I don’t understand. What does it mean that they sell order flow to high freq traders?
How are they fucking me?
How are they fucking me?
This is very similar to "front running" [1], but because a) this happens privately and in small quantities, and b) it is not necessarily privileged information, it's considered legal by the SEC. But it is highly questionable for sure.
"Flash Boys", by Michael Lewis [2] is a great read, and goes into detail on the world of high frequency traders, and how they operate.
[1] https://en.wikipedia.org/wiki/Front_running
[2] https://www.amazon.com/Flash-Boys-Wall-Street-Revolt/dp/0393...
The problem I suppose is the poor chaps don't know this is what is happening.
No, they are quite clear on how they make money and that is not it. They, officially, make money on interests and a subscription service [1].
[1] https://support.robinhood.com/hc/en-us/articles/360001226106...
2) The price displayed to you is 20ms late
3) You accept order at this price
4) The actual price might be less, so a firm can buy it and sell it slightly higher.
5) You get a fill at a better price than you thought.
- There is a premium to Robin Hood vs other apps because most users are on mobile, where latency is likely to be higher.
You can beat someone to the punch who may have traded better than the limit.
It’s worth $26 on a 100K transaction for the HFT firms. So let’s say it’s worth $50 to them. Not s big deal if you buy and hold forever. If you day 20 times a year because you think it’s free, that $50 times 20 becomes $1000, or 1% of your stake.
On the other hand, imagine the stock is currently trading at 105. The limit order will hang there, waiting for the price to drop below the limit you specified (and either never gets executed, or then becomes the flow above). Rinse and repeat.
Note they don't need to make money in every transaction, but the bigger the order flow, the more opportunities they have to make profit on top of traders.
Say the price of the stock is $101. You place a limit order for $100. HFT sees that but can’t do anything since the stock price is above the limit.
Stock price drops to $99.5. Your order is the executed by the exchange before the HFT can buy at $99.5 and sell to you at $100.
Look at the companies listed in the disclosures. Citadel appears to have the largest share in all of the examples listed. Their website [1] claims that:
> We act as a specialist or market maker in more than 3,000 U.S. listed-options names, representing 99% of traded volume, and rank as a top liquidity provider on the major U.S. options exchanges, executing approximately 39% of all U.S.-listed retail volume, making us the industry’s top wholesale market maker.
Citadel is paying Robinhood to put your limit order into their system at the NYSE or NASDAQ or whatever other exchange and then they handle the execution of it. Also, I don't believe that this article is claiming that Citadel et al are the high frequency traders, but that the high frequency traders are connected to their platforms and profiting (in some unspecified manner) from the orders that come in.
[1] https://www.citadelsecurities.com/products/equities-and-opti...
...OTOH, what that product revealed was that Reg NMS violations were pretty rampant and the SEC wasn't interested in doing anything about it. You may have difficulty enforcing this.
Orders take time to process. HFT guys are fast enough to react and make money from it.