The no commission model RH is providing is awesome and if they found a way to sustain that business model, great. The amount they have saved me (an avg trader with 25-50K) is well worth them selling my trade data to other firms. Sometimes their system is a bit glitchy. I'm sure as time goes by things will get tightened up. I mostly trade derivatives. If I open a 4 legged trade with 400 contracts that would cost me $300 in commissions on my old broker (TD Ameritrade) to open and an additional $300 to close it. Totally free with RH.
They're selling your trades not your trade data. They sell the orders you place to HFT firms which arbitrage them and kick back a commission to Robinhood to fund their business. It kinda costs you, actually, you just don't see it. [1] With low trade volumes/order sizes you may end up ahead but I don't have data to back that up.
> So by selling its customers’ orders to market makers, Robinhood is actually stealing from two sets of “the rich”: Rich market makers like Citadel are paying it directly for the orders, while rich hedge-fund managers are getting worse execution on public stock exchanges so that Robinhood customers can get better executions off those exchanges. Big institutions are paying to subsidize free trades for Robinhood’s customers. It feels pretty Robin-Hood-y! If I were Robinhood I would advertise that!
The profits MMs take here aren't zero sum between you and the MM, because there are other participants in the market. An MM can profitably quote a more generous spread to a retail trader, because retail order flow isn't going to wipe out their book and expose them to inventory risk.
Essentially: you are cheaper to make a market for than a giant fund is, and you, Citadel, and Robinhood can split the savings.
Why would they pay for the order flow and create smaller spreads which makes them less money? They have no reason to do so. I don't see what you mean by savings - if they're making less money, how does that translate into savings for anyone?
> Why would they pay for the order flow and create smaller spreads which makes them less money?
Competition. Why does Coca-Cola spend money on advertising, driving up their costs and (seemingly) ensuring they make less money? Retail order flow is essentially free money for the market maker who gets it, and they compete with each other to obtain it. That competition shows up in a mixture of tighter spreads (ie, better than the "best price" for the customer), and payment for order flow. And payment for order flow, in turn, shows up as some mixture of lower fees or higher margins for the broker.
At a big picture level, retail orders are valuable, and that value will be split between the market maker, the broker, and the customer, with the exact split depending on a number of factors.
> I don't see what you mean by savings - if they're making less money, how does that translate into savings for anyone?
Keep in mind, market makers make money by being extremely efficient at buying stocks when people want to sell, and selling them when people want to buy, minimising the stocks they hold at any given moment, making a tiny amount on every transaction, and making it up on volume. If the incoming orders are "uninformed", ie, it's just a dentist in Milwaukee daytrading his retirement account, then this is very safe. If the incoming orders might be "informed", ie, it might be the first indication of a fundamental shift in the value of the stock, then this is not safe, because every trade could just be noise, or it could be the start of some hedge fund shifting a billion dollars into or out of the stock.
The NBBO (National Best Bid and Offer) is the best available price for "mixed" order flow, that captures the risk to the market maker that, if they fill the order, they might be about to get run over by a bus. The more they can get order flow which is safer than that, the more they can afford to beat that "best price". They do this because they believe that, on average (and after adjusting for risk), they will be making more money, not less.
This is all pretty concrete, nothing here is new, every broker does this, and it's all very well understood. If the current best ask is $X, and you can promise that you're an uninformed idiot who has no clue what's going on and just wants to buy 50 shares, then you can find someone who'll give you a better rate than $X. If you're Bridgewater and you want to buy 50 million shares, you won't.
A market maker sets a bid (the price at which they buy) and an offer (the price at which they sell).
The offer will always be higher than the bid, and they make the spread between the bid and offer price.
If buy and sell orders are roughly balanced, they will not lose money. The idea behind purchasing flow such as Robinhood's is that the traders are random noise traders, with a balance of buys and sells as such.
There is another kind of market maker whose job is to provide liquidity by always staying in the market. The exchange pays them some fraction of a penny per share bought and sold.
In this case, the proposed tax is meaningless because it's fantasy headline legislation (it exists solely as vote-stirring propaganda) that has no shot at passing. The never-passing proposal will have no effect on Robin Hood's business model.
I was under the impression that pretty much all retail brokerages (especially online discount brokerages) sell your trades (i.e. "payment for order flow") so I'm not sure if this would create a material difference whether you went with RH or some other retail brokerage?
Nothing is ever free. Robinhood sells order flow, meaning your trades are executed by a real market maker but with slower fills, larger spreads and more restrictions on trades.
> meaning your trades are executed by a real market maker but with slower fills, larger spreads and more restrictions on trades.
Incorrect. Retail customers who have their orders routed like this obtain instant execution at prices at least as good as, and sometimes better, than the best available price on public markets, and in the case of Robinhood, they also pay zero fees.
In other words, everything you said is wrong. They don't get slower fills, they get tighter spreads, and lower fees. This is strictly good for the retail investors.
The good news is that the broker isn't screwing them.
The bad news is that the reason for that is because the broker doesn't have to screw them; they're uninformed noise traders buying and selling in basically equal measure. The traders buy at $1.001 and sell at $0.999 as much as they want until they're blinded out by the spread, which the broker keeps.
The "savings" being passed along is just a reduction in the portion of the spread that the broker would normally use to protect itself against informed traders.
Sure, there's only a few companies that control all the flow but paying fees usually results in smaller spreads and faster execution. It also seems to result in better software and support. Maybe not everyone needs it, RH is good if you just buy and hold, but I wouldn't say fees are for nothing.
I don't understand why you believe paying fees "usually" results in smaller spreads. Most of the brokerages you pay trading fees to are doing what Robinhood does, because retail order flow is made to be internalized, and firms like Citadel do a better job of it --- for customers --- than the firms that run the brokerages do; the job of a typical brokerage is to make a pretty web UI, keep some servers running, staff a bunch of brick-and-mortar locations, and answer the phones, and the job of actually executing trades is specialized in a different direction. More likely, the firm you're paying trading fees to is handing your order off to an internalizer, getting rebated for it, and pocketing both the rebate and the trade fee.
It's from my experience and I've heard the same from many others. Maybe better spread is from better speed, and maybe the speed is a result of better software platform. The fees are also negotiable though, and responsive support is good to have and helped when I needed it.
If it was that simple then I find it strange that these brokers don't offer free starter accounts to new users to compete against Robinhood. They must know something we don't about the real value of the company and how much competition they're adding.
"If it was that simple then I find it strange that these brokers don't offer free starter accounts to new users to compete against Robinhood. They must know something we don't about the real value of the company and how much competition they're adding."
Or it just may be an example of how changes don't happen instantly. If they lose enough customers, they may cut commissions, even to zero. As long as it isn't a big problem, they won't.
It seems to me that a lot of brokers are providing an increasing number of commission-free securities, and you also see promotional deals where a new account of sufficient size gets several hundred free trades.
Doubly true if it's outside market hours. Unlike every other broker Robinhood doesn't (always) warn you when the markets are closed. I've had fills come in dollars off the last trade simply because the market order was placed before or after hours.
Robinhood also makes it harder to use limit orders than other brokers. I suspect it's because they receive more payment for order flow when it's a market order.
