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Comment by DINKDINK | Hacker News Reader

>their core strategy, which is spending what would otherwise be a marketing budget on keeping commissions at zero, making money on the other ways

"Making money others ways" aka stripping their clients of financial privacy by selling their clients' investment-decision data: "Robinhood Is Making Millions Selling Out Their Millennial Customers To High-Frequency Traders"[1] If your investment brokerage firm's strategy is to use you as a sucker, no marginal gain in interest rate is worth it.

[1]https://seekingalpha.com/article/4205379-robinhood-making-mi...

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Yes HFT buys trade flow from robin hood because they make more money executing against it but that's not actually to the detriment of the people on the robin hood app. The main way HFT firms make money is by making a market, they offer to buy and sell stocks cheaper than anyone else and get paid by people crossing the spread and sometimes exchange fees. The reason robinhood trade flow is valuable to HFT firms Isn't because they are trading against "dumb" millennials but because they know millennials aren't likely to move the market playing around on their smartphone. HFT firms can collect a small rent sitting in between millenials trading with one another without the risk of being on the wrong side of a trade that materially moves the price of a stock.

Matt Levine does great write ups on this stuff, would highly recommend: https://www.bloomberg.com/opinion/articles/2018-10-16/carl-i...

The stock market is a zero sum game. If HFTs are making money then someone else's is losing it. The other traders who's trades are closest are the most likely losers. HFTs will tell you what a great liquidity service they provide but they are doing nothing more than using the equivalent of insider information to skim the cream off the top.

>The stock market is a zero sum game. If HFTs are making money then someone else's is losing it.

But who's that "someone else"? It's not the robinhood customer, because they're getting at least the best price on NMS[1]. So what's the issue? Would you rather pay $10/trade so your trade gets posted directly to the exchange and the profit goes to some random investment bank or daytrader rather than the HFT firm?

[1] https://en.wikipedia.org/wiki/Payment_for_order_flow#Legalit...

In 2018 people like to scream about “selling their data” way too much.

In 2018 I'm still not being paid for my data.

NMS regulations do not apply to "odd lots" (orders <100 shares). This likely constitutes 99.9999999999% of trades done on Robinhood (and most retail trading, to be fair).

The stock market is not a zero sum game. I don't know where people get this idea that because every transaction involves two sides, the sum is therefore zero. Every transaction in the "real economy" also has two sides, and we all know that grows. The stock market grows too. There are even indexes to track how well it is growing.

The “real economy” runs on a fiat (inflating) currency system that is effectively not zero sum. The stock market is a closed system that currencies feed into - at the end of the day it’s still a measure of a fixed amount of value and thus zero sum.

But there's stocks on the other side that represent real things that increase in value. E.g, compare Google 20 years ago with Google today and see if you think it's more valuable.

No, companies create excess value and grow. Tesla pre Model 3 is a very different company than Tesla post Model 3. A drug company is very different if they've patented a new wonder drug. New companies come into existence and offer shares via an IPO.

Investing in the stock market is literally investing in the collective appreciation of the value of the companies that make up it.

> The stock market is a closed system that currencies feed into

Currencies feed into the stock market, but it's not a closed system. If you think a company is undervalued in the stock market, and you buy shares, that raises the price of shares for that company. With a higher share price, that company can borrow money (by issuing shares) at better terms, and spend that money on growing more than they could have if they had not borrowed that money.

If the stock price is too low, the company may buy back shares of its own stock (thus enabling future borrowing). Alternatively, investors may buy up a majority of the stock of that company, thus acquiring control of that company, and either try to force the company to do a thing they expect to be profitable, or liquidate the assets of the company (which will then be distributed to shareholders in proportion to how many shares they hold).

So basically the stock market moves money to the companies based on how effectively they could spend borrowed money / how valuable they would be if liquidated.

Currency is a tool for measuring economic value, it's not the basis of economic value.

This is why fiat currencies are so useful: you can change the length of the "ruler" to accommodate changes in the thing you're measuring, so the value of the increment remains stable.

Here is my understanding. Let a<b<c be small numbers. Some investor thinks a stock is worth x+c. They put in a limit buy order at x. Some HFT firm sees this and thinks well if they want it at x, I want it at x, and puts in their own order at x (+a fees to robin hood). Millenial comes and wants to sell their stock.

Normally the investor would get the stock since they placed their order first. But since the HFT firm is paying for the order they get it instead. If things go well the HFT firm can sell to the investor at x+b, if things go poorly they cut their losses and sell at x.

The investor that didn't get the order and has to buy it from the HFT firm at x+b is the loser.

The money that funds this dance comes from the millennial who sold a stock worth x+c at x, but that would have happened regardless.

I can't speak to the accuracy of your claim, but Matt Levine recently wrote about another factor, payment for order flow [0]:

>They want to buy stock for $99.99 and sell it at $100.01 and clip two cents on each trade. If their orders are random—if sometimes people buy and sometimes they sell, with no pattern—then that works out well for the market makers. But their big risk is what they call “adverse selection”: Sometimes, when a customer buys 100 shares at $100.01, it then buys another 100 shares at $100.02, and another 100 shares at $100.03, and keeps going until it has bought 10,000 shares and pushed the price up dramatically. The market maker who sold it the first 100 shares—and who is probably now short and needs to go out and buy those shares at a higher price—has been run over.

>[...] [I]f a market maker can guarantee that it will only interact with retail customers—if it can filter out big orders from institutional investors—then its risk of adverse selection goes way down. The way the market maker does this is by paying retail brokers to send it their order flow, and promising those brokers that it will execute their orders better* than the public markets would. [...] It can offer a tighter spread than the public markets—and have money left over to pay the retail brokers—because it doesn’t have to worry about adverse selection. If the retail broker is, say, one designed to let young people day-trade for free on their phones, then those orders are probably particularly valuable, because they are probably particularly random.*

[0] https://www.bloomberg.com/opinion/articles/2018-10-16/carl-i...

This is a facile analysis. If you believe HFT internalizers are taking money from retail traders, try to outline the series of orders that results in money from the retail trader's pocket going into the HFT's pocket, and precisely how the retail trader could have made that same money on their own.

The reality is that market makers price non-retail flow more conservatively (ie: costing traders more) because they have to anticipate informed large block trades wiping them out. Since they don't have to do that for retail flow, their cost basis for those trades is lower, and they can (and do) split the proceeds of that reduced cost with brokerages.

It's overwhelmingly likely that any other brokerage you use does the same thing, and simply doesn't tell you or pass any of those savings on to you.

But the zeroes that the HFTs are taking is from the old-line manual market makers, not sellers or buyers.

Stocks are not zero sum. In theory, their value is based on future income. Information about the future is what most affects stock prices, because it changes expectations around future income. Even with no transactions in a stock, offer price can continue to rise because of these expectations, and it represents real increase in wealth to people who own the stock, no transactions necessary. When offer price rises enough to tempt someone to sell then you have an estimate of the market value.

That's not true. When Robinhood (or any other retail broker) sends orders to a 3rd party to be filled, there is no way for that 3rd party to see who is sending the order other than it's coming from Robinhood. Robinhood maintains their own book customer orders; the FIX protocol that the orders are coded in doesn't even support that kind of granular info.

There are valid criticisms of payment for order flow but privacy isn't one of them.

Aren't all orders eventually public anyway? I get that the liquidity that "market makers" claim to create is not really that beneficial to society, but as long as you're not trying to use robinhood to compete with the high speed traders, I don't see a problem with it.

> Aren't all orders eventually public anyway?

no. most orders are not executed on the public exchanges, but by internal matching via your broker and a market maker. (also most exchanges only support trades in multiples of 100 shares.)

Exchanges handle odd lot orders nowadays. Maybe some brokers or dark pools do not, but they are not exchanges (their quote is not protected, or they show no quote).

I believe all customer trades/executions on actual securities should eventually be publicly visible, though there may be a small delay for them to "print to the tape".

Not doing so or at least in a condescended form is kind of operating a fraudulent exchange. It is kosher to bundle 50 buy orders of 1 stock into 1 order or visa versa - get a bunch of little orders that adds up to a cheaper option. If it doesn't work out refund and inform that it failed to go through. If they asked for 1 share at $25 and you legitimately give it to them it isn't fraud. It is another to say "buy" Tesla shares for people when you really shovel it into another investment and work out what they owe when you think they will just go bankrupt and Theranos is the way of thw future....

All the big banks and Visa and MasterCard sell your transaction data to marketers.

That's an extremely poor article. Anyone can throw a hot take on SeekingAlpha; that doesn't mean their take is worth anything.

1. I don't know why the title mentions "millenial" customers in particular, because every brokerage does this across all demographics,

2. This activity is not "selling out" customers. If you believe that customers are "suckers" because their order flow is sold to high frequency traders, you have a very fundamental misconception about high frequency trading and its role in market making,

3. There is no codified definition of, or law protecting, "financial privacy" in the sense of order flow. This data isn't connected to you as an individual, just as you can't see which individuals or companies are placing bids and asks in the order book just because you can see the amounts and prices. All trades in the market are publicly reported regardless of whether or not your order flow is sold.

It never ceases to amaze me how the term "high frequency trading" can compel people to pontificate about things they clearly don't understand. You'd think we'd have collectively moved on from the Flash Boys misconceptions by now. Yet here we are, with an article talking about high frequency traders as some kind of financial boogeyman in 2018.

privacy has nothing to do with it as all trades are reported anyway.

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