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

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

#31

Post by TOR_USER_01 »

vgatherps wrote: post #25
tptacek wrote: post #21

Earlier quoted context omitted.

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…

Another argument against PFOF is that brokers could (and Robinhood has been caught doing it) be incentivized to route orders to the highest PFOF rather than executing at the best real price.

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

#32

Post by rocqua »

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.

Dark pools mean that public market prices aren't as accurate. The story of financial markets being valuable to wider society is, among other things, price discovery. Dark pools don't serve that purpose.

Moreover, the PFOF story depends on 'price improvement'. If public stock markets aren't accurate, then 'price improvement' is a meaningless concept, because it compares the price to the public stock market price.

> It’s no different than telling your neighbor you’re willing to sell your house for $X without publicly listing it.

The difference is that the most accurate price for 'my house' is not of significant public value. Whilst the most accurate price for stocks is quite valuable to the wider world.

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

#33

Post by adrr »

vgatherps wrote: post #25
tptacek wrote: post #21

Earlier quoted context omitted.

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…

As a retail investor, I’d rather have PFOF and free trading instead of paying $5 to $10 a trade which is more expensive than spread improvements.

That’s what PFOF has brought to retail investors. It’s not like retail investors was ever put onto the public exchanges prior to robinhood and PFOF, they were sent to dark pools for institutional investors to trade against but retail investor never got the benefit.

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

#34

Post by anonymoushn »

rocqua wrote: post #32
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.

Dark pools mean that public market prices aren't as accurate. The story of financial markets being valuable to wider society is, among other things, price discovery. Dark pools don't serve that purpose. Moreover, the PFOF story depends on 'price improvement'. If public stock markets aren't accurate, then 'price improvement' is a meaningless concept, because it compares the price to the public stock market price. > It…

'price improvement' compared to lit venues with no retail flow is already a meaningless concept.

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

#35

Post by anonymoushn »

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.

Levine is entitled to his opinion, but I don't think he has argued that retail investors receive better prices compared to a condition where all of their orders are sent to lit venues and makers who want retail flow have to get it by having top-of-book (or midpoint peg or whatever) orders at lit venues.

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

#36

Post by TOR_USER_01 »

manual89 wrote: post #5

Wonder how Robinhood is going to survive a potential dilution of payments for orderflow if these proposals become reality.

They will make the market:

> ...the company has quietly been laying the groundwork to become a standalone market maker,

> One way to reduce its reliance on PFOF is for Robinhood to actually match its own order flow instead of selling it to other brokers, company executives said. They even hinted during the roadshow meetings with investors that they too will be looking at getting into the business…

https://www.foxbusiness.com/markets/robinhood-ipo-twist-busi...

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

#37

Post by pclmulqdq »

tptacek wrote: post #13
runeks wrote: post #12

> Requiring such auctions would be a big change. The SEC says brokers send more than 90% of marketable orders to wholesalers. Unlike exchanges, which display price quotes publicly and allow a variety of market players to attempt to fill orders, wholesalers trade directly against the incoming retail flow, an arrangement that effectively prevents other market players such as institutional investors from interacting wit…

Levine points out that it's not clear that the change --- brief order-by-order auctions to beat the wholesaler price (which is in turn at least as good as the public market) --- will actually improve outcomes for retail investors; there's a paper: https://deliverypdf.ssrn.com/delivery.php?ID=285088095002029...

If we look at the actual price improvement that retail order flow gets, I think we can be pretty confident that Robinhood and IBKR Pro users, who have the least price improvement today (one group because of greedy brokers and the other because they are usually professionals doing their personal trading), will do better. Users of Schwab and TD Ameritrade, who get the best price improvement, will probably do worse.

Whether the total amount of price improvement in the market increases still does seem to be up for debate - I personally doubt that it will be much better for average retail investors than the old system.

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

#38

Post by dchftcs »

bmer wrote: post #19
tptacek wrote: post #15

Earlier quoted context omitted.

Robinhood doesn't have a parent company?

I think what was meant is "Robinhood the app's parent company, also named Robinhood"?

Given the tone I suspect the person meant "Citadel". Which is a view I don't endorse, but see often.

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

#39

Post by _5uxp »

anonymoushn wrote: post #34
rocqua wrote: post #32

Earlier quoted context omitted.

Dark pools mean that public market prices aren't as accurate. The story of financial markets being valuable to wider society is, among other things, price discovery. Dark pools don't serve that purpose. Moreover, the PFOF story depends on 'price improvement'. If public stock markets aren't accurate, then 'price improvement' is a meaningless concept, because it compares the price to the public stock market price. > It…

'price improvement' compared to lit venues with no retail flow is already a meaningless concept.

All details and Fin. Engineering are just a more sophisticated scam to dump on public investors. There I said it. Sure someone can explain why not that in a long text but IMO that is not the truth.

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

#40

Post by texasbigdata »

tptacek wrote: post #8

This is covered in great detail in today's Money Stuff, and you can usually skip a great deal of HN, um, truth-searching just by reading Levine first. https://www.bloomberg.com/opinion/articles/2022-12-15/the-se...

What does truth searching mean, that’s an interesting term.
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