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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

#51

Post by brookst »

cool_dude85 wrote: post #47
rocqua wrote: post #30

Earlier quoted context omitted.

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 diff…

>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. But why should Robinhood or whoever else get part of the 10 cents that the algo is offering me, the little ol' retail investor? Just…

Because they’re offering you “free” trades and making their money from their cut of that price advantage rather than charging you $5?

I don’t use Robinhood, but I don’t see anything wrong with that pricing model. Prohibiting it would be equivalent to banning no-fee trades for small time retail investors. It would be like banning ad-supported business models. Well, on second thought…

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

#52

Post by LatteLazy »

svggrfgovgf wrote: post #49

From Levine: "Payment for order flow sort of created the zero-commission retail-brokerage model, but it’s not really necessary anymore. You can run a profitable retail brokerage on net interest margin, without charging for trades at all." So what everyone should be complaining about is not PFOF, but "net interest margin". In other words everyone should be complaining about the brokers not paying enough interest on th…

This confused me at least: do people keep cash in their brokerage accounts? Is this an American thing (limey Brit here).

I transfer cash in once I've decided to trade and the brokerage usually holds it for a max of a day or two until the trade actually executes (say I am buying an index fund where orders today are executed tomorrow). The only time there has been cash for longer than that was when I know I needed it (a week or two before buying my first place) so I didn't want to risk a stock market crash etc.

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

#53

Post by JumpCrisscross »

LatteLazy wrote: post #52
svggrfgovgf wrote: post #49

From Levine: "Payment for order flow sort of created the zero-commission retail-brokerage model, but it’s not really necessary anymore. You can run a profitable retail brokerage on net interest margin, without charging for trades at all." So what everyone should be complaining about is not PFOF, but "net interest margin". In other words everyone should be complaining about the brokers not paying enough interest on th…

This confused me at least: do people keep cash in their brokerage accounts? Is this an American thing (limey Brit here). I transfer cash in once I've decided to trade and the brokerage usually holds it for a max of a day or two until the trade actually executes (say I am buying an index fund where orders today are executed tomorrow). The only time there has been cash for longer than that was when I know I needed it (…

> do people keep cash in their brokerage accounts?

Some people use a brokerage account as a checking account. Most don’t. Interest can also be earned on lent securities.

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

#54

Post by thefreeman »

cool_dude85 wrote: post #47
rocqua wrote: post #30

Earlier quoted context omitted.

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 diff…

>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. But why should Robinhood or whoever else get part of the 10 cents that the algo is offering me, the little ol' retail investor? Just…

Because they built the app you are trading on, made the agreements with the HFT, and are facilitating the trade?

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

#55

Post by pclmulqdq »

We already see a LOT of auctions running in the options markets, and trading these auctions it is one of the profit centers of market makers. It turns out that speed is still a factor in a stock market auction, and you can still have designated market makers that are guaranteed to get a cut of each auction.

I'm not sold that this move will actually result in much better prices for customers on average, but it will certainly "spread the wealth around" by allowing all brokerages to take advantage of a uniform price-improvement structure rather than negotiating individually with Citadel/Virtu. I have been an IBKR customer for a while, and I'll be happy because I don't get a lot of price improvement under the current system. Schwab customers, who get a lot of price improvement, may be less happy.

In options, there is the suspicion that the presence of a lot of auctions probably results in wider spreads, which we could see as auctions make it to the stock market, too. If all retail order flow goes into the market through special channels, the only trading remaining in the "normal" system will be from sophisticated traders, who you don't really want to trade against.

Of course, the SEC may then say "the experiment was a great success, retail traders are getting HUGE price improvement," ignoring that retail traders may be getting worse prices than the old NBBO from the widening of the spread.

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

#56

Post by seanhunter »

As someone who used to work in execution brokerage, this rule change seems on net to be good news for retail investors and bad only for folks like citadel and robinhood.[1] In the wake of flash crash there was a fair amount of research suggesting that rolling auctions (rather than continuous order matching) are net positive for almost everyone except HFTs who exploit market microstructure.

In my view they should also get rid of reg NMS, which entrenches HfT arbs and gives a permanent advantage to people who pay to colocate at the exchanges. Europe has shown that reg NMS is not needed and doesn’t benefit investors.

[1] noone should be crying for robinhood. Their entire business model is about disadvantaging small investors to benefit themselves and Ken Griffin.

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

#57

Post by ProjectArcturis »

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...

Matt Levine is a treasure.

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

#58

Post by vgatherps »

pclmulqdq wrote: post #37
tptacek wrote: post #13

Earlier quoted context omitted.

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. Whe…

It really depends on whether non wholesale players step up and participate in these auctions.

While Citadel and Virtu are very large market makers, there are other equally large firms that don't jump through all the hoops to participate in wholesale, but would probably do on-exchange auctions.

The SEC also talks about non market makers using this for execution, but I don't think that's going to happen immediately...

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

#59

Post by yalogin »

I had no idea that, until the recent round of “innovation”, the retail investor traded only with other investors in the brokerage consumer list. I always thought the brokerage is just facilitating access to the actual trading desk where the trade is put up for anyone to pick up.

Am I right in understanding that Robinhood took this and abused it by turning itself and its customers as the source for high frequency traders?

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

#60

Post by vgatherps »

rjchint wrote: post #22

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.

Options already have to go through an on exchange auction process
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