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Comment by thefreeman | Hacker News Reader

the sell order flow to market makers who gobble up the other side of bad retail trades

I highly doubt market makers are in the business of betting against retail traders.

I suspect they're in the business of collecting the spread on lots of small trades that they can assume are largely random.

What you described is how you bet against retail traders. The bet is that they have no edge so it’s safe to run tight spreads and nice pure market making algos that assume random behavior at volume.

Feels weird to call it a 'bet against' when the other side can (potentially) benefit from the tighter spread you offer.

But yes, the market maker doesn't run the risk of trading with someone with knowledge and a lot of capital to apply it.

Yeah, I don’t like the phrase either, but market making in these pools is quite literally taking the other side of their trades.

Which means that your cost is market maker's spreads instead of fees. Still a cost to you.

Nope, this is one of the counterintuitive things about people paying RH for order flow. Market makers can offer tighter spreads when they know it’s a pool of dumb money.

tighter spreads are not zero spreads

What’s your point? The spreads are tighter than you would get on the open market.

NBBO requires that if there is something better that Robinhood gives it to you.

I think the point is that if you trade, you pay the spreads. Market makers can help you pay narrower spreads, but you still pay them.

If you just hold your index fund, you don't pay these recurring spreads.

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