Why ‘Free Trading’ on Robinhood Isn’t Really Free
wsj.com
wsj.com
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.
I wonder if they lie about this like Fidelity does.
If the market on some product is 100.00/100.06 with a mid price of 100.03, and I route an order at the mid price that is filled at 100.02 that is then a price improvement of 1 cent.
On Fidelity I've noticed they calculate everything off the asking price, and would say my price improvement was .04, which is not really right.
https://www.sec.gov/reportspubs/investor-publications/invest...
> The opportunity for "price improvement" – which is the opportunity, but not the guarantee, for an order to be executed at a better price than what is currently quoted publicly
It's measured with reference to the quote, not your order price. Think about it, if you sent a limit order for $20.02 and got filled at $10.02, did you get $10 of price improvement?
Yes. That's a rather extreme example, but If I route a limit order for X and get filled for Y, my price improvement is X-Y, not the asking price - X. I guess it depends on if you consider the price of something to be the mid price or the bid/ask price.
As far as I am concerned Fidelity IS lying. The market on the thing could be 100.00/100.10, with a LAST trade price of 100.05. I route a limit order for 100.05 and get filled at 100.05 and fidelity claims I got price improved by 5 cents, which is bullshit.
edit: also, that page you linked and quoted is specifically talking about market orders:
> Here's an example of how price improvement can work: Let's say you enter a market order to sell 500 shares of a stock...
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.
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.
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.
Crime is not legal on Wall Street nor anywhere else in America. If you don't like the laws, we have a system to change them. It seems like you disagree with the finance profession, whose purpose is to efficiently move and allocate capital.
Wow, you really are using pedantry to avoid the larger point of the parent post.
It's arguable that pharmaceutical rebates are bribery, so is the pharma industry criminal? College football coaches make millions while professors become starving adjuncts, is academia criminal?
I think we can separate issues from describing an enormously essential component of our economy as criminal.
>>which allows free trades at slightly more expensive prices
so they arent free, its priced in. Not criminal, but misleading and could be construed as corrupt.
>> t's arguable that pharmaceutical rebates are bribery, so is the pharma industry criminal?
are the rebates helping to push a drug that they know to be addictive? if its not criminal, it should be.
>> College football coaches make millions while professors become starving adjuncts, is academia criminal?
and college athletes get no pay, but a very "strings attached" education, in which many end up going to bed hungry, which basically amounts to indentured servitude if not slavery
When people talk about crime being legal on Wall Street, they're referring to the many cases of fraud on the scale of billions of dollars that result in no jail time for the people involved. Sometimes there will be fines, but the fines are significantly less than the amount of money the bank profits from the fraud.
For a couple quick examples that immediately come to mind, see everything that led to the 2008 crash, or Wells Fargo creating checking and credit card accounts without permission.
Yes, this exactly is what I meant. Laws are written and passed that legalize what would otherwise be criminal conduct, and on the other side, the SEC will simply levy fines on fraud and no-one goes to jail [1].
Usually the fines, even if it's millions, is just a blimp on the quarterly profits of the wall street entity in question.
> BNP used a network of banks in the Middle East, Europe and Africa with their own clearing codes to mask dollar-based transfers connected to Sudanese companies. Employees also removed information from wire transfers that could have revealed the identity of the countries blacklisted by the United States, according to the complaint.
Source: France’s BNP Paribas to pay $8.9 billion to U.S. for sanctions violations => https://www.washingtonpost.com/business/economy/frances-bnp-...
In this case, BNP Paribas officials at the highest level were involved in laundering money for the Sudanese Government, directly working with Govt officials. This directly translated to funding genocide in the South Sudan war (by way of the Sudanese Govt purchasing weapons and killing people). Yet not a single person went to jail from BNP Paribas. The fine they paid is nothing compared to what they make in yearly profits.
The Sudanese government could likely still purchase weapons with euros or roubles.
The only situation where sanctions are effective (for now) is when countries need to sell commodities into USD, i.e. oil. But that is also changing as the dollar becomes less of a global reserve currency.
The big banks pay fines for money laundering yet no bankers go to jail.
Now just because payment for order flow is done by every brokerage doesn’t mean it’s necessarily okay to do in my opinion. I have some qualms about it, but the issues are complex. The market makers brokerages route their orders provide liquidity and stability that without their existence would result in a far more volatile market.
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.
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