So if I understand this correctly, they assume they are going to make profit purely based on rebates? I don't think this kind of business model has been tested yet so this is quite interesting.
It is structurally different from but conceptually similar to the mark up you pay when you exchange currency.
No free lunches, as they say.
edit: See http://en.wikipedia.org/wiki/Payment_for_order_flow and http://www.sec.gov/answers/payordf.htm
I don't know how they are going to make money any other way, but their vague handwaving about it sure is suspicious. If they are going to make most of their money from rebates are they going to prevent people from taking liquidity?
[edit] chollida1 confirms that they are selling order flow: https://news.ycombinator.com/item?id=8358217
I can just imagine it now, a week after some viral video knocking a company, they find out it was orchestrated by some Wall St types to make their quarterlies.
A 'no fee' app called Robinhood, something tells me it's not the banks that are getting robbed. Can't wait til they open this up to pink sheets.
I'm sure is not like this and the broker won't deny any transaction if I were the broker I would just get a commission on some transactions by third parties but I don't see what I could change in order to get a greater commission.
could you elaborate please, I'm at a lost.
The customer is usually none the wiser as they are being charged the same fee from their broker typically regardless of the routing. The only way a customer would know is if the broker discloses it to them. In the US equities markets that disclosure is a legal requirement.
Definitely nothing is free!
Are you suggesting the customer's orders will not be filled at the NBBO? Or something else? Can you state explicitly (i.e., describe the timeline) of what you think is happening?
...mark up the prices their customers are paying for securities.
It would have been much more accurate to say that the broker is benefiting from part of the spread. Of course, one expects a service provider to benefit from providing a service.
This is also true of exchanging currencies and everything else in the capitalist circle of life -- so it was very possibly not a useful comment.
[1] What is the opposite of adverse selection? Advantageous selection?
The customer will get the exact same price as if his order went to the public exchanges. The only difference is that instead of selling to anonymous person on BATS, he'll sell to anonymous HFT on the broker's internal dark pool.
I actually wrote about the selling of flow this morning here: https://news.ycombinator.com/item?id=8355210
They make it hard to find but the trail goes like this:
From here: https://www.robinhood.com/legal/
Open this document:
https://brokerage-static.s3.amazonaws.com/assets/robinhood/l...
Which links to this document, which contains the details.... http://public.s3.com/rule606/apex/APEX_2Q2014_Rule606.pdf
Note this:
> 1 Apex receives payment from Knight Capital Americas LLC. (Knight) for directing order flow. Payment varies based upon a number of factors including but not limited to: Size of the order, time of order placement, whether an order is marketable at the time of order entry, the underlying price of the security and any special handling instructions. Payments received from Knight averaged less than $0.0025 per share for the period 2Q2014.
> 2 Apex receives payment from LavaFlow ECN for orders that add liquidity to LavaFlow and are subsequently executed. The rate for adding liquidity to LavaFlow was $0.0032 per share. APEX is charged for removing liquidity from LavaFlow The rate for removing liquidity from LavaFlow was up to $0.0035 per share.
> 3 Apex receives payment from Credit Suisse for directing order flow to Credit Suisse. Payment varies based upon a number of factors including but not limited to: Size of the order, time of order placement, whether an order is marketable at the time of order entry, the underlying price of the security and any special handling instructions. Payments received from Credit Suisse averaged less than $0.0025 per share for the period 2Q2014.
Holy shit, their order flow is 70% market orders? That cant' be right. Funds must be throwing money at these guys to buy their flow.
I don't want to sound like Jim Cramer but people please don't use market orders!!!!
It happens alot, and since these guys came from the industry it wouldn't be a large logical jump to conclude they are taking money from a fund that wants to trade against their uninformed flow they generate.
Its scummy if true, but it happens. If you aren't a hedge fund then your trades are being sold:) Heck half the time if you are a fund your flow is also being sold:)
Alternatively they have some sketchy fees which you can see here:
https://brokerage-static.s3.amazonaws.com/assets/robinhood/l...
No fee to transfer money into them but a fee to get your money out is a big red flag. Hello Hotel California!
EDIT to explain scummy, its because it allows the big funds to "jump the queue" if you will. Scummy may have been a poor choice of words.
Rather than having to be active in the market with a quote on the NBBO, this allows the big funds to look at each order and say, pass, pass , take, pass, take, etc.
If there is money in filling the order they will, if not they will pass it onto the market where it will either sit or get filed by those who actually participate in the market.
In short, this is a way for HFT A to beat HFT B.