak in the point that, to my understanding --- and the previous commenter would know better than I do --- one of the big information advantages institutional traders have is simply the knowledge that their order is the first of 1000 identical orders they're about to follow up with.

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

#223

Post by tptacek »

arcticbull wrote: post #213
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…

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...

IB Pro is the reason I used the word "virtually". :P

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

#224

Post by smabie »

smogcutter wrote: post #219
smabie wrote: post #207

Earlier quoted context omitted.

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…

Yep, that's pretty much spot on.

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

#225

Post by librish »

smogcutter wrote: post #219
smabie wrote: post #207

Earlier quoted context omitted.

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…

My understanding is that it's not that the trades themselves will move the market, but it's likely that the market will move.

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

#226

Post by smabie »

tptacek wrote: post #222
smogcutter wrote: post #219

Earlier quoted context omitted.

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…

You are putting it almost exactly how Matt Levine puts it. I would just sneak in the point that, to my understanding --- and the previous commenter would know better than I do --- one of the big information advantages institutional traders have is simply the knowledge that their order is the first of 1000 identical orders they're about to follow up with.

Yes, this is also a good point. Retail trades are more likely to express real demand. When a retail traders puts in an order for 135 shares, say, it's most likely that's an accurate and complete signal of that traders intentions: they are looking to buy 135 shares. For institutional players, it could be an iceberg order: once the 135 shares are filled, the refill the order with another 135, again and again. So the actual orders they submit are less representative of their actual intent, making handling their trades much more risky.

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

#227

Post by maerF0x0 »

Does all this inferior execution boil down to Market orders? I learned early on (iirc from Jim Cramer!) to use limit orders.

There would never be an inferior execution with limit orders, right?

EDIT: this comment seems to speak to the topic: https://news.ycombinator.com/item?id=25456763

according to ^^ even if you limit buy for $100 they have a duty to get you $99 if it's available.

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

#228

Post by pochamago »

I confess I don't really understand the controversy here. I thought everyone who cared was already aware of how RH makes its money, and everyone who didn't was still getting a better deal per trade than they would have with traditional brokers. I ended up switching away from RH once my trades for big enough that other brokers were effectively taking less, but I'm still really grateful that I was able to learn the ins and outs of standard speculation with a $500 account

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

#229

Post by tptacek »

pochamago wrote: post #228

I confess I don't really understand the controversy here. I thought everyone who cared was already aware of how RH makes its money, and everyone who didn't was still getting a better deal per trade than they would have with traditional brokers. I ended up switching away from RH once my trades for big enough that other brokers were effectively taking less, but I'm still really grateful that I was able to learn the ins…

* Basically all of the brokerages make money this way.

* Robinhood took a bigger slice of the pie than the other brokerages did.

* Robinhood claimed in marketing materials that they were not taking more of the pie.

* Even factoring in the fee savings, Robinhood took so much of the pie that you'd get a better deal at other brokerages.

The issue on HN is always going to be a litigation about PFOF itself. But that's not the SEC's complaint here; rather, it's that when you enter into a PFOF rebate deal, you dial in profits for yourself against savings for customers. Everybody does that, but Robinhood both (1) turned the dial way towards themselves and (2) claimed otherwise.

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

#230

Post by nrmitchi »

maerF0x0 wrote: post #227

Does all this inferior execution boil down to Market orders? I learned early on (iirc from Jim Cramer!) to use limit orders. There would never be an inferior execution with limit orders, right? EDIT: this comment seems to speak to the topic: https://news.ycombinator.com/item?id=25456763 according to ^^ even if you limit buy for $100 they have a duty to get you $99 if it's available.

A limit order just specifies the maximum that you are willing to spend per share.

For example, putting in a limit order at $100 for a share of "X", means that you won't pay more than $100. If the best available price for "X" at the time is $98, and Robinhood gives you a share for $99, that is still an inferior execution.

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