Robinhood was indeed too good to be true
morningstar.com
morningstar.com
The spread on most trades is probably in the range of 50c on low liquidity shares and $1 on low liquidity options.
Perhaps the reason RH collects more in revenue from order flow is because they:
1) get paid more for their order flow on a per trade basis
2) they don't collect any fees from options driving down revenue
3) they charge less for margin fees with less users using margin
There are any number of reasons, but to say that you're getting royally screwed is a massive stretch in my mind. Prior to RH fees were outrageous. The fees are still outrageous on my self-directed 401k. I'm not getting $10 in losses from bad execution.
> Overall, Robinhood’s investors may not have been harmed by their decision. The SEC identified $34 million that Robinhood customers lost by not receiving best execution, which is much less than the money they saved by forgoing trading commissions. (That said, their losses might also be much higher. That $34 million comes only from “certain” transactions, which might be the tip of the iceberg that the SEC possessed the ability to measure.) They were, however, duped.
> The SEC identified $34 million that Robinhood customers lost by not receiving best execution, which is much less than the money they saved by forgoing trading commissions.
But paragraph 42 of the Order[1] says (emphasis added):
> ... certain Robinhood orders lost a total of approximately $34.1 million in price improvement compared to the price improvement they would have received had they been placed at competing retail broker-dealers, even after netting the approximately $5 per-order commission costs those broker-dealers were charging at the time.
Unfortunately, the degree to which customers are getting fleeced is hard to know. Which, let me repeat, is exactly why this model exists. The article mentions it’s at least $34M but even the SEC seems unable to calculate the exact amount. And if they can’t determine it, then how in the world is the typical customer supposed to? At the end of the day, the degree to which customers are getting fleeced is probably exactly proportional to Robinhood’s revenue from order flow. If RH is receiving vastly less revenue-per-customer from that source than explicit-fee exchanges make from fees and order flow, then customers are getting a possible bargain. If RH is doing as well or even better with this model than competitors, their customers are probably getting screwed and don’t even realize it. (And if by some miracle RH isn’t abusing this, then other brokerages will abuse it and try to outcompete RH.)
On the other hand price improvement is so hard to enforce. I'm not sure how SEC can even regulate it.
If you make higher margins but don’t lower your prices, the only other way to outcompete is to offer a broader array of services. Otherwise “outcompete” just turns into “save up more money and buy them out”.
It's often a fairly "bad for you"/"predatory" product, too, but the problem is that it's very hard to create a new entrant doing it the "good for you" way, because all that extra margin the bad guys make can be used to squeeze you out of the market. Legacy industry examples would include whole life insurance, title insurance, payday lending, and whatever it was that "Dun & Bradstreet Credibility Corp" was selling (not the historical D&B) a few years back.
I consider it enough of a pattern of "bad money chases out good" that I identify it regularly among pitches I receive.
I sometimes do the reverse when I'm in a shop that I don't have good things to say about, especially if I think they just cheated me in some legally defensible way. Like Captain Ahab trying to kill the whale with his pocket knife. Fuck you, I'm taking 1.5% of your life away!
Robinhood is more expensive than commissioned brokers, it just hides the charges better.
You were willing to pay $100, so from your point of view you weren't "harmed" either way, but with the traditional broker you saved $2/share, and with Robinhood all the savings went to them.
Generally, brokers are either required to go with the best offer, or, if they don't, explain to customers that they don't and why. Robinhood violated that rule by marketing themselves and going with the best offers (but actually did the opposite) and that's what the SEC is fining them for.
Which do you think is more expensive for the customer:
1. $0.003 per share of inferior execution on a retail order of 50 shares.
2. A $9.99 commission.
Assuming they have multiple hidden revenue sources, that 9.99$ commission could be up to ~4 orders of magnitude cheaper.
So, sure the article is talking about one specific means their using, but that’s hardly the only option they have. Remember the best conmen run multi layered con’s, as people finding the first layer and trying to profit from it are the easiest marks.
The OP complained that with the benefit of hindsight the options went up in value after being sold, but given that all retail traders are degenerate gamblers with zero actual alpha there was a 50/50 chance the options could have gone in the entirely opposite direction, and selling them early could just as easily have saved the commenter thousands of dollars.
If closing early generates more profit then they don’t win or lose, just executing the trade at close for the customer.
However, if waiting generates more profit then they can always say they executed early while waiting and then pocket the difference.
They could even even pick a mid point at time X, then compare some random time period before and after the transaction looking for a hypothetical less profitable execution time.
Do you have an explanation that doesn't involve making up wild, evidence-free conspiracy theories? I can claim that Robinhood secretly makes most of their revenue from selling their users to human traffickers if I want, but that's not an actual reasonable criticism of their business model.
Anyway, the existence or not of this policy is kind of secondary to the idea that indirect profit can be more expensive to the users. Clearly they need to be generating some revenue, and if you don’t know where it is that’s often a very bad deal. 401k hidden fees for example can sometimes exceed the tax savings.
I think you misunderstand the payment-for-order-flow business model. The revenue doesn't come from hidden fees to the users. It comes from third-party liquidity providers. They do so because liquidity providers overwhelmingly prefer to interact with retail order flow over the undifferentiated toxic flow in public exchanges.
The best analogy is how Miami club promoters will get pretty girls free entry and drinks. The pretty girls aren't paying any sort of hidden fees, and in fact are getting a better deal than they would with general admission. Rather it's the venues that paying the fees, because they overwhelmingly prefer patrons who are pretty girls compared to the average person who shows up at the door.
That argument doesn't make much sense to me. People trade slivers of pennies for all sorts of things across the economy. Literally just liking a UI color has a value you can denominate in some sliver of a penny.
The SEC's problem with Robinhood isn't that they weren't offering the best available price improvement. It's that they knowingly weren't, but told customers otherwise. The implication is that if they'd simply been up front about it, and said "we don't charge commissions and have a snappy UI, and we make up for it by taking a bigger share of the rebates our upstreams offer to retail traders", they'd have been just fine.
(Robinhood is bad, but the reasons have very little to do with PFOF).
In this case the real questions are: (1) does RH's model result in some customers paying more for the same services than they would pay at competitors, and (2) can these customers realistically make the determination before they choose a service?
We don't exactly know the answer to (1), and the reason we don't know the answer to that is because the answer to (2) is "almost certainly not". In fact the RH model is so opaque that even the SEC can't fully answer the question, and on top of this normal opacity RH added a layer of clear misrepresentation.
Maybe in the end, it should be totally fine for brokerages to make all their money from order flow fees, in ways that are completely invisible and opaque to the customer, and regulators should just back off the whole thing as long as there are a few lines of text in a ToS somewhere. To me as a customer that seems kind of crummy, but I'm not a regulator.
Maybe you’ve read both and you disagree with the evidence presented. That’s ok by me: but it would be more efficient for you to state your arguments for why this case didn’t harm customers, rather than asking me to (poorly) litigate the SEC’s case. My only point here is a simple one: that opaque pricing schemes seem like a recipe for anti-competitive behavior.
If I had to summon a direct rebuttal to your argument, it would be this:
I perceive you to be suggesting that the problem with Robinhood is that it uses PFOF, which means that customer outcomes are dependent on private deals Robinhood inks with companies like Citadel, which aren't transparent.
The problem with that argument is that literally everybody, including, apparently, IBKR, inks private deals with companies like Citadel, which means you can't suggest that something is distinctively wrong with Robinhood for having done so.
I perceive you to be suggesting that Robinhood would be more honest and transparent if they simply charged a commission that covered their expenses, rather than doing weird PFOF deals. Again: practically every brokerage does PFOF, because it would be dumb not to. Most brokerages charge commissions, but that doesn't make them transparent; they are still turning a private dial in their back office that trades off customer savings with brokerage profits based on PFOF deals.
Robinhood, for what it's worth, is bad, and the badness does have something to do with "no commissions". But the problem isn't shady execution; it's that Robinhood is a gambling site, not an investment site.
From what little I've read here it seems that there is a continuum of different business strategies in which brokerages use their customer base and clout to negotiate PFOF deals that simultaneously (1) produce revenue for the brokerage, and (2) produce better prices for their customers. Since exchanges have finite financial resources, there is some tension between these two goals, which means that at some point brokerages are essentially trading their own interests against their customers' interests. This creates a power and information imbalance that can probably harm customers if the exchange behaves in ways that maximize (1) at the cost of (2). (RH is alleged to have pushed this balance much farther than common industry practice.) But that does not mean all PFOF deals are definitionally bad.
The question in this case is not "is PFOF always bad", but rather "is there some point at which brokerage-revenue-maximizing PFOF negotiations actually harm customers by overcharging them compared to a more transparent system." The answer to that question is simple: almost certainly there does exist such a point and when a brokerage reaches that point, customers probably won't be able to tell that the point has been reached. Moreover, brokerages with no commissions seem clearly incentivized to optimize towards or beyond that point. Maybe you could argue that RH hasn't reached that point in this specific case, but this does not seem to be your argument.
The question then is: what do you do about it? Should all PFOF be disallowed? You seem to be making a compelling argument that this is not a good solution. Should there be some kind of standard for how much that brokerage/customer balance should be allowed to stretch? Plenty of business practices are regulated along lines like this, where the regulation doesn't outright ban the practice but instead provides some guidelines and standard practices to prevent abuse of weaker parties like customers.
I'm not here to give an answer: I'm just pointing out that eventually if you allow brokerages to keep optimizing for revenue, customers will be harmed. Maybe they already have. At that point it's up to the regulators to do something, because that's their job.
As I've said: I'm a little bit at a loss as to what your problem with Robinhood even is. They don't charge trading commissions. But they do take an 80/20 share of price improvement payments where other brokerages take 20/80. We can all agree that it's not OK to lie about doing that. But now we know†, and they've been fined. What next? Should they take 20/80? Why not 15/85? Is the right split just what the majority of the other discount brokerages take?
Again: I loathe Robinhood. They are a force for evil. But when people come up with weird diagnoses for why they're bad, it leads them to make silly decisions about other discount brokerages, none of whom (a) seriously prioritize their customers (perhaps excepting Vanguard), or (b) operate the way people on message boards believe brokerages operate.
† You might be able to argue that knowing the right Google query here, and also giving a shit††, would have enabled you to know this before the SEC announcement, because Robinhood's most important venue is also Schwab's, and you can just compare the per-share rebate they're getting. My confidence level here is not super high.
†† (my subtext here is that people don't really give a shit)
What consumers don’t have the time or resources to do is try to reverse-engineer the costs that they are actually paying when using RH’s platform. I’m not even sure they possibly could do so given the information asymmetry between firm and customer, and your “maybe there’s a Google search but I have low confidence” counterargument isn’t moving me. The SEC report shows that for some customers RH’s costs were inordinately high compared even to competitors that charged fees and had PFOF revenue, but others weren’t. How do I, as a customer, actually figure out how much a trade is going to cost me at different brokerages? Under the current regime (even without RH actively lying about PFOF revenue) it seems like customers cannot figure this out in any reasonable way.
The question then is: what should regulators do about it? Your position seems to be some kind of binary “we must either disallow PFOF entirely or allow any PFOF arrangement without reservation as long as brokerages disclose that PFOF revenue exists somewhere in their TOS.” My point is that different PFOF arrangements have very different impact on customer prices. For example, it's easy to envision a large class of PFOF arrangements that are undeniably harmful to customers, and yes, absolutely regulators should find some reasonable grounds to police those. Because at the highest level, a situation in which those deals are allowed is going to be terrible for consumers. With brokerages hunting for new revenue sources, those situations are going to become increasingly the norm.
ETA: Even ignoring the “bury it somewhere in the TOS” problem, it’s not obvious to me that simply disclosing “we have PFOF arrangements” is sufficient. It seems problematic that a single disclosure should apply equally to everyone from Vanguard to Schwab to RH (or even some hypothetical future scam brokerage that massively overcharges its customers via PFOF) when all of these companies have wildly different arrangements that affect customer trading prices differently. The nature of the arrangements matter too, and at minimum customers deserve sufficient disclosure of the arrangements that they can make determinations about which company is going to cost more to trade with. I hope we can agree that current disclosures and your random low-confidence Google searches do not achieve this goal.
> For most orders of more than 100 shares, the analysis concluded that Robinhood customers would be better off trading at another broker-dealer because the additional price improvement that such orders would receive at other broker-dealers would likely exceed the approximately $5 per-order commission costs that those broker-dealers were then charging. The analysis further determined that the larger the order, the more significant the price improvement losses for Robinhood customers—for orders over 500 shares, the average Robinhood customer order lost over $15 in price improvement compared to Robinhood’s competitors, with that comparative loss rising to more than $23 per order for orders over 2,000 shares.
Given who RH's target customers are, it seems that the majority of them benefited from no commission and worse execution than if they used a competing broker.
I've never used RH, but I'm happy that they forced all competitors to get rid of their per trade fees.
There are two violations in the order:
(1) Securities Act Sec. 17(a) arising from Robinhood's failure to fulfill their duty (in this case, of best execution).
(2) Exchange Act Sec. 17(a) arising from Robinhood's failure to keep adequate records which means that during the course of the investigation the SEC asked for one or documents and Robinhood, for whatever reason, failed to produce the requested document(s).
Neither of those violations relate to Reg. NMS or NBBO which was promulgated under Exchange Act Sec. 11A and is not mentioned anywhere in the Order.
That's an orthogonal criticism. But the point is the same regardless. Even if RH customers see smaller price improvement, they're still better off than at a hypothetical brokerage that eschews payment-for-order flow. Because in that case they'd see zero price improvement (plus pay public exchange fees and commissions).
The customers are still better off, but not by as much as the advertising said.
It would be interesting to apply this insight to "surveillance capitalism" industry. You get to use Google/Facebook/Twitter/etc for free, even though there is some fixed amount you would theoretically be willing to pay to use them. In exchange, the companies use your personal information to display ads to you, but you have no idea what that is worth to those companies. In other words, your personal info (which is used to sell ads) is by definition worth more than the cost to serve Google/Facebook/Twitter to you (otherwise those companies would make no money). But you have no way of knowing how much more.
>The spread on most trades is probably in the range of 50c on low liquidity shares and $1 on low liquidity options.
Is demonstrably wrong. The minimum spread on options contracts is $1 and the spread on liquid options contract (not SPY liquid but like TSLA or AAPL) is generally in the mid $10s and often hits $100+ on ATM contracts). Right now an ATM call on AAPL a month out quotes 4.75 to 4.85 which is $10 and the same on TSLA quotes 44.05 to 44.40 which is $35. Not a trivial amount, and it implies that the broker could get price improvement that is an order of magnitude more than the typical commission on options (~1$ per contract).
The feature set in RH is straight up heavily diluted compared to other brokers like IB or TD (TOS). There's no way to set exchange parameters in RH, users can't edit the charts for TA, and the functionality is heavily reduced on purpose for the sake of not overloading users that have basically no clue what they are looking at anyways.
Not that any of this excuses RH. Given RH's user base, some random person trading PLTR and GME calls probably is not even looking into any of this stuff to begin with.
Seriously considering taking them to small claims court. No notification beforehand, and even afterwards it took a week to find out what happened.
You don't need to be an expert in the rules and try to determine on your own whether it's a violation of FINRA's rules. FINRA will do that for you.
Even if Robinhood technically disclosed that they might do it, violating a customer's express orders without documenting appropriate reasons for doing so is generally a violation of FINRA's rules. Brokers have lost their licenses for shenanigans like that.
Contacted support, and they responded within 2 minutes explaining exactly why this had been done (risk profile at the time, and insufficient margin to cover). They answered all my questions and even explained what I should do to mitigate this issue going forward.
These kids with their RH accounts have no idea..
Those other brokerages charge trading fees (these days, just for options trading), so of course their proportion of revenue from order flow will be lower.
I lost thousands when Robinhood prematurely executed my position ~100 minutes before market close. I was waiting for right before the hour window.
Of course, 10 minutes after they sold my position, it quadrupled in value. I even already had had a limit sell order on the books! They cancelled my order, and executed their own, without any notice, outside of their own documented window.
When I contacted support and pointed them to the docs, their reply was that it could be “anywhere from 60-90 minutes before close.” Here is their email [1]. I asked them to provide a link to where their documentation says such - they never responded. I followed up twice.
Such utter bullshit. Immediately switched to ETrade and have had a great experience. There is a nice representative who’s direct phone number I can call and always reach, she always answers, and gives me any info or help I need. She called me within a week of me opening the account just to say hi and walk me through my account settings.
Also, sure, ETrade will auto sell your position too - within 10 minutes of market close. That sounds a lot more like protecting my investment, than a 60-90min window used to drain retail investors of their expiring options.
Edit: this page [2] still says "about an hour" to define the auto-exercise window. Click on the "What happens" dropdown under the first header.
[2] https://robinhood.com/us/en/support/articles/expiration-exer...
I would not use Robinhood for HFT or in general where I would care about the speed of trade execution.
But they don't, because of everything that you said. They are lightweight by design, they are not for large investors, they are made for the retail space.
You can see this echoed in their featureset - for example, no historical date on options prior to purchase date, and only visible once you've purchased the contract. With Etrade or other institutional brokerages, you have access to full historical data for any contract or stock you are looking into. You are able to educate yourself and make much smarter decisions, without leaving their app.
Granted, the Robinhood app is much smoother. They dont' have an iPad app though, which was another big con for me.
Although it leaves a sour taste, I can't disagree with what you've said.
I think you nailed the sentiment well, basically blind spots in an industry that thrives off exploiting them.
But even with this caveat, RH should still have a reasonable business model. I think the vast majority of individual investors have most trades that are not time critical. For those folks, having investment options that they would otherwise be priced out of may be a good thing. My 2c.
Hence my ETH bot example, which often times use cross-exchange strategies that are indeed latency-sensitive.
[1] Second and third year law students performing limited legal work under the supervision of an experienced attorney.
The whole point of these new apps is that millennials don’t want to talk to you on the phone.
But between having a rep proxy my account needs, or zero recourse for dealing with my account problems? I'm happy to make the phone call.
Former options market maker. A reliable source of alpha involved mining retail brokerage agreements--particularly the online-only ones, which were the bleeding edge at the time--for these sorts of shenanigans.
In some cases, the conflicts were clear. We paid a large brokerage for their options flow. They got a premium because, in part, they didn't automatically exercise in-the-money options at expiry. So you'd have a stream, on every expiry, of free money coming in. It always struck me as odd that one part of their business was profiting from another being deficient.
[1] http://finra.org
In fact it takes incredibly sophisticated infrastructure to do it. The kind of infrastructure you build if you are a market maker who would like to pay for order flow.
Even the SEC doesn’t have the capabilities to check execution rates for every order. They rely on audits of smaller subsets of the orders in historical reports.
For normal investors / traders / gamblers, this shouldn't make a difference. The reality is that most micro-swings in a stock are indistinguishable from random noise, so if a price "should" have been $10.05 and you paid $10.07 on Robinhood, it's just as likely that 5 seconds later you're at $10.03 as you are $10.11.
So....shrug
Seems like the big brokerages should encourage Robinhood "gaming".
Speaking of which — would love to see a game (does it exist?) where you can play at an investor with pretend money and real market day to say numbers drive your winnings.
Paper trading is definitely a thing, and there's plenty of apps that support it. The problem is people will never act the same with paper as they do with real money. It doesn't correlate at all. This is why Vegas odds tend to be far more reliable than polling numbers.
However no one treats that remotely the same as real money. Good chance whatever you do with fake money won’t matter much the second you have a big loss with your real money.
It seems like market orders are, and always have been, for chumps. Robinhood is just being more shameless about abusing them than previous brokers.
Depending on your broker, they may have built-in safety mechanisms for market orders. I use Fidelity and they have a price improvement feature. They basically execute your order at the best possible price available at that time.
The way that this is bad is if you are a high frequency trader making micro-trades to capitalize on tiny upticks throughout the day. These rely on frequent 0.5% upticks to make money, so a 0.5% surcharge cancels out its effectiveness. Or someone who is pushing significant capital through the brokerage. If you are pushing $10k - $100k trades then this starts to really significantly hurt you. But then again, Robin Hood isn't really meant for you either. Schwabe, TD Ameritrade, Fedelity would work better for you.
But for the average Robin Hood investor, most of us are making a handful of trades a month at small volumes (yes, even $1,000 trade is a small volume). Most Robin Hood customers are trading even less. A single share here and there.
In the later case, this technique for revenue generation from Robin Hood is actually GOOD for its customers. Instead of paying a flat $7 trade fee that a larger investment firm might charge, you get a "free" trade that technically was marked up 0.5%. So on a $50 share, this means you pay $50.25, essentially a 25¢ fee. This is still better for Robin Hoods customers. And Robin Hood making money is actually a good thing for their customers, because it means they can stay around and continue to exist. Robin Hood serves a niche in the trading space that larger firms have no interest in serving. Robin Hood is starting to learn why the larger firms have no interest in this space, but if Robin Hood can figure it out, then it is good for the larger population that can benefit from its service.
If you're purchasing in retail volumes and holding for the long term it's negligible. Don't sweat it.
No this is too pessimistic, there are best execution rules which say the broker must get the best price possible. It can trade off exchange with a hedge fund, in a dark pool or internally with another customer, but the price must be better than that of the exchange bid/ask.
Suddenly, the popularity and profitability of HFT starts making a lot more sense.
If you think that the profitability (what little there is left) of HFT is due to maliciously manipulating the time of customer order submissions than your understanding of how this system works is flawed.
Here are some ways it happens:
1. A broker-dealer has client orders in its possession and trades ahead of them (classic front running)
2. A hedge fund with 2 portfolios trading correlated signals, one faster than the other (the Medallion-RIEF hypothesis)
3. Anticipate retails flows using behavioral advertising data or network intercepts from a statistically meaningful population (the Robintrack model)
There are more, but they all share the same flavour. I wonder if Robinhood is sending retail orders to anyone running strategy 3.
It's not as simple as that. Market orders vs limit orders are a trade-off between immediacy and price. If you have an information advantage you may want to capture it as fast as possible and execute a market order (or a limit order that crosses the spread). The person on the other side with the standing limit order faces the risk of adverse selection (ie. they are only matched when their information is out of date and the price is too low or high). With a limit order you can avoid crossing the spread but you might either miss getting filled or only be matched when the price moves against you.
Overall Robinhood has been a net positive that disrupted & forced old retail investors trading platforms to go 0 commission
I’ve always been more of a long term dividend investor so micromanaging my trades isn’t something that I tend to spend much time worrying about. If it’s a good investment, it’s a good investment.
All things being equal if you don’t care much about execution costs limit orders that cross the market are what you want.
Poor execution leads to a lot of shortfall, good execution leads to a small amount of shortfall and in some cases even negative shortfall.
You can think about execution slippage as being the "information impact" of trading and a good broker will attempt to minimise this cost along with other transaction costs (eg fees etc).
Note that for a limit order to be executed, you need someone else doing a market order (or a limit order with price below market).
https://kjlabuz.substack.com/p/57-robinhood-traders-anonymou...
The more boring a firm is, the better I feel.
This is true for ETrade, TDA, Schwab, TradeStation, TastyWorks, and friends. Your order flow must be sold to give you free trades. It's operationally impossible to be any other way since everyone, at minimum, is required to pay fees to the exchanges. Someone needs to pay for you, and a broker sure as hell isn't doing that for free.
- CME Fees: https://www.cmegroup.com/company/clearing-fees.html
- NYSE Fees: https://www.nyse.com/markets/nyse/trading-info/fees
- NASDAQ Fees: http://www.nasdaqtrader.com/trader.aspx?id=pricelisttrading2
Robinhood, for example, waives all of these somehow only charging for certain regulatory fees:
- Robinhood: https://robinhood.com/us/en/support/articles/trading-fees-on...
Robinhood also miraculously waives these mandatory fees for small transactions.
How? By selling your order flow just like everyone else.
If you really care about good executions and your order flow not being sold, you should use a service like Interactive Brokers.
Kind of, but the article specifically mentions that Robinhood is getting 4x more money than the industry average, in exchange for giving users worse prices:
> Typically, the SEC found, payments for order flow equal about 20% of the average price improvement that investors realize on their trades. But Robinhood insisted on receiving what amounted to 80% of the improvement: 4 times the customary level.
> When Robinhood made that demand, the principal trading firms with which it was negotiating informed the company that something had to give. If Robinhood were to take that much of the proceeds for itself, then “there would be less money available for the principal trading firms to provide price improvement for Robinhood’s customers.” In other words, Robinhood explicitly was informed that more for it meant less for its customers. The company accepted those terms.
yeah they have VC money. you can offload the cost as a consumer until they change their business model.
They have details here: https://gdcdyn.interactivebrokers.com/Universal/servlet/Regi...
But essentially if you are using their “pro” service, which charges commissions then no. If you are using their “lite” service with zero-commission then maybe.
The brokerage is forwarding your flow to one of it's partner broker-dealers who is providing the actual execution service. Those BD's would happily take this flow for free (as evidenced by the fact that they now _mostly_ pay for it). The executing BD, not the brokerage, is on the hook for trading fees _if_ they need to execute the order in the public market - which is rare as they mostly internalize that flow. The executing BD's business model is based on the assumption that the flow is not particularly toxic and that at scale, the profit margin per share exceeds any execution costs.
The larger point stands though: from the perspective of the executing BD the payment for order flow + price improvement are both costs, which they want to cap. If you dial up PFOF, you naturally get less price improvement.
I am glad the SEC came down on it. This is actually a very minor penalty and more like a slap on the wrist than anything else. But it shows at least that there is some scrutiny of what RH tells its customers.
I have raised FINRA complaints in the past about this company for their poor order handling. I encourage anyone else to do the same when they see something wrong with RH or any other trading platform.
RH needs to massively increase its controls as well as investor education.
I think this penalty is also a massive day of reconing for their business model. They need to move to more of a full service broker - like all the other old-school firms. There's no money in order routing such as this. They need to boost their account size and attract higher quality users focused on investing - not gambling.
This seems like one of those companies that can't both carry out their business and say what that business actually is. In any industry there's the official story of how it makes money--obsessing with quality is a common stated goal--and then there's the actual nitty gritty of how it gets the impression of that quality without going to all the expense.
This seems like the financial equivalent of Facebook/Google. Free to use, but you are the product the company profits off of. I'm not really seeing an issue if there is no measurable _net_ harm to the investors.
>certain Robinhood orders lost a total of approximately $34.1 million in price improvement compared to the price improvement they would have received had they been placed at competing retail broker-dealers, even after netting the approximately $5 per-order commission costs those broker-dealers were charging at the time.
So, could this mean that Robinhood's business model just went bust? If they are getting the majority of their revenue from, and they will now be required to provide, presumably, some form of execution that is closer to best execution, then the other firms they are trading with will lower the money that RH receives, no? Naturally it may not matter - they are a SV darling and have quickly made Schwab et al look like dinosaurs.
You pay commission.
If you don't pay commission, you pay in bigger spreads they offer.
If the spreads aren't bigger then you're getting worse execution.
All anyone can do is understand HOW they are paying and use that information to minimise what they ultimately pay.
"Free" isn't a thing.
"What do you mean I can't know how much I'll be charged until after I'm charged?"
"I made two identical orders and the second one cost twice as much!"
"What do you mean there is a way to tell me how much I'll be charged, but at the cost of getting filled at a worse price?" etc.
“There are three ways to make a living in this business: be first, be smarter, or cheat.”
I constantly wish for the new Silicon Valley startups to do the first two and I usually only get the last one.
>When Robinhood made that demand, the principal trading firms with which it was negotiating informed the company that something had to give. If Robinhood were to take that much of the proceeds for itself, then “there would be less money available for the principal trading firms to provide price improvement for Robinhood’s customers.” In other words, Robinhood explicitly was informed that more for it meant less for its customers. The company accepted those terms.
There's a missing logical step here: if 80% fees mean there is less money available, so will 20% fees. So is it just that payment for order flow is inherently bad for the customer, and RH are the worst of a bad bunch?
For me, the Morning Star is a British socialist newspaper[1] and I thought the story would be about debunking the myth of the outlaw Robin Hood.
Quite an irony that this Morning Star website seems to be an investment and stock market news site.
[1] https://en.wikipedia.org/wiki/Morning_Star_(British_newspape...
It's also a fairly victimless crime, as the article notes (although it downplays this); in practice, it seems users typically saved more money thanks to Robinhood's zero-fee trading than they lost in less optimal pricing for their trades. The problem here wasn't that payment-for-order-flow is bad — even Schwab does it for their zero-fee trading platform, and in practice it's often a good tradeoff — the problem is Robinhood lied about it.
RH demanded 80% of it for themselves. Sure, their customers still got a better price than available in the lit exchange(s) but they were bilked by the 4x hidden commission.
Use a decent broker like Interactive Brokers, Thinkorswim or Schwab. Schwab comes with a decent bank account.
And I am neither a big fan of day traiding nor trading on the phone with an app.
Read any second post by Matt Levine over at Bloomberg as to why selling of order flow isn't necessarily bad, and probably quite ok, for retail customers. But the gist is: fulfilling retail customer orders is lucrative for market-makers because they do not run the risk of fulfilling some order that is part of a larger, institutional, trade that will make the market move against them a short time later.
The difference is Robinhood is taking a larger percentage of the payment than most others. If you provided that information months ago, it may have been a worthy comment.
https://banyanhill.com/robinhood-infinite-leverage-money-che...
https://www.bloomberg.com/news/articles/2019-11-05/robinhood...
Investors prefer paying indirect, opaque fees to paying explicit fees AND indirect, opaque fees. They simply assume that they are being charged the opaque fees no matter what. As this article demonstrates, they are generally correct about that.
Kinda fits the Robinhood moniker, right?
But because they chose to shop around for better prices than they could have achieved with directed orders, they had an obligation to pass on more of that price improvement to the customer. How much more? It's not clear. Seems like the SEC is hinting at "roughly as much as everyone else does" - brokers shouldn't be allowed a business model that subsidises low trading fees with high PFOF.
Other brokers subsidise their low or zero trading fees by collecting interest on their customers' cash balances. This only works when the balances are relatively large. The SEC's approach arguably encourages transparency, but I don't find either business model particularly transparent - the bigger effect is to discourage brokers targeting smaller clients.
It’s fair to say that this rule cuts off some interesting business models which might better serve different market segments, but that’s largely the point. In the SEC’s judgment, the potential for abuse is too high if stock brokers start acting like retail stores.
That's the definition of best execution as it applies to undirected orders. But you can also offer your clients direct execution on the exchange, in which case you don't have to (and must not) shop the order around. If RH had done that, they'd be in the clear.
Yes, I understand that retail brokers aren't usually in the business of directed orders (because shopping round the orders is in the interest of both them and the client).
This seems like a distinction without a difference. If you accept any payment for order flow you're always implicitly rejecting a hypothetical alternate arrangement where you agree to give up all PFOF in exchange for better price improvement.
Unless I'm missing something the boomer either didn't catch that, or chose not to acknowledge it. As a millennial I'll assume his best intentions and that this isn't an attack on a successful company business model that he's receiving a kickback for to de-legitimizing Robinhood.
What you're missing is that Robinhood is not the only commission-free brokerage. I'm sure you'd rather have no commissions and 80% of the price improvement instead of no commissions and 20% of the price improvement.
The real problem is that Robinhood advertised they have THE BEST EXECUTION compared to other brokers, set up a Committee to ensure they have THE BEST EXECUTION, and then that Committee somehow failed to notice that Robinhood clearly doesn't have THE BEST EXECUTION because they're taking an 80% cut of price improvement, instead of 20% like everyone else.
Person B places a trade, then there’s some breaking news about the COVID vaccines and the market fluctuates, and then the trade is executed. Person B makes more money than expected because it took longer for the trade to execute and there was time for the market to change.
The broker may be able to route order that to a venue that will execute at $10.05; this is potential price improvement for the seller.
The potential price improvement is split between the broker and the customer. This is what "payment for order flow" really means. The broker routes the order to a particular trading venue in exchange for a cut of the potential price improvement, with the rest going to the customer.
What's worth knowing about Robinhood is a) they did not disclose that they were being paid for order flow and b) that they contracted to receive a much larger cut of the potential price improvement than was typical; e.g. other brokers might take $0.01 of that improvement, whereas Robinhood was taking $0.04.
Is there any demand for this?
I would've thought the self-styled "retards" of WSB would love the high-volatility, high-return nature of the commodities market.
1) a robin hood trader submits order
2) robin hood routes it to principal trading firm for a small amount
3) principal trading firm executes trades and makes profit by selling or matching order on other end? (this i got from a high frequency trading book )
so robin hood was fined because, they got more money for this? or customers have to pay more for a stock since it goes via robin hood, how the customer was affected ?
That one.
It's a bit complicated but the gist is the price Robinhood customers pay for their securities is worse than it could be due to the deals RH has with their trading partners.
.. reads FAQ ..
"yeah they're probably selling your data"
> [...] 76% of retail investor accounts lose money when trading CFDs with this provider [...]
This was completely unnecessary, but true.
And now, please permit me a hearty laugh at the expense of millennials...
LOLOLOL
However, I know people that have used robinhood, I’m upset that they were affected, and I don’t blame millennials.
Everything else is pretty much just sour grapes or outright smears.
These were specific actions approved by specific people. Why hasn't the SEC file criminal referrals against the people involved?
Lawyer Ken White, aka Popehat, regularly points out that laws about crimes appear to vary quite a bit based on how much a lawmaker can imagine that they might see the sharp end of the law. Seems like that's in play here.
A false statement that covers up one party gaining at another's expense is something that I'm going to presume is a lie. Especially when that false statement is made prominently, over and over. Calling that an inaccuracy strikes me as another convenient inaccuracy.
Because it's a civil offense, not a criminal one.
See for example https://files.klgates.com/files/upload/se_manual_chapter_8.p...
That wasn't lack of disclosure. It was disclosure of the opposite. This is called fraud. Fraud of both customers and investors.
It was certainly serious enough to warrant $65 million fine.
So when deciding upon what punishment would be proportionate to the crime, there tends to be more empathy with the defendants as they are part of that same 'in group'.
This article feels like a smear to me. As a knowledgeable investor, I can say that however Robinhood makes their money, hasn’t had any significant impact on the performance of my investments. Quite the opposite. By not incurring fees per trade and by allowing fractional shares, I was able to start with a much smaller amount of capital.
If your trades comes down to a cent or two, you shouldn't be using Robinhood. If you're actually investing, and not a high frequency trader, Robinhood is great.
From the article: "The SEC identified $34 million that Robinhood customers lost by not receiving best execution, which is much less than the money they saved by forgoing trading commissions." The article literally confirms that the saved money on trading commissions is far more than the money lost on slightly worse executions.
Now that other platforms have started to offer commission-free trading, is this still the case?
"(That said, their losses might also be much higher. That $34 million comes only from “certain” transactions, which might be the tip of the iceberg that the SEC possessed the ability to measure.)"
Martin Shkreli's customers made money but he still went to prison for fraud.
fraud: wrongful or criminal deception intended to result in financial or personal gain
> ... certain Robinhood orders lost a total of approximately $34.1 million in price improvement compared to the price improvement they would have received had they been placed at competing retail broker-dealers, even after netting the approximately $5 per-order commission costs those broker-dealers were charging at the time.
What’s the first rule of fight club? The stock market is not for retail investors. When the retail investor shows up (represented via the prominence of a Robinhood or a Etrade once upon a time), you’ve entered ‘time to get real’ territory.
Their entire customer base will be gone once things get ugly, so don’t even worry about how they make money since they are going to have bigger problems inevitably.
What happened the last time everyone’s mom became a real estate agent pre-2008? These things are symptom of a fantasy playing out.