Why ‘Free Trading’ on Robinhood Isn’t Really Free
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Re: Why ‘Free Trading’ on Robinhood Isn’t Really Free
#2My intuition has always been that the smaller your portfolio, the better deal it is for you to use Robinhood. So it certainly has its place for an underserved class of investors.
Re: Why ‘Free Trading’ on Robinhood Isn’t Really Free
#3isn't this (payment for order flow) regulated by the SEC? specifically, the broker must provide a price that's at least as good as the NMS. so it's not like you're getting a worse price on trades
Re: Why ‘Free Trading’ on Robinhood Isn’t Really Free
#4> It’s a controversial but legal practice in the brokerage industry called payment for order flow.
and then
> But that’s only if the broker passes that benefit, which brokers call “price improvement,” down to the customer.
> It’s unclear whether Robinhood gives customers that benefit
So the customer is not benefiting in this case, yet it's not illegal, just "controversial".
...Like a whole lot of other things on Wall Street, where crime is legalized and so none of the suits go to jail.
Re: Why ‘Free Trading’ on Robinhood Isn’t Really Free
#5Well, if you receive your shares at the limit price, it hardly matters to you, does it?
Re: Why ‘Free Trading’ on Robinhood Isn’t Really Free
#6Well, if you receive your shares at the limit price, it hardly matters to you, does it?
If a Robinhood user thinks they are getting the wrong prices when they buy or sell, then they should seriously contact the SEC because that is illegal (as far as I know the prices aren't wrong).
The reason guaranteed small-scale trade orders are valuable is because they are a way to avoid 'salami tactics' which involve slowly building up to a large order. By the end of a larger order the price will have moved, and the earlier 'sliced' traders will be disappointed.
Re: Why ‘Free Trading’ on Robinhood Isn’t Really Free
#7> The difference is often less than a penny. But it adds up for larger trades. Schwab, for instance, says that for orders of 500 to 1,999 shares of S&P 500 companies, the average savings from price improvement is $10.80.
Ok and Schwab charges $4.95 for trades. So an investor ends up saving $5 per trade. S&P 500 companies stock price ranges from $20 to $1200 so to buy 500 shares of a company with $20 price per share would mean you spend $10000 resulting in a saving of 0.05%. On the other end of the spectrum you spend $600,000 resulting in a savings of 0.0008% assuming that when they say "average savings" they mean "average savings" per trade and not per share.
Just to put the whole thing in perspective.
Re: Why ‘Free Trading’ on Robinhood Isn’t Really Free
#8The article links directly to the FAQ, but doesn't mention this which is on there, and I think is very relevant:
How much does Robinhood make in rebates?
Robinhood earns ~$0.00026 in rebates per dollar traded. That means if you buy a stock for $100.00, Robinhood earns 2.6 cents from the market maker. Other brokerages earn rebates and charge you a per-trade commission fee on top of this.
Re: Why ‘Free Trading’ on Robinhood Isn’t Really Free
#9> if you’re trading hundreds or thousands of shares at a time, you’re better off elsewhere
Exactly. Any price improvement other brokerages can offer should be considered net of their fees. Because flat fees per trade are regressive, smaller investors are better off on Robinhood.
Re: Why ‘Free Trading’ on Robinhood Isn’t Really Free
#10Based off the content in the article, shouldn't the title be "Why free trading on Robinhood may not be really free"?