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Comment by sithlord | Hacker News Reader

Although robinhood's app was pretty revolutionary, I think their real "innovation" was removing the cost of trades, basically forced the entire market to remove that. Before, it would cost 4.99+ to execute a trade, so if you were not buying significant amounts that could EASILY eat up a lot of profits.

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There have been brokers like that for at least 15 years. Zecco was doing it back in like 2006.

Yeah, it is standard in Europe for at least the whole last decade.

Note that it's illegal in the UK and being scrutinized in the EU: https://www.ft.com/content/3254a7c5-3c9b-468c-9ed4-a324f5e42....

Yeah, another example of the "great" EU "helping" the people...

Agreed; it's disappointing that the UK beat them to banning it.

Nobody moved to remove the cost of trades until after IBKR in 2019.

The large brokers more or less did not care when robinhood did the same thing years and years and years ago.

It’s looks like free but it isn’t, RH makes money by selling trading requests to high frequency trading firms like Citadel, which buy/sell before the actual order in a better position so they can earn a penny from selling to or buying from you. The more transactions, the more they earn.

- https://fortune.com/2020/07/08/robinhood-makes-millions-sell...

All brokerages do this. RH started charging $0 + (selling order flow) while everyone was charging $5-10 + (selling order flow).

For smaller trades that's charging 99+% less than their competitors at the time..

That's still 'free'. Every business makes money somewhere and when you're not paying money directly to that business, we generally call that 'free'.

The existing retail brokers were also, with very few exceptions, selling trading requests on top of the fees they charged. (Also, in general this actually results in better-than-market prices because the trading firms know that retail traders aren't likely to have information they don't and aren't likely to be making large market-shifting trades, so they can relatively safely make money by market making between people who want to buy and people who want to sell at slightly different times.)

That would be front-running and it's illegal. The article you linked explains what PFOF is, but in general there's nothing wrong with market makers fulfilling brokerage orders. It means traders get a better price on their order and the market makers earn a profit.

The concern is that when market makers share that profit with brokerages they encourage brokerages to select the market maker that gives them the biggest cut rather than the one who gives the best price for the trader. Still, the trader will never get a worse price than what's available on the exchange. (That's also illegal.)

>It’s looks like free but it isn’t, RH makes money by selling trading requests to high frequency trading firms like Citadel, which buy/sell before the actual order in a better position so they can earn a penny from selling to or buying from you.

That's literally not payment for order flow works, and it's illegal under regulation NMS.

No, you don’t understand how that works. Citadel wants the retail order flow because it’s a huge pool filled with uninformed investors. They can actually offer you better spreads because on average you have no edge.

It’s similar to a casino offering free hotel rooms to people who play blackjack but who do not know how to card count. They even offer 3/2 on blackjack instead of 6/5.

robinhood isnt the only one selling their requests, they basically all do it.

I'm not a robinhood fan - I moved all the investments I had out of their years ago. But, to think they are the only one selling order flow is disingenuous

As others in this thread have noted, what you described would be illegal. But suppose for the sake of argument that Robinhood's order flow is actually really bad and users are getting a measurably worse price through RH vs other brokers. RH targets small-time investors who are trading in small amounts - perhaps investing a bit of their paycheck every week. It seems unlikely that the order flow would be so bad that RH users are losing anywhere close to $5 per trade because of it.

So even if "it's not really free" it's still a significant discount compared to the pricing that was standard before RH came along. Opening up investing to more people by making smaller & more frequent trades feasible seems generally good to me.

I will admit that other aspects of Robinhood's business such as the degree of gamification are still concerning, though.

RH offered free trading in a small selection of issues with a poor ui and worse execution while others were offering great platforms for 50 cents to 7.95 a trade. They built a user base through marketing to the initiated, not through a better product.

Any investor can get 0 now with good brokerages or use something like IB for cheap trades on otc or foreign stocks in small amounts.

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