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SEC set to propose rules that would squeeze stock-market middlemen

wsj.com

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Re: SEC set to propose rules that would squeeze stock-market middlemen

#21

Post by tptacek »

CSSer wrote: post #20
tptacek wrote: post #17

Earlier quoted context omitted.

Who's skimming off money where now?

Institutional investors. I can’t explain it better than Matt Levine’s article. It’s well worth the read, and it links directly to the SEC proposal if you’d like to read deeper from there. After reading the article, my take is less harsh. It is really bizarre to me why instead of outright banning it, they just want to make it a really bad deal to do so. But if it works, great! We’ll see.

Levine doesn't believe PFOF involves people skimming money from retail investors, if that's what you're implying. Levine's story boils down to: retail order flow is cheaper to make markets for, wholesalers and brokers can split the savings three ways (between retail investors, the broker [via PFOF], and the wholesaler). That's not skimming; that's, like, the operating principle of Walmart.

Re: SEC set to propose rules that would squeeze stock-market middlemen

#22

Post by rjchint »

The proposal needs to go further and expand the scope of the rules to stock options as well, which is where most of citadels revenue comes from, being the contraparty to options trades of robinhood yolos.

If someone can add that as a comment to the rules to the SEC that would be fantastic.

Re: SEC set to propose rules that would squeeze stock-market middlemen

#23

Post by [deleted] »

koolba wrote: post #7
largepeepee wrote: post #4

How about get rid of obfuscated monetary bullshit like darkpools first

What’s wrong with dark pools? The name is meant to conjure up some evil mental image, but it’s just two or more parties that want to offload / onload some stock without impacting the market. It’s no different than telling your neighbor you’re willing to sell your house for $X without publicly listing it.

[deleted]

Re: SEC set to propose rules that would squeeze stock-market middlemen

#24

Post by maxbond »

tptacek wrote: post #9
koolba wrote: post #7

Earlier quoted context omitted.

What’s wrong with dark pools? The name is meant to conjure up some evil mental image, but it’s just two or more parties that want to offload / onload some stock without impacting the market. It’s no different than telling your neighbor you’re willing to sell your house for $X without publicly listing it.

Also: what's "monetary" about them?

Seems pretty clear from context they meant "financial" or perhaps "related to money", I don't think we have to put them on the spot for it.

I imagine this is part of the meta-point you're making across the thread that people on HN talk out of their hat about finance (I plead guilty) but I feel like your comment about Money Stuff/"truth searching" was enough, and that asking people to defend their misuse of terminology is punching down.

Re: SEC set to propose rules that would squeeze stock-market middlemen

#25

Post by vgatherps »

tptacek wrote: post #21
CSSer wrote: post #20

Earlier quoted context omitted.

Institutional investors. I can’t explain it better than Matt Levine’s article. It’s well worth the read, and it links directly to the SEC proposal if you’d like to read deeper from there. After reading the article, my take is less harsh. It is really bizarre to me why instead of outright banning it, they just want to make it a really bad deal to do so. But if it works, great! We’ll see.

Levine doesn't believe PFOF involves people skimming money from retail investors, if that's what you're implying. Levine's story boils down to: retail order flow is cheaper to make markets for, wholesalers and brokers can split the savings three ways (between retail investors, the broker [via PFOF], and the wholesaler). That's not skimming; that's, like, the operating principle of Walmart.

There's an argument that it artificially increases spreads in lit markets, since you have segregated the least toxic flow to only go to a few select players (largely Citadel and Virtu). Further, these increased spreads mean that the 'price improvement' is only price-improved against a spread that's being quoted against only the most toxic flow. However, many spreads are still close to a single tick, although this is less true as individual ticker prices have generally gotten higher.

The tick size changes are interesting as well in the context of auctions. If a claim is "you can't have an auction with sub-penny pricing so there's no improvement", well then make the tick size smaller.

Re: SEC set to propose rules that would squeeze stock-market middlemen

#27

Post by TOR_USER_01 »

tptacek wrote: post #21
CSSer wrote: post #20

Earlier quoted context omitted.

Institutional investors. I can’t explain it better than Matt Levine’s article. It’s well worth the read, and it links directly to the SEC proposal if you’d like to read deeper from there. After reading the article, my take is less harsh. It is really bizarre to me why instead of outright banning it, they just want to make it a really bad deal to do so. But if it works, great! We’ll see.

Levine doesn't believe PFOF involves people skimming money from retail investors, if that's what you're implying. Levine's story boils down to: retail order flow is cheaper to make markets for, wholesalers and brokers can split the savings three ways (between retail investors, the broker [via PFOF], and the wholesaler). That's not skimming; that's, like, the operating principle of Walmart.

Matt Levine:

> The customers think they have no cause for complaint, because they did better than the NBBO. The whole thing is an institutional equivalent of retail payment for order flow: The partner firms fill the customers at a better price than the NBBO, make some profit for themselves, and kick back some of it to the broker (Coda).

https://www.bloomberg.com/news/newsletters/2021-09-23/money-...

Re: SEC set to propose rules that would squeeze stock-market middlemen

#28

Post by TOR_USER_01 »

> Robinhood to pay $65 mln fine to settle SEC charges of misleading customers

> The SEC charged the company with failing to inform customers about payments it received from trading firms to route customer orders through them, a move that resulted in customers paying higher prices to execute trades.

> Robinhood customers' orders were executed at prices that were inferior to other brokers' prices," the SEC found.

https://www.reuters.com/business/finance/robinhood-pay-65-ml...

Re: SEC set to propose rules that would squeeze stock-market middlemen

#30

Post by rocqua »

CSSer wrote: post #16

The first thing I did was open the article and search for PFOF (Payment for Order Flow). > This proposal would address a controversial practice called payment for order flow, in which some brokers collect rebates for sending customers’ orders to wholesalers. Mr. Gensler has called the practice a conflict of interest and, in past statements, left open the possibility of banning it. The SEC’s best-execution proposal do…

PFOF is not a problem, except that it hurts your pension funds. PFOF needs to be price improvement. Research has been done and it _does_ give price improvement.

The main point of PFOF is that high frequency traders have much less risk when trading with single persons than they do trading with big players. They are willing to offer them much better prices than they will offer big players. Suppose there is 10cents difference. PFOF means they pay your broker, say 5c to give you a 5c better price. You are better off, your broker is better off, the high frequency traders are better off. The only people worse off are the big players. Because when HFTs can filter out the low risk trades, the high risk trades get more expensive for them.

Research has been done showing that different brokers split the price advantage differently. Robin hood, IIRC was one the worse side, allocating 80% of price advantage to PFOF, leaving only 20% to the customer. But the customer is still better off than paying the public exchange rate.

-----------------------------

The above was written before I found this report: https://www.afm.nl/~/profmedia/files/nieuws/2022/afm-paper-a...

I found it trying to find the source for the research I quote. That stat came from Matt Levine's newsletter. This report contradicts what I wrote above. It does seem that the report is about european brokers, whilst Matt Levine was talking about US brokers.

edit: I believe this is the orginal source regarding US markets: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4189239

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