It seems like market orders are, and always have been, for chumps. Robinhood is just being more shameless about abusing them than previous brokers.
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 they are only matched when their information is out of date and the price is too low or high).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.
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.
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).
Overall Robinhood has been a net positive that disrupted & forced old retail investors trading platforms to go 0 commission
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.
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).
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.