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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

#301

Post by TearsInTheRain »

smabie wrote: post #224
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…

Yep, that's pretty much spot on.

Although Im sure the improvement isnt that significant per trade, is it worth trying to game this to lower my toxicity, i.e. use odd lots, break up my trade etc?

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

#302

Post by arcticbull »

kevstev wrote: post #297
arcticbull wrote: post #286

Earlier quoted context omitted.

Depends on the size of your account and how you trade, and what you're looking to get out of it. If you have an account value of over $110,000 IBKR will offer you the industry's lowest margin rates (as low as 0.75%, tax deductible) and very competitive order pricing, without PFOF. Of course with a substantial account you can ask any of them to match IBKR margin rates and they likely will. I sell a lot of margin-secur…

I bought a house last year and long story short ended up not selling my condo, meaning to close I needed to not sell a chunk of my investments. Problem is, many had significant capital gains. I ended up just taking a margin loan for a blended rate of about 1%. I avoided capital gains, the margin interest is deductible, and my tech heavy portfolio has increased substantially in absolute terms and on a percentage retur…

That's how I made the down payment on my condo too. It's a heck of a deal! Especially when your portfolio skyrockets afterwards. YMMV ofc.

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

#303

Post by emteycz »

whimsicalism wrote: post #129
emteycz wrote: post #120

Earlier quoted context omitted.

You know that Robinhood users declare themselves investors, right?

Sorry, and the relevance at hand is?

In Europe, no one can be an investor without signing papers accepting these risks. i see it's different in the US

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

#304

Post by _cs2017_ »

gypsy_boots wrote: post #97
_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?

> Or did the trading firms treat order flow from RH differently than from other sources? I'm not well versed in financial language by any stretch, but i believe it's this. Matt Taibbi did a piece on them last week and goes into this. https://taibbi.substack.com/p/pandemic-villains-robinhood

The article seems somewhat on the fluff-and-feathers side. It doesn't really explain anything. The only non-obvious thing it says is:

> Robinhood receives a fixed rate per spread (vs. a fixed rate per share by the other eBrokers). Rather than receiving simple payment by volume, Robinhood receives a percentage of the spread between the bid and the ask in each trade. This is interesting because while HFT proponents insist their practices narrow spreads, some critics maintain that high-frequency trading ends up widening spreads.

Unfortunately, what this excerpt claims as "interesting" makes no logical sense. The fact that RH is paid by HFT on the spread would suggest that HFT like to get order flow in stocks that already have a large spread. It is completely unclear how this is related to the claim that HFT tend to increase the spread.

The "traditional" interpretation is that HFT make money from creating liquidity. This means they take illiquid stocks (with large spread) and make them liquid (reducing the spread). Since they make money doing that, they are willing to pay for orders in illiquid stocks.

Is this the correct interpretation? I have no clue. But it seems the article's author has even less clue, and adds nothing of value to the discussion.

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

#305

Post by _cs2017_ »

Kranar wrote: post #144
bagacrap wrote: post #95

Earlier quoted context omitted.

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.

This is incorrect. The benefit of order flow to the consumer is additional sources of liquidity. If a consumer submits an order to buy 500 shares of AAPL for $100, there may only be 100 shares available on the public market at that price in which case the price of AAPL will increase from $100 to at a minimum $100.01. The way pay for flow works is that firms can execute against that order agreeing to fill any portion…

The quality of comments in this thread is atrocious. I wonder what makes so many presumably technically trained people, to make confident claims about topics on which they very clearly have no bloody clue.

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

#306

Post by _cs2017_ »

smabie wrote: post #210
himoacs wrote: post #102

Earlier quoted context omitted.

Basically, if you want to buy AAPL at $100 and as your broker, I take that info and share it with someone else, such as an HFT, they will quickly (milliseconds/nanoseconds) buy AAPL and sell you at a higher price. So, while you expected to pay $100, you ended up paying $100.10. Now that doesn't seem a lot to you but times the difference (10 cents) by volume and number of Robinhood customers placing orders and it can…

No that's not how it works at all. Source: work at a hft market making firm

If you have a few minutes, would you mind giving some technical overview of what's going on?

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

#307

Post by dmak »

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…

what does alpha mean here?

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

#308

Post by kasey_junk »

tptacek wrote: post #291
arcticbull wrote: post #286

Earlier quoted context omitted.

Depends on the size of your account and how you trade, and what you're looking to get out of it. If you have an account value of over $110,000 IBKR will offer you the industry's lowest margin rates (as low as 0.75%, tax deductible) and very competitive order pricing, without PFOF. Of course with a substantial account you can ask any of them to match IBKR margin rates and they likely will. I sell a lot of margin-secur…

Just to be annoying here: You keep saying that a benefit of IBKR Pro is "no PFOF". That's true --- IBKR Pro is I think the only online retail brokerage that doesn't do that. To my understanding, the only meaningful benefit to "no PFOF" is potentially better price improvement. Which is to say, if you place orders with Ameritrade, which is doing PFOF, you're going to get price improvement over NBBO, but with IBKR Pro,…

Pedantically, Vanguard Broker Services, the equities broker for Vanguard hasn’t to my knowledge ever gotten PFOF.

Their options broker has and Vanguard is on record as being pro PFOF so it’s not a moral stance and could change any quarter without notice.

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

#309

Post by smabie »

dmak wrote: post #307
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…

what does alpha mean here?

alpha here means "information"

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

#310

Post by smabie »

TearsInTheRain wrote: post #301
smabie wrote: post #224

Earlier quoted context omitted.

Yep, that's pretty much spot on.

Although Im sure the improvement isnt that significant per trade, is it worth trying to game this to lower my toxicity, i.e. use odd lots, break up my trade etc?

Nah probably not. But if you use IBKR, you can use their best efforts VWAP execution algo: https://www.interactivebrokers.com/en/index.php?f=1124
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