Robinhood’s Customers Are Hedge Funds Like Citadel, Its Users Are the Product | Hacker News Reader

Robinhood’s Customers Are Hedge Funds Like Citadel, Its Users Are the Product

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117 pointswhoknew112214 comments

One big difference between Robinhood (and other commission free brokers) and other service providers where the users are the product (line Facebook or Google) is that Robinhood has a legal fiduciary duty to the users and a federal watchdog tasked with enforcing that duty.

Personally, as both a former trader and a current Robinhood user, I’m much more comfortable with their relationship with Citadel than I am with Facebook or Googles relationship with advertisers (I’m a google user and ex adtech person fwiw).

I wonder which one RH cares more about...

- their legal fiduciary duty

- or shareholder value

My guess is like most US companies, revenue generation and shareholder value is their main concern.

Disagree? There are thousands of similar examples:

- Deustche, Chase, HSBC, etc

- housing / mortgage crisis.

- Enron, VW, Purdue Pharma, Tyco, etc.

- Every annual big pharma qui tam lawsuit.

I don’t mean to sound condescending but your inclusion of the breadbasket of any big company that has acted poorly in a discussion about what brokers legal duties are show why this subject is so fraught. You are extrapolating from any and all corporate scandals behaviors about a particular regulatory regime.

Broker oversight is complex and constantly changing but it’s not immaterial. It’s regularly enforced and compliance is a big part of broker ops.

Aren't Deustche and VW German companies?

>I wonder which one RH cares more about...- their legal fiduciary duty - or shareholder value

Given that Enron ended up losing their shareholders 70 billion caring about the latter without the former isn't really possible. Financial authorities are the ones in the US you don't really want to mess with in particular.

What fiduciary duty? They disclose right up front that they are paid for order flow, and I assumed, correctly, that this meant they were allowing Citadel, et al. to front-run the retail orders and skim risk-free cream from the rubes. As a former trader, if you're fine making a donation to Ken Griffin with every trade, I suppose there's little more to say there, but Robinhood markets their service to unsophisticated investors that may not realize that is what they are effectively doing.

Brokerages have a duty to their traders. I imprecisely spoke when I used fiduciary as recent guidance says they have the lower “suitability standard”. With regard to fills they are covered by reg nms and the nbbo. All of that is a much stronger regime than Facebook is under and to my opinion Facebook uses their power much more detrimentally. Reasonable people can disagree on that.

All retail brokers besides vanguard and IB’s paid tier sell order flow. This enables cheap/free trades and low spreads which I view as well worth the execution difference ymmv.

I’d also suggest if your mental model is that citadel is doing risk free front running you don’t understand market dynamics correctly.

In any case it’s cheaper for me to execute my retail trades than any time in history. I’m good with that outcome.

I'm sure the average Robinhood investors volume is low enough that an Office Space penny fraction skimming scheme is a pretty meh thing.

But combined, it's sure is something.

That’s not how internalizers work...

Stock brokers are not fiduciaries.

Sorry I used fiduciary imprecisely. All I meant to say, besides all the movement in the SEC position on wether brokers are advisors/not and what that implies about their responsibilities, there is case law and a regulatory agency responsible for it. Contrast that with Facebooks obligations to their users.

This is a well known fact. If a stock broker is offering zero commission trades, any competent investor or trader would look into how they can offer their service for free before using it. They make money by selling your orders to market makers. Market makers can withdraw liquidity from a stock if it becomes too volatile for them to be able to provide market making service on. So it makes sense that Robinhood halted trading on Gamestop, if they have no one to sell that order flow to. The alternative would be to start charging commissions but you can't expect them to turn their business model upside down overnight.

Complete this sentence : If the product is free, who is the real product ? ______________

And the origin customers are companies themselves who want to achieve some kind of liquidity, but want nothing to do with mayhem.

I can see major listed companies making rules about their shares requiring minimum transaction fees etc. to help avoid the volatility.

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