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Comment by imcoconut | Hacker News Reader

This is robinhood's fault.

He's not wrong that instant (or same day) settlement would be better than T+2, but there were plenty of other brokers that did not restrict trading. This was a liquidity issue for robinhood. This is a risk you run being a "cool startup that moves fast and breaks things" in the arena of securities trading. Additionally, Some of the bugs they've experienced are absurd in the context of a broker that potentially houses people's entire liquid net worth, including a bug that reversed the direction of trades - "oh you meant to sell those shares? whoops!"[0].

Why choose robinhood when the alternatives include some of the most well capitalized institutions in the world, eg JP Morgan or Bank of America Merrill Lynch - they have literal trillions in assets each and neither has these issues. I appreciate that robinhood pioneered zero commission trades, but that has been largely adopted by the industry at this point. From my standpoint I only see risks versus their peers and precisely zero benefits.

I implore everyone here to stay far away from robinhood.

[0] https://www.nytimes.com/2021/02/02/technology/robinhood-ceo-...

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I think this is jumping the gun. Robinhood takes some fault yes, but why are people ignoring the DTCC/clearinghouses role in this?

It seems they raised deposit requirements potentially more than was standard. This needs to be investigated.

WeBull's CEO claimed their clearinghouse told them to stop selling these securities (no mention of deposit requirements). If they really weren't even given an option to deposit more, that seems to me to be an abuse of power by the clearinghouse.

Finally, was the DTCC not having the long side cover the risk on the short side? It seems to me, the vast majority of the risk was on the shorts. The short side seemed to be made up of mostly large hedge funds, so if one went down, it would have been extremely difficult for the DTCC to front the cash on all of their trades, and of course shorting has infinite risk. The long side was finite, was distributed among multiple brokers and then even more distributed among retail investors. It seems like the risk was low there.

People ignore the clearing house because they don't see it, they don't interact with it, and they don't have a customer contract with it. For all their practical purposes, the clearing house doesn't exist.

It's obvious from RHs statement that they are stuck between the DTCC and customers. They are not willing to call out the DTCC because they are fully at the mercy of it. So they are trying their best to be positive and forward looking, trying to offer help to rally around something totally outside their control (real time settlements).

> they raised deposit requirements potentially more than was standard

What is your source for this?

DTCC collateral requirements are calculated using, more or less, a fixed, predictable formula. And the DTCC isn't the ultimate creditor in these arrangements. They are drawing on lines of credit from banks, who are ultimately taking the credit risk of the collateral being insufficient for settlement.

Vlad said live on air (in Clubhouse) in conversation with Elon Musk on Sunday that the clearinghouse increased their requirements from (IIRC) 30% to 100%, and that the formula for calculating that was "not transparent" and had a component that was "a multiplier based on their opinion".

RH negotiated with them all Thursday last week and reduced the required payment from $3B to ~$0.7B. So it sure seems like the DTCC made an arbitrary decision to jack up systemic safety cushion that resulted in the RH clients turning very sour.

DTCC has higher requirements for concentrated positions than for other uncleared CNS positions. Couple this with Robinhood laying out its own capital to fund margin trades and Robinhood Instant trades, and you've got some pretty aggressive capital commitments.

  (PROCEDURE XV)
  288
  II. if the absolute value of the largest non-index position in the portfolio
  represents more than 30 percent of the value of the entire portfolio (the
  “concentration threshold”), an amount determined by multiplying the gross
  market value of such position by a percentage designated by the
  Corporation, which percentage shall be not less than 10 percent. Such
  percentage shall be determined by selecting the largest of the 1st and
  99th percentiles of three-day returns of a composite set of equities, using
  a look-back period of not less than 10 years that includes a one-year
  stress period,2 and then rounding the result up to the nearest whole
  percentage.
  The concentration threshold would be no more than 30 percent, and would
  be determined by the Corporation from time to time and calibrated based
  on the portfolio’s backtesting results during a time period of not less than
  the previous 12 months.

Also, the fact that the man running Robinhood gave out material nonpublic information on a a private podcast with a billionaire says a lot about his judgment, in my opinion.

> had a component that was "a multiplier based on their opinion"

I'll chalk this up to colloquialism. The DTCC has very little discretion in what they do. That's why they're trusted to do it.

The "opinion" component could be a reference to their line of credit banks, who adjust the rates they charge the DTCC based on their varied risk models. There is a valid argument that there isn't as much transparency in that layer as there could be. But that isn't relevant to this case.

Any off-the-shelf collateral cost estimation tool should have told you, given GME's realized volatility in the week prior to the fiasco, that it was a high clearing risk. If the CEO is getting blindsided by the DTCC at 3AM, it's a oversight of internal controls.

> RH negotiated with them all Thursday last week and reduced the required payment from $3B to ~$0.7B

Negotiating collateral requirements involves netting out trades and delaying settlement on some trades and accelerating settlement on others. It does not involve recomputing collateral rules. (The DTCC can't recompute collateral rules for one member over another.)

To add to your comment:

In his chat with Elon Musk, the RH CEO said that Robinhood was given the $3B bill at 3am in the morning, and got it down to $0.7B after saying they would only allow closing out of positions for "meme stocks".

By his own words, RH took the first step to "change the game", which I am not really seeing discussion of anywhere. The DTCC certainly did not change any rules for them, but this still feels unprecedented.

No, the multiplier is from the "Margin Liquidity Adjustment Charge". It was raised so the brokers had to front 100% of purchase prices for 2 days.

People keep referring to a super transparent formula, yet nobody has actually been able to point me to what this formula actually is.

Seems quite opaque to me, actually.

Not completely, they have the right to add charges. Take a look at this tweet:

https://mobile.twitter.com/KralcTrebor/status/13551753956420...

It seems that they used this right by the fact that Robinhood was able to negotiate their deposit [0]. The DTCC demanded $3 billion. Robinhood negotiated down to $1.4 billion. If done by the formula, how is this possible?

[0]: https://www.cnbc.com/2021/02/01/elon-musk-on-clubhouse-robin...

> The DTCC demanded $3 billion. Robinhood negotiated down to $1.4 billion. If done by the formula, how is this possible?

Netting out trades.

Which is such a basic idea that it’s impossible that they didn’t come up with it themselves and had to be schooled by Vlad.

It’s like the “smart guy” having an insightful moment in a sci-fi movie: “I got it, we’ll use gravity assist!” Astrophysics 101.

I think the point is that Robinhood made a promise to net out trades, by bringing some balance to the buys and sells in their book.

We may not find out this news cycle, but my guess would be they wanted collateral for pending trades, and they eventually agreed on future trades only. The amount RH eventually raised, $3.4 billion, is in line with that.

“ Mr. Denier said that Apex was told by DTCC that collateral requirements had been raised on transactions for GameStop to near 100%.” - https://www.wsj.com/articles/gamestop-trading-restrictions-b...

... and now you will presumably give us an example of a case similar to GME where collateral requirements were not raised so we can see that the treatment was not standard?

Look to similar trades where concentration was as high as for GME.

> DTCC collateral requirements are calculated using, more or less, a fixed, predictable formula.

"Less" might be accurate, given there's apparently a subjective multiplier. https://www.youtube.com/watch?v=2M7X2dsW_Xw&t=5m25s

According to the RobinHood CEO, the formula used is opaque and secretive.

https://www.youtube.com/watch?v=2M7X2dsW_Xw&t=5m25s

All of them are at fault. The broker, DTCC and the hedge funds. The market is not functioning as a free market or "it is rigged" for various reasons.

The CEO of the biggest brokerage company says he has halted the "buy" side because it wanted to protect his clients(hedge funds) and his money and it will resume the trading when the prices reaches $17. If you dig deeper you may find that the DTCC/clearinghouses may have a vested interest in a specific position as their investors may be invested in that position (i.e. short).

Of course there might have been just a risk management issue and no collusion but in practice and in essence as well this was just a way to save the hedge funds(the client)'s money and ripoff the retailers(the product).

[0] https://www.youtube.com/watch?v=7RH4XKP55fM

If companies like Robinhood don't come along, how do you think disruption in the financial market will happen? If we always go back to the existing players, rate of innovation will be so slow (especially in the financial market). And it's obvious that startups will not have the same amount of assets that century old companies have. But JPMorgan or BofA did not earn their trillions overnight. In fact, we can even say they have screwed over more people than Robinhood has.

I am not trying to say what Robinhood did was correct or that they have not done any mistakes. I am just saying that I am glad that companies like Robinhood exist because otherwise the entrenched players would have never taken any steps to innovate.

Is an obsession with "disruption" over "improvement" wise for a system that moves hundreds of billions of dollars every day?

We were on T+3 a few years ago. Now we're on T+2. That wasn't the result of some whiny blog post, it was the result of gradual and careful operational improvements. There's a lot of work that goes on in the back and middle offices of those century-old companies.

I don't think that the OP is arguing for "always" sticking to entrenched players, but rather for people to face the reality that the agility of startups come with drawbacks in their service (even though it's often not apparent).

It all comes down to making informed decisions. If you're just using RH for "playing around" with some surplus money, this lack of liquidity shouldn't be as important for you (as compared to, e.g., the ease of use, or low fees...). However, if you're using RH in a "serious" capacity, this (reliability) should definitely be something to seriously consider, since you may not have the guarantees that you can take for granted with traditional players.

The true problem with the RH situation is the lack of transparency throughout. It really does no good (and comes off as very "slimy") if third parties have to expose their business model or why they're having issues. A little transparency would have gone a long way for people to be sympathetic to the startup. But then again, I guess that harms the "magic" factor of a startup.

I agree with your sentiment, but for people who have used RH for a while, this is basically par for the course as far as RH support/PR goes. I'm surprised people haven't dumped them in the past for their reliability issues, and they shouldn't get a pass for this event either. For instance, Amazon wasn't the first e-commerce or compute resource provider either. Their competency and dedication to customers have put them ten steps ahead.

Completely agree; Robinhood seems to give us a new reason to distrust them each week.

The guy who allowed his service to store passwords as plaintext[1] says “There is no reason why the greatest financial system the world has ever seen cannot settle trades in real time.” -- pardon my fucking skepticism of the deep technical knowledge he must possess to make such a bold assertion

[1] https://techcrunch.com/2019/07/24/robinhood-stored-passwords...

From your link:

“That same week, Robinhood released software that erroneously reversed the direction of customer trades, which meant that a bet on a stock going up was turned into a bet that it would go down. Mr. Tenev oversaw technology.

Technological issues continued piling up. In 2019, customers discovered that Robinhood’s software accidentally allowed them to borrow almost infinite amounts of money to multiply their stock bets. Last March, as the pandemic hit the United States and the stock market gyrated wildly, Robinhood’s app seized up for almost two days, leading some customers to lose more than $1 million.”

I like disruptive businesses. But sometimes I think SV fetishizes the “move fast and break things” mantra without understanding that it may sound cool without appropriately acknowledging the risk it brings.

I’m sometimes labeled as a codger but it makes me cringe when people espouse that attitude on projects that can ruin someone’s livelihood let alone on safety critical code that can end someone’s life

> Why choose robinhood when the alternatives include some of the most well capitalized institutions in the world

The biggest reason is that none of those world class institutions can actually build a functioning smartphone app

Merrill Edge is ugly but quite functional and featured on iOS. Same with Schwab. I don't need the "millennial" UI experience when moving thousands of dollars. And that's not to say it doesn't have value - I love it for many things. I'm a happy customer of Warby Parker, Brooklinen, Joybird, and Lemonade to note a few, all of which offer slick UI's and a bit of markup for a "just works, simply" experience. I much prefer ugly/clunky yet working correctly and not fucking me over randomly with bugs when it comes to major financial stakes.

You don't need a good UI experience the same way my dad doesn't need a "fancy website thing" because he can easily call his stock broker to make the trade. But if these companies don't evolve they are going to keep losing younger millennials and beyond to Robinhood as time goes on.

That's a huge mischaracterization of what I said.

As I made clear, I clearly do value UI/UX and I'm not some old person making trades over the phone (I'm 24, directly in the Robinhood demo). What I'm saying is that in this specific use case, it's not nearly as important as correctness/reliability, which Robinhood has a terrible history with. An improved UI could be a factor that would draw me away, but there are simply more important things when it comes to where to bank my savings.

Again, the point here is that there's not a huge gap that people seem to try to say there is. They have a fully working website, apps, etc. They're regularly updated and all, see UI refreshes, the usual. Trading may take 4 clicks instead of two, but it's just so much more minor than people claim.

> if these companies don't evolve they are going to keep losing younger millennials and beyond to Robinhood as time goes on

Maybe to other companies, but I think Robinhood may never recover from this. Whoever does draw these away will have to offer bank-level correctness standards in addition to the nice UX. I'd be willing to bet Robinhood had a steady stream of bigger players leaving the platform as they got older because the product is optimized for new investors, not long term financial management. Maybe that niche of new investors is all they need, but their UX won't keep those who age/grow out of that type of user IMO.

I've been mostly happy with the Charles Schwab app. They also don't charge any fees.

I have not been. It seems to constantly forget my fingerprint.

Nor does it have a particularly nice UI, unlike Robinhood. That might be a plus (doesn't gamify it) but it is an inferior UI.

Vanguard’s app works fine for me.

Sure it’s not gamified or meme-ready but maybe “investing your life savings” as a category shouldn’t be?

i have a vanguard account with most of my investments, with like 10% in robinhood for gambling.

the way i think about it is vanguard works fine (theres some bugs but not end of the world). but it is not optimized for timed trades. it works well enough for me to put in a big chunk of money on a recurring basis or liquidate funds for use elsewhere.

robinhood allows me to easily trade off of market emotion or do options trading.

they serve two very different markets. if i tried to trade options using vanguard i'd probably want to throw my phone against the wall.

Maybe—just maybe—we shouldn’t be encouraging the general public to trade options? Triply so with margin accounts?

This is isn’t “democratizing finance”. It’s literally just a wealth transfer from the poor to the rich. It’s putting fish at a poker table full of professional sharks backed by billions of dollars and teams of analysts, and encouraging the fish to put their life’s savings on table.

Index funds are boring as fuck, but have done more to put market returns in the hands of the average member of the public than anything in the history of finance.

I’m not saying people who want to shouldn’t be allowed to trade options. But putting the ability in the hands of anyone who has zero financial experience but can download an app isn’t helping things.

i partially agree with you. robinhood is ran by rich guys who make money when people use the app - regardless if the traders make money or not. and i agree that index funds are a great way to get exposure to the long term growth of the economy.

however, giving people the ability to trade on margin and options just like the big shops is an equalizer. robinhood wasn't lying there. the problem really is:

1) education

there's a significant inequality in knowledge. the average person isn't taught market fundamentals, theory, or the technical details of how stuff works (how does a call work? what does T+2 mean?)

2) capitalism

the market is tipped in the favor of the big guys, because currently the financial market is incentivized to keep these guys not just afloat but jacked up. big gains = everyone is happier. as such, very smart people, like physicists, are attracted to the financial sector where they are paid the big bucks to make insanely rich people even wealthier, instead of working in academia or an industry where they can contribute their abilities to bettering the entire world. i.e. working on green energy or reducing environmental impact or improving productivity

They need a Game Over screen for when you are liquidated.

When the app can't do what it's supposed to do (buy/sell securities), the nicer interface is pointless.

Actually the biggest reason is RH was the first to offer zero commission trading and a very simple UI. That led to a big customer base of new traders. Lots of free marketing by those newcomers on social media and the inertia of switching brokerages kept the flywheel going. This incident was bad enough to make people get over the inertia of switching, others now offer zero commission trading, so RH is going to bleed customers as a result.

The other apps may not be quite as easy to use for someone who has never traded before, but the basics of trading and options have been democratized enough that it is probably no longer enough of a moat.

I've used Fidelity for many years: the app is excellent.

I use Fidelity - the app sucks.

It may be 'excellent' relative to competitors in "shitty old financial company app" space, but it is in no way excellent compared to a high quality phone app.

Robinhood is successful because their software is actually good. My bullish case for them would be them leveraging this capability as a way in to becoming a Fidelity sized financial competitor.

Their CEO's inability to honestly communicate with the public is hurting them though. He should have lead with their liquidity clearing house issues and directly addressed the apparent conflict of interest. He appears to either be unwilling or incapable of doing this.

They've now after the fact explained some of the clearing house issues, but they still act as if they don't understand the conflict of interest question. Just address it directly.

When Elon asked him about it he should have said something like, "I can see why people would think we'd be under pressure from the funds that buy our order flow, but we live and die by our retail reputation and would not risk that to illegally coordinate with these funds. We'd go direct to our retail customers first. That said, we were not asked to do what we did or pressured by them, we had to make choices on the fly to stay liquid and in that craziness I failed to communicate what we were doing in real time to our users - that was my failure".

Instead he mostly dodged the substantive question and came across as full of shit (only addressing the narrow aspects not really in dispute). I think this could be the truth, but when paired with him lying on TV about their liquidity issues it leads me to distrust him, and by extension the company.

I suspect the reality is something in the middle, considering what RH's customers (the funds) would want, fear of mentioning their liquidity issue causing a run, and the clearing house concern. He handled this poorly.

Well that's a long reply, and I agree with you by and large. RH has a bright future if they communicate better with their users.

Re: Fidelity, by excellent I mean: it does what I want it to do, and the UI is clear enough. To be fair, I'm an infrequent trader who mainly uses Fidelity for banking, so I don't spend much time on the app. I'm also willing to sacrifice UI flashiness for a functional service that doesn't block me from trading when I do.

[ETA: I believe there's a lot to be said, and has been said, for ugly functional UIs that outlast fancier competition. The archetype is craigslist]

It sounds like we probably agree on most things and use fidelity in roughly the same way.

I’d argue Craigslist’s design is ugly, but quite good - it’s dense/high bandwidth, does exactly what people want without fluff. It’s fast. They also benefit a lot from network effects, but even ignoring that I think the website does a pretty good job doing what it's supposed to and is easy to use.

Fidelity is ugly and bad. Hundreds of hidden menus. Many things can’t be done via the app. Some actions require a phone call. Options trading sucks.

For an example, I wanted to wire my rent. The place to do this is via transfers.

Specifically: Transfer -> to bank account -> that I do not own.

That’s the flow to wire money to an external person. It’s not obvious and buried and it can only be done on a desktop.

Automated deposits are similarly cumbersome.

The app is also quite slow and the login flow is painful.

My first thought logging into their mobile app and desktop was "Jesus Christ this is terrible". Maybe it is functional, but RH knocks UI out of the park.

I've been using the TD Ameritrade app (formerly "thinkorswim") since 2008, on an iPhone 3G, without issue.

Wondering if I had $10,000 to invest I would use an app.

Zero commission trade is actually bullshit anyway. You end up losing more from inferior execution time than you would if you just paid the $5 per trade. Robin Hood also lied to users about this and ended up paying a $65 million fine[0].

[0]https://www.sec.gov/news/press-release/2020-321

"Not charging $5 per trade" implies that other brokerages such as Schwab, Fidelity, and TD Ameritrade — which haven't been penalized by the SEC — suddenly offered poorer order execution when they dropped their commissions, which by all accounts they did not. They all experienced declines in revenue.

What Robinhood did was to lie about their execution. They claimed their trade prices were as low as other brokerages, while in fact being much worse. SEC penalized them for (1) intentionally misleading customers and, in the words of the press release, (2) "failing to satisfy its duty to seek the best reasonably available terms to execute customer orders".

Unlike Robinhood, Schwab, Fidelity, and TDA all have popular real-time trading platforms where order execution quality is crucial.

Lol. You cannot judge your order execution quality as a retail customer. It takes the SEC years of investigation to do that. Its certainly not something retail brokers compete on.

Robinhood lied and should be punished but they were penalized for doing so before other brokers had gone to $0. It remains to be seen what happens at the other brokers now that they are free.

> Lol. You cannot judge your order execution quality as a retail customer.

If you've traded the same listed securities frequently on various platforms, you certainly can. In terms of speed, PFOF systems can hang on to limit orders that are marketable (ie they cross NBBO), technically not printing them outside the confines but taking their sweet time to make a decision about whether to cross the order or post it to an exchange. And once it goes to an exchange, you can also get a feel for how much of the displayed bid or offer you get on one platform versus another.

You can make a lot of money proving that.

Nanex made a bit of a cottage industry whistleblowing on that sort complaint.

There's no money in proving that different brokers have varying execution quality, and it's not a regulatory requirement to execute instantaneously. I'm not sure how Nanex figures into it; there's nothing nefarious involved.

If I am in New York and I send a limit buy order to Schwab that is two cents through the offer, Schwab may route my order to a market-maker in Chicago who uses a decision model to either take the other side of my order on the offer, or post my limit order to the exchange with the best offer. Let's say the market-maker doesn't want to sell me the security and routes it to an exchange in Miami. By the time he posts the bid, the offer may have moved and my limit order may no longer be marketable. That doesn't mean Schwab broke the law. Routing orders between computer systems and making risk decisions takes nonzero time, and factors like latency and exchange fees can affect where the order goes and when it arrives.

Let’s be clear are you sending routed orders in this case?

Are you suggesting that limit orders are filling but at a different price than expected or not filling at all?

The reason Nanex is important is that they’ve made bank on proving that risk systems and broker latency don’t matter when enforcing reg nms.

Neither does order volume. If you can accurately track execution to the point where you can see slippage (not on the broker report cards) you can make money on that info.

None of that is to say different brokers don’t have different slippage just that in aggregate if you can accurately calculate it you a) have no business trading through a retail broker (and you know it) and b) there is money to be made in compliance that doesn’t take on trade risk.

I use two brokerages and I almost exclusively trade US listed equity options. That's why it's easy to know if I'm getting good liquidity or not; the price doesn't move as much and the spreads are far wider than cash. If I use the one with PFOF, on rare occasions it takes a minute or more for my order to show up on the screens. The other one is very fast with SOR but it doesn't always get a high percentage of the displayed size. When I worked at a shop I got most of the displayed size pretty much all the time because the SOR was way better.

Analogous to the PFOF situation...if a hedge fund sends a limit order to a bank the NBBO may have moved unfavorably by the time it gets sent down to a floor broker. That may be horrible execution but it's not illegal for a floor broker to suck at picking up the phone promptly.

I guess my point is that it doesn't take long to figure out which brokers can improve your committed price, which floors participate aggressively, which electronic crosses break you up, etc, and that knowledge can affect customer fills. But I get what you're saying and you're right that people could monetize it if they had hard quantitative slippage data. That wasn't really what I was describing.

>The reason Nanex is important is that they’ve made bank on proving that risk systems and broker latency don’t matter when enforcing reg nms

I don't understand what you mean by broker latency and Reg NMS...latency between different legs of SOR can affect execution even without a trade-through violation by causing the offer on Exchange B to fade if an order routed to Exchange A crosses the betters there well before the bid destined for Exchange B arrives. I think I'm missing a piece of the puzzle here.

The SEC judgement was on Dec 17, 2020. Schwab announced commission-free trading on Oct 7, 2020. IBKR dropped their fees (for IBKR Lite) in September that year.

The judgement was for behaviors between 2015 and 2018.

https://www.sec.gov/news/press-release/2020-321

Whether you would be better off with the $5 trade or not is dependent on how many shares you trade at a time.

It wouldn’t have been an issue if Robinhood had been upfront about their pricing. They still would have been a good deal for many retail investors, but they instead chose to lie.

How is this possible when I use limit orders? (not a robinhood user btw, but pretend I am)

If, by the time your order reaches the book, there is a better price than your limit, you are entitled to it.

That is the best execution obligations of your broker.

In RH case, their intermediary bought at the better price and resold it to you at your ask, keeping the difference.

from screenshots I have seen lately, I'd bet that at least 20% of RH users have no idea what a limit order is.

The general recommendation is never use limit orders - do not reveal your intention to the other side.

This is terrible advice. if your slippage risk is such that you aren’t protected by NBBO you have absolutely no business on a retail broker of any sort. Meanwhile limit orders minimizes the most likely risk a retail trader has to overcome. Either you don’t understand the advice you were given, you were duped or you are trying to be duplicitous.

In any case, terrible advice to be repeating in the context of retail trades.

I don’t give any advice. I was probing to see the reaction . It is amusing to look at postings glorifying the pundits advice. They are not your friend.

Have you actually placed a limit orders? Do you practice this advice with your own $’s? Do you know how much taxes you pay for a trade considered day trading? If the limit order is executed same day it is considered day trading. What is the point then?

Why retail investors are penalted for that but hedge funds are not? Are you retail trader or on the other side of the table? If so why you are giving advice to retail investors? The motivations? When I used to follow the pundits “advice” they were always wrong - limited orders were immediately executed. These “fluctuations “ causing execution of limit orders are never reported in the historical data . I used to purchase historical data for thousand $’s and never found these fluctuations in the official dat I saw on the screen. Meaning you can never rely on historical data for analysis. If you had the same experience you would know. Learning from practice I’ve different way of making $’s.

I spent years writing HFT trading systems. I’ve built back testing systems that actually worked. I’ve been out of the industry for more than five years and every order I’ve sent since I left (all through retail brokers including RH) have been limit orders.

I’m going to guess that I’ve spent more time in front of a real market feed than you trying to divine how the orders are impacting the book but who knows.

All that said I’d love to subscribe to your newsletter and learn the secrets to why limit orders have a different tax treatment than market orders.

Also for the record market orders tell the market you have no price sensitivity. If your newsletter could tell me how that’s better for retail investors I’d appreciate it.

Got it , just an observer working for the establishment. Why you didn’t invest your own $’s if your algo is so good? Other peoples’ money I know. Is that a real job? HFT is a scam. What about naked short selling (hft by other name )? Making money out of thin air? Selling something you don’t own? You did the hft for that too? What about GME now? 1.8 million missing shares . What your algos will do to the market? Crashing it?

Now the hedge funds are a joke, no? They aren't buying 50 million shares at 30c, nor $100, nor $300, and that's their problem. You can do hft all in nanoseconds - nothing is helping them. PRICE DOESN'T MATTER

How hft algo is helping the hedge funds now? The market will be never be the same , no hft , no newsletters , no apps will save it .

And this isn't a financial advice.

I've seen recommendations to never use market orders; I've never seen one against limit orders.

Just try with your own $ and you will learn from practice. Good luck following recommendations. Practice is the best teacher. Now - do you have thousands $’s to learn from your mistakes?

Say the national best bid and offer (NBBO) is: Bid: $10.45 Ask: $10.55

You place a limit buy order at $10.55 for 100 shares.

$0 commission broker that sells order flow: Your order is routed to the market maker buying your broker's order flow. They sell you the 100 shares for $10.55 since it's within your limit and within the NBBO spread.

$5 commission broker: Your broker attempts to price improve by searching multiple liquidity sources and gets a hit at the NBBO midpoint: $10.50.

In both cases you paid $5 for the trade.

This is not at all how NBBO works. Effectively all retail brokers sell order flow and if they dont they still dont have any obligation to improve your price beyond NBBO.

> This is not at all how NBBO works

Open to corrections

> they still dont have any obligation to improve your price beyond NBBO

But those that do price improvement use it as a marketing differentiator:

https://www.fidelity.com/learning-center/tools-demos/trading...

https://investor.vanguard.com/investing/online-trading/order...

https://www.schwab.com/execution-quality

https://www.tdameritrade.com/tools-and-platforms/order-execu...

https://www1.interactivebrokers.com/en/index.php?f=47202#bes...

Schwab, Fidelity, TD Ameritrade & IB all engage in PFOF. They all have free offerings.

Here is what robinhood advertises for their price improvement https://robinhood.com/us/en/about-us/our-execution-quality/

All NBBO improvement requires is that if you send an order through the book you’ll get the best price on NBBO. Even when Robinhood got fined it wasn’t for that, it was for promising better than their competitors and then putting it in writing that they were happy being worse than their competitors.

> Open to corrections

Under the "Robinhood" header of this Matt Levine column is a pretty good explanation of payment for order flow:

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

They are diverting the attention from their core problem: lack of transparency. I had a RH account for years and I didn't know it was a margin account (be sure: I did not signup for their "margin" service). All RH account are margin accounts even if they feel like cash accounts (but with T+0 settlement). This is what triggered their cash problems and what drives people crazy now: a user feels they gave them 100$ to buy 100$ of stocks, while what happens is that you get a loan and they buy some form of stock in their name while committing to you for the value of one stock. Robinhood is the facebook of finance. I moved my money out of them.

This has nothing to do with being a margin account, it's DTCC requirements related to wanting to buy the same stock everyone else at the same broker also wants to buy.

My understanding is that it does. One example (there's more like the instant deposit): when you buy a stock with money from another sale not yet settled, you are basically using margin (a loan) and thus RH have cash requirements which are a % of the cost of the trade to be settled.

If you don't allow that, and only let people trade on a cash basis after the trades have been settled, you effectively have 100% of the money you need to settle the trades you closed.

Robinhood isn't allowed to use your money as collateral with DTCC, they must use their own. That's why it doesn't matter what kind of account you have.

Presumably their lack of trade fees hurts them here.

That does not seem right unless there is something more hidden going on:

1) I issue on order and close a trade (using a broker as intermediary) 2) i have already provided the liquidity to settle that trade which is already in the broker's control 3) why would the broker need to provide more liquidity to guarantee this trade?

I have the feeling what you say is true but only because there is some finance magic going on that nobody needs but the finance system.

I have tried to look for more information about this DTCC requeriment but couldn't find much.

Thats true but do any brokers do that in their apps? Neither my Vanguard nor my Fidelity UI make it obvious when i’m using settled vs non-settled funds.

Yes, I never used any of those but it looks like they followed suit on the RH success and implemented something similar.

I had an Interactive Brokers account for years and there the distinction is very clear. A cash account just can't use money before they are settled (not different from many bank accounts show you two balance, one available the other one including pending transactions). To upgrade to a margin account you need to go through a rather long process of documents and signatures.

I agree that this is robinhoods fault, and that they have been deceptive in their PR about this, and that their UX workflows are misleading about what’s actually happening...

But, plenty of other brokers had the same issue. Including Merrill for instance. I would say that the more concerning issue that this has highlighted is how this part of the system gives large institutions greater access to markets than retail investors get. Addressing a systemic flaw like this seems like the best possible thing that could come out of this controversy.

> This was a liquidity issue for robinhood.

The only reason robinhood has liquidity issues is because of T+2 settlement.

I mean why should a broker app need to have liquidity at all. Why restrict the ability to make this type of business to companies with a lot of capital.

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