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Comment by xtacy | Hacker News Reader

Yeah, they still have to fill you at the NBBO, and this trade routing is no different from what other brokers (Schwab/E-Trade/etc.) do when you place a trade.

I wonder whether the fact that Robinhood doesn't internalise its trades (i.e., capitalise on the bid/ask spread by matching buyers/sellers from their own customer base) is the reason why market makers pay more to Robinhood?

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The reason why MMs pay more for RH is there are no toxic clients in there. RH's flow is almost entirely a bunch of little guys.

Toxic flow would be something like a huge institution that just keeps buying a stock they like. Once the market maker has sold them a few portions, he realises the price has moved against them.

With a bunch of little guys the MM combines:

- Benefit from the two-way nature of the flow. Some little guys are buying, some selling.

- Hedge against other pools of liquidity. Either find a similar stock (stocks are highly correlated) to sell, or an index.

- Hold on to the risk until it relaxes and goes the other way.

Ex MM / HFT guy.

Interesting, thanks for sharing your insights. I thought that huge institutions prefer to trade on exchanges directly (for anonymity), but it looks like there are other incentives in play.

There are degrees of huge. A large hedge fund still trades through a prime broker, who has the exchange connection. The PB plays yet another game by aggregating the risk of the funds they are servicing.

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