This article isn't exactly convincing. The SEC identified $34mm in poor execution. If you did 65c each way per option contract & free stock trades that would only be 52.3m option trades. That's miniscule. That's over 5 years. It would take a whole lot of unidentified trades for that to be substantial.
The spread on most trades is probably in the range of 50c on low liquidity shares and $1 on low liquidity options.
Perhaps the reason RH collects more in revenue from order flow is because they:
1) get paid more for their order flow on a per trade basis
2) they don't collect any fees from options driving down revenue
3) they charge less for margin fees with less users using margin
There are any number of reasons, but to say that you're getting royally screwed is a massive stretch in my mind. Prior to RH fees were outrageous. The fees are still outrageous on my self-directed 401k. I'm not getting $10 in losses from bad execution.
Anytime you move fees from a regime where they’re fully visible to the customer into one where they’re hidden, the customer is eventually going to get fleeced. It may not happen instantly, but it’s inevitable. You’re simply removing one of the only competitive metrics that customers have to choose between brokerage firms and replacing it with something opaque. (The fact that Robinhood even exists is proof that explicit-fee brokerage models produce competition from lower-fee competitors.)
Unfortunately, the degree to which customers are getting fleeced is hard to know. Which, let me repeat, is exactly why this model exists. The article mentions it’s at least $34M but even the SEC seems unable to calculate the exact amount. And if they can’t determine it, then how in the world is the typical customer supposed to? At the end of the day, the degree to which customers are getting fleeced is probably exactly proportional to Robinhood’s revenue from order flow. If RH is receiving vastly less revenue-per-customer from that source than explicit-fee exchanges make from fees and order flow, then customers are getting a possible bargain. If RH is doing as well or even better with this model than competitors, their customers are probably getting screwed and don’t even realize it. (And if by some miracle RH isn’t abusing this, then other brokerages will abuse it and try to outcompete RH.)
> Anytime you move fees from a regime where they’re fully visible to the customer into one where they’re hidden, the customer is eventually going to get fleeced.
I think you misunderstand the payment-for-order-flow business model. The revenue doesn't come from hidden fees to the users. It comes from third-party liquidity providers. They do so because liquidity providers overwhelmingly prefer to interact with retail order flow over the undifferentiated toxic flow in public exchanges.
The best analogy is how Miami club promoters will get pretty girls free entry and drinks. The pretty girls aren't paying any sort of hidden fees, and in fact are getting a better deal than they would with general admission. Rather it's the venues that paying the fees, because they overwhelmingly prefer patrons who are pretty girls compared to the average person who shows up at the door.
The article is very explicit about how price improvements aren’t being passed on to the customer to the same degree as other brokerages, because RH demanded higher payments for order flow. I don’t know how to map that to your club analogy, but it definitely does not seem to map to this situation. Maybe a club where there's no cover fee, but all the drinks are 20% more expensive?
The premise of your argument seems to be that investors are entitled to the best possible price improvement, rather than the RegNMS NBBO, and that any sliver of a penny they get less than the best available price at any brokerage is a "fleecing".
That argument doesn't make much sense to me. People trade slivers of pennies for all sorts of things across the economy. Literally just liking a UI color has a value you can denominate in some sliver of a penny.
The SEC's problem with Robinhood isn't that they weren't offering the best available price improvement. It's that they knowingly weren't, but told customers otherwise. The implication is that if they'd simply been up front about it, and said "we don't charge commissions and have a snappy UI, and we make up for it by taking a bigger share of the rebates our upstreams offer to retail traders", they'd have been just fine.
(Robinhood is bad, but the reasons have very little to do with PFOF).
Terms like "fleecing" are subjective, and I wasn't claiming that RH necessary fleeced anyone in this instance. I was pointing out that opaque pricing models are problematic, since they make it much harder for customers to compare competing services and determine which offers more reasonable costs. In the extreme case, this can harm competition and make everyone worse off than they would be in a transparent regime, aka "people get fleeced".
In this case the real questions are: (1) does RH's model result in some customers paying more for the same services than they would pay at competitors, and (2) can these customers realistically make the determination before they choose a service?
We don't exactly know the answer to (1), and the reason we don't know the answer to that is because the answer to (2) is "almost certainly not". In fact the RH model is so opaque that even the SEC can't fully answer the question, and on top of this normal opacity RH added a layer of clear misrepresentation.
Maybe in the end, it should be totally fine for brokerages to make all their money from order flow fees, in ways that are completely invisible and opaque to the customer, and regulators should just back off the whole thing as long as there are a few lines of text in a ToS somewhere. To me as a customer that seems kind of crummy, but I'm not a regulator.
What I don't see in this comment is an acknowledgement that for all practical purposes (besides niche venues like IBKR Pro) all retail order flow is done through brokerages that do PFOF. Can you be more precise about what part of Robinhood's "model" you're talking about? Depending on what you mean, I might agree with you, or I might strongly disagree with you. Does your critique apply to all brokerages, or Robinhood in particular? If it applies to everyone, what does it matter what the SEC says? The SEC doesn't have any problem with Schwab.
Rather than asking me the question, you should read the article that summarizes the SEC investigation or the investigation report itself. The article directly addresses the “isn’t PFOF common practice” and “maybe PFOF was beneficial to the customer” arguments and provides fairly detailed evidence that RH did this at a different scale and with more significant detrimental effects on its customers than common practice.
Maybe you’ve read both and you disagree with the evidence presented. That’s ok by me: but it would be more efficient for you to state your arguments for why this case didn’t harm customers, rather than asking me to (poorly) litigate the SEC’s case. My only point here is a simple one: that opaque pricing schemes seem like a recipe for anti-competitive behavior.
I've read both and I'm not sure I know enough about your argument to challenge it directly, which is my critique of it. You're invoking these "isn't PFOF common practice" and "maybe PFOF was beneficial" questions as if they were controversies; of course, they are not. PFOF is practically universal, and it is universal because separating out non-toxic order flow is a win-win.
If I had to summon a direct rebuttal to your argument, it would be this:
I perceive you to be suggesting that the problem with Robinhood is that it uses PFOF, which means that customer outcomes are dependent on private deals Robinhood inks with companies like Citadel, which aren't transparent.
The problem with that argument is that literally everybody, including, apparently, IBKR, inks private deals with companies like Citadel, which means you can't suggest that something is distinctively wrong with Robinhood for having done so.
I perceive you to be suggesting that Robinhood would be more honest and transparent if they simply charged a commission that covered their expenses, rather than doing weird PFOF deals. Again: practically every brokerage does PFOF, because it would be dumb not to. Most brokerages charge commissions, but that doesn't make them transparent; they are still turning a private dial in their back office that trades off customer savings with brokerage profits based on PFOF deals.
Robinhood, for what it's worth, is bad, and the badness does have something to do with "no commissions". But the problem isn't shady execution; it's that Robinhood is a gambling site, not an investment site.
I think what you are trying to do is take an argument that has shades of gray and turn it into a black/white argument. This is a very CS thing to do, but I'm not sure it's really a very good way to look at this business situation.
From what little I've read here it seems that there is a continuum of different business strategies in which brokerages use their customer base and clout to negotiate PFOF deals that simultaneously (1) produce revenue for the brokerage, and (2) produce better prices for their customers. Since exchanges have finite financial resources, there is some tension between these two goals, which means that at some point brokerages are essentially trading their own interests against their customers' interests. This creates a power and information imbalance that can probably harm customers if the exchange behaves in ways that maximize (1) at the cost of (2). (RH is alleged to have pushed this balance much farther than common industry practice.) But that does not mean all PFOF deals are definitionally bad.
The question in this case is not "is PFOF always bad", but rather "is there some point at which brokerage-revenue-maximizing PFOF negotiations actually harm customers by overcharging them compared to a more transparent system." The answer to that question is simple: almost certainly there does exist such a point and when a brokerage reaches that point, customers probably won't be able to tell that the point has been reached. Moreover, brokerages with no commissions seem clearly incentivized to optimize towards or beyond that point. Maybe you could argue that RH hasn't reached that point in this specific case, but this does not seem to be your argument.
The question then is: what do you do about it? Should all PFOF be disallowed? You seem to be making a compelling argument that this is not a good solution. Should there be some kind of standard for how much that brokerage/customer balance should be allowed to stretch? Plenty of business practices are regulated along lines like this, where the regulation doesn't outright ban the practice but instead provides some guidelines and standard practices to prevent abuse of weaker parties like customers.
I'm not here to give an answer: I'm just pointing out that eventually if you allow brokerages to keep optimizing for revenue, customers will be harmed. Maybe they already have. At that point it's up to the regulators to do something, because that's their job.
When you suggest that I'm collapsing this down to a binary issue, is that based on information you have about market structure? Have you done a bunch of research on this? Can you be more specific about it? Or is it just a thing you feel happens on message board threads?
As I've said: I'm a little bit at a loss as to what your problem with Robinhood even is. They don't charge trading commissions. But they do take an 80/20 share of price improvement payments where other brokerages take 20/80. We can all agree that it's not OK to lie about doing that. But now we know†, and they've been fined. What next? Should they take 20/80? Why not 15/85? Is the right split just what the majority of the other discount brokerages take?
Again: I loathe Robinhood. They are a force for evil. But when people come up with weird diagnoses for why they're bad, it leads them to make silly decisions about other discount brokerages, none of whom (a) seriously prioritize their customers (perhaps excepting Vanguard), or (b) operate the way people on message boards believe brokerages operate.
† You might be able to argue that knowing the right Google query here, and also giving a shit††, would have enabled you to know this before the SEC announcement, because Robinhood's most important venue is also Schwab's, and you can just compare the per-share rebate they're getting. My confidence level here is not super high.
†† (my subtext here is that people don't really give a shit)
My point, which I think I made clearly in the very first post of this thread, is that highly opaque pricing structures are bad for consumers. You justify this with “consumers don’t give a shit”. I think consumers clearly do give a shit about trading costs, and my evidence for this is that zero-fee brokerages like RH are taking over the industry.
What consumers don’t have the time or resources to do is try to reverse-engineer the costs that they are actually paying when using RH’s platform. I’m not even sure they possibly could do so given the information asymmetry between firm and customer, and your “maybe there’s a Google search but I have low confidence” counterargument isn’t moving me. The SEC report shows that for some customers RH’s costs were inordinately high compared even to competitors that charged fees and had PFOF revenue, but others weren’t. How do I, as a customer, actually figure out how much a trade is going to cost me at different brokerages? Under the current regime (even without RH actively lying about PFOF revenue) it seems like customers cannot figure this out in any reasonable way.
The question then is: what should regulators do about it? Your position seems to be some kind of binary “we must either disallow PFOF entirely or allow any PFOF arrangement without reservation as long as brokerages disclose that PFOF revenue exists somewhere in their TOS.” My point is that different PFOF arrangements have very different impact on customer prices. For example, it's easy to envision a large class of PFOF arrangements that are undeniably harmful to customers, and yes, absolutely regulators should find some reasonable grounds to police those. Because at the highest level, a situation in which those deals are allowed is going to be terrible for consumers. With brokerages hunting for new revenue sources, those situations are going to become increasingly the norm.
ETA: Even ignoring the “bury it somewhere in the TOS” problem, it’s not obvious to me that simply disclosing “we have PFOF arrangements” is sufficient. It seems problematic that a single disclosure should apply equally to everyone from Vanguard to Schwab to RH (or even some hypothetical future scam brokerage that massively overcharges its customers via PFOF) when all of these companies have wildly different arrangements that affect customer trading prices differently. The nature of the arrangements matter too, and at minimum customers deserve sufficient disclosure of the arrangements that they can make determinations about which company is going to cost more to trade with. I hope we can agree that current disclosures and your random low-confidence Google searches do not achieve this goal.
You understand that all these brokerages are in fact required to disclose many of these details already, and that the SEC pursued Robinhood not because of the details of its PFOF arrangements but because of what it's marketing materials said, right? In what way are the current disclosures in inadequate? I'm prepared to hear that they are, but maybe less sanguine about a thread about how the big problem is you didn't know about them.
> For most orders of more than 100 shares, the analysis concluded that Robinhood customers would be better off trading at another broker-dealer because the additional price improvement that such orders would receive at other broker-dealers would likely exceed the approximately $5 per-order commission costs that those broker-dealers were then charging. The analysis further determined that the larger the order, the more significant the price improvement losses for Robinhood customers—for orders over 500 shares, the average Robinhood customer order lost over $15 in price improvement compared to Robinhood’s competitors, with that comparative loss rising to more than $23 per order for orders over 2,000 shares.
Given who RH's target customers are, it seems that the majority of them benefited from no commission and worse execution than if they used a competing broker.
I've never used RH, but I'm happy that they forced all competitors to get rid of their per trade fees.
So in other words, a small subset of customers significantly overpaid so that a large number of customers could get a bargain. The question is whether that's this a good thing, and also whether it's sustainable. Presumably those high-paying customers are going to be top candidates for competing brokerages to steal away with offers of better execution price. If that happens, does RH just content itself with lower profits -- or do they start finding new ways to increase revenue on the backs of their remaining customers?
You are conflating Reg NMS NBBO with a broker-dealer’s duty of best execution. RH has a fiduciary duty to customers to (on balance) achieve best ex. And a fiduciary duty means they must act in the best interest of their customers — including putting customer interests ahead of their own. Here RH was clearly prioritizing their own interests ahead of their customers.
I've read the SEC's order and I am certain what I've said is accurate. This is about best execution, not Reg NMS. See paragraphs 5, 13-4, 43-44 and footnote 2.
There are two violations in the order:
(1) Securities Act Sec. 17(a) arising from Robinhood's failure to fulfill their duty (in this case, of best execution).
(2) Exchange Act Sec. 17(a) arising from Robinhood's failure to keep adequate records which means that during the course of the investigation the SEC asked for one or documents and Robinhood, for whatever reason, failed to produce the requested document(s).
Neither of those violations relate to Reg. NMS or NBBO which was promulgated under Exchange Act Sec. 11A and is not mentioned anywhere in the Order.
You're right, of course. I think what happened here is that I jumped the gun on what I perceived your argument to be; that you were expressing something like the sentiment that Robinhood has to maximize customer outcomes on trades; that, for instance, if it has a dial that can go 80/20 -> 20/80 broker/customer on rebates, it actually is required to turn that dial to 0/100 if possible.
The original comment was criticizing payment-for-order-flow as a business model. Whereas you're merely making the point that other RH is delivering a worse customer experience than other payment-for-order-flow venues.
That's an orthogonal criticism. But the point is the same regardless. Even if RH customers see smaller price improvement, they're still better off than at a hypothetical brokerage that eschews payment-for-order flow. Because in that case they'd see zero price improvement (plus pay public exchange fees and commissions).
In real life, RH's competitors aren't hypothetical. They're actual brokerages that negotiate better price improvement for their customers. This is the problem.
I agree that it needs to be more transparent but RH isnt the only one hiding the back office deals. There needs to be a larger inquiry into all the trading platforms like Fidelity, Schwab.
On the other hand price improvement is so hard to enforce. I'm not sure how SEC can even regulate it.
So you would rather pay a commission fee AND have order-flow sold as opposed to no fee and just sold order-flow? No matter where you trade right now, all the brokerages are practicing this.
The implication is their making up the difference in other ways. As such the example linked is a source of profit to make up for the missing 9.99$, not a customer service issue.
So, sure the article is talking about one specific means their using, but that’s hardly the only option they have. Remember the best conmen run multi layered con’s, as people finding the first layer and trying to profit from it are the easiest marks.
Can you explain how you think closing options positions a few minutes early can magically generate profit for Robinhood?
The OP complained that with the benefit of hindsight the options went up in value after being sold, but given that all retail traders are degenerate gamblers with zero actual alpha there was a 50/50 chance the options could have gone in the entirely opposite direction, and selling them early could just as easily have saved the commenter thousands of dollars.
It’s the same game as a bank which reorders transactions after the fact to maximize overdraft fees. Rather than a small profit on 100% of transactions they make significant profit on some low percentage of transactions. Making 10k on 1 in 1,000 transactions = making 10$ on every transaction.
If closing early generates more profit then they don’t win or lose, just executing the trade at close for the customer.
However, if waiting generates more profit then they can always say they executed early while waiting and then pocket the difference.
They could even even pick a mid point at time X, then compare some random time period before and after the transaction looking for a hypothetical less profitable execution time.
> However, if waiting generates more profit then they can always say they executed early while waiting and then pocket the difference.
Do you have an explanation that doesn't involve making up wild, evidence-free conspiracy theories? I can claim that Robinhood secretly makes most of their revenue from selling their users to human traffickers if I want, but that's not an actual reasonable criticism of their business model.
I just provided evidence both in the linked example and the stated policy of “anywhere from 60-90 minutes before close”. Sure, it’s not beyond a reasonable doubt, but the given example is both plausible and there is at least some evidence in favor of the practice.
Anyway, the existence or not of this policy is kind of secondary to the idea that indirect profit can be more expensive to the users. Clearly they need to be generating some revenue, and if you don’t know where it is that’s often a very bad deal. 401k hidden fees for example can sometimes exceed the tax savings.
For example: if you want to buy X for $100, but it's available for $98, then the traditional broker will buy it for $98. Robinhood, instead, will go with the $99.99 offer if that seller offers them more money.
You were willing to pay $100, so from your point of view you weren't "harmed" either way, but with the traditional broker you saved $2/share, and with Robinhood all the savings went to them.
Generally, brokers are either required to go with the best offer, or, if they don't, explain to customers that they don't and why. Robinhood violated that rule by marketing themselves and going with the best offers (but actually did the opposite) and that's what the SEC is fining them for.
I don't know if there's been a study, but that's the substance of the SEC charges that the source article is describing. (It's not clear to me if the full details of the SEC's calculation are private or I just don't know how to find them.)
The linked article contradicts this point. On balance today Robinhood is not more expensive. The parent's point about the slippery slope still stands of course.
I read your first paragraph and now I’m thinking of paying for something in the US where all the taxes and tips are clearly visible and added at the end for you to see, vs paying for something in Europe where what you see is what you pay. I think people overwhelmingly prefer the European system.
> then other brokerages will abuse it and try to outcompete RH.
If you make higher margins but don’t lower your prices, the only other way to outcompete is to offer a broader array of services. Otherwise “outcompete” just turns into “save up more money and buy them out”.
There are an awful lot of businesses that charge huge margins and use that extra cash flow, plus their scale, to essentially fence out new entrants by a mix of sales/marketing, channel spiffery/bribery, and regulatory capture.
It's often a fairly "bad for you"/"predatory" product, too, but the problem is that it's very hard to create a new entrant doing it the "good for you" way, because all that extra margin the bad guys make can be used to squeeze you out of the market. Legacy industry examples would include whole life insurance, title insurance, payday lending, and whatever it was that "Dun & Bradstreet Credibility Corp" was selling (not the historical D&B) a few years back.
I consider it enough of a pattern of "bad money chases out good" that I identify it regularly among pitches I receive.
This really hurts those of us that are unable to access these types of reward points. It pushes additional costs onto us all, but especially onto those without exceptional credit.
Someone taught me long ago that if you're using a debit card in a store you actually like, you should chose the debit option rather than the credit option, as the fees are lower.
I sometimes do the reverse when I'm in a shop that I don't have good things to say about, especially if I think they just cheated me in some legally defensible way. Like Captain Ahab trying to kill the whale with his pocket knife. Fuck you, I'm taking 1.5% of your life away!
> Anytime you move fees from a regime where they’re fully visible to the customer into one where they’re hidden, the customer is eventually going to get fleeced.
It would be interesting to apply this insight to "surveillance capitalism" industry. You get to use Google/Facebook/Twitter/etc for free, even though there is some fixed amount you would theoretically be willing to pay to use them. In exchange, the companies use your personal information to display ads to you, but you have no idea what that is worth to those companies. In other words, your personal info (which is used to sell ads) is by definition worth more than the cost to serve Google/Facebook/Twitter to you (otherwise those companies would make no money). But you have no way of knowing how much more.
Don't have much to say about the rest of the comment but
>The spread on most trades is probably in the range of 50c on low liquidity shares and $1 on low liquidity options.
Is demonstrably wrong. The minimum spread on options contracts is $1 and the spread on liquid options contract (not SPY liquid but like TSLA or AAPL) is generally in the mid $10s and often hits $100+ on ATM contracts). Right now an ATM call on AAPL a month out quotes 4.75 to 4.85 which is $10 and the same on TSLA quotes 44.05 to 44.40 which is $35. Not a trivial amount, and it implies that the broker could get price improvement that is an order of magnitude more than the typical commission on options (~1$ per contract).
RH sets an initial default value for the limit order at the middle point between the bid/ask. You are in control of your limit order pricing there. If you wish to join the queue at the bid you can. There is no option for a market order. You can leave your bid and wait to be filled same as others.
The article mentions that may just be the amount the SEC can actually prove.
> Overall, Robinhood’s investors may not have been harmed by their decision. The SEC identified $34 million that Robinhood customers lost by not receiving best execution, which is much less than the money they saved by forgoing trading commissions. (That said, their losses might also be much higher. That $34 million comes only from “certain” transactions, which might be the tip of the iceberg that the SEC possessed the ability to measure.) They were, however, duped.
I think the author has misunderstood the SEC Order. The article says (emphasis added):
> The SEC identified $34 million that Robinhood customers lost by not receiving best execution, which is much less than the money they saved by forgoing trading commissions.
But paragraph 42 of the Order[1] says (emphasis added):
> ... certain Robinhood orders lost a total of approximately $34.1 million in price improvement compared to the price improvement they would have received had they been placed at competing retail broker-dealers, even after netting the approximately $5 per-order commission costs those broker-dealers were charging at the time.
I am not a lawyer, but the problem with this $34mm is that seems to be illegal. Quote: "In the United States, accepting payment for order flow is only allowed if no other trading venue is quoting a better price on the National Market System"
Retail order flow directed to electronic market makers obtains better prices than the NBBO. That's what "price improvement" refers to. The entire controversy here is about how much better than the NBBO Robinhood's prices were.
Right... so everyone quotes the same price, and then they compete based on paying more for order flow instead of the sticker price. It’s the difference between having a larger bid-ask spread or larger transaction fees: either way, the cost of execution will be paid.
Even prior to the potential news of RH routing orders to certain market makers for greater margins, I think any serious trader looking to optimize orders would have not been using RH to begin with.
The feature set in RH is straight up heavily diluted compared to other brokers like IB or TD (TOS). There's no way to set exchange parameters in RH, users can't edit the charts for TA, and the functionality is heavily reduced on purpose for the sake of not overloading users that have basically no clue what they are looking at anyways.
Not that any of this excuses RH. Given RH's user base, some random person trading PLTR and GME calls probably is not even looking into any of this stuff to begin with.
Robinhood closed out an option spread I had deep in the money with no notice, citing some kind of risk. I get a notification that "my" order executed two minutes before market closed, I immediately contact Robinhood saying that I didn't place the order. It took a week for them to tell me that they had put the order in on my behalf. Cost me $1800 vs the value held to expiration (which was a month out.)
Seriously considering taking them to small claims court. No notification beforehand, and even afterwards it took a week to find out what happened.
To contrast, in my early days of options trading with Interactive Brokers, they had closed a spread ~10 minutes before expiry at a loss, which turned profitable 8 minutes later.
Contacted support, and they responded within 2 minutes explaining exactly why this had been done (risk profile at the time, and insufficient margin to cover). They answered all my questions and even explained what I should do to mitigate this issue going forward.
Used to have IB: that broker is no joke. I would see ads on TV of $7 a trade while I was paying their crazy .001 cents per share or whatever their price was. Great paper trading account, and a Java/C++ API for everything. Plus level-2 data.
Research this a bit more. It may be within their risk parameters or guidelines. But if you think theres a breach here, you should raise a FINRA complaint.
They pointed me to an obscure page on their site that implies but doesn't directly say that this might happen. I don't know the laws, have to do more research.
You don't need to be an expert in the rules and try to determine on your own whether it's a violation of FINRA's rules. FINRA will do that for you.
Even if Robinhood technically disclosed that they might do it, violating a customer's express orders without documenting appropriate reasons for doing so is generally a violation of FINRA's rules. Brokers have lost their licenses for shenanigans like that.
> That Robinhood sold its order flow is unremarkable, but the scale of its activities certainly merits comment. Forbes reports that in the first quarter 2020, 70% of Robinhood’s revenues derived from payments for order flows, as opposed to 17% for E-Trade and just 3% for Schwab. Yes, Robinhood has observed standard practice–but with distinctly above-average enthusiasm.
Those other brokerages charge trading fees (these days, just for options trading), so of course their proportion of revenue from order flow will be lower.
Robinhood’s own documentation for the greater part of last year explicitly stated they would automatically sell or execute your options within a 1 hour window of expiry.
I lost thousands when Robinhood prematurely executed my position ~100 minutes before market close. I was waiting for right before the hour window.
Of course, 10 minutes after they sold my position, it quadrupled in value. I even already had had a limit sell order on the books! They cancelled my order, and executed their own, without any notice, outside of their own documented window.
When I contacted support and pointed them to the docs, their reply was that it could be “anywhere from 60-90 minutes before close.” Here is their email [1]. I asked them to provide a link to where their documentation says such - they never responded. I followed up twice.
Such utter bullshit. Immediately switched to ETrade and have had a great experience. There is a nice representative who’s direct phone number I can call and always reach, she always answers, and gives me any info or help I need. She called me within a week of me opening the account just to say hi and walk me through my account settings.
Also, sure, ETrade will auto sell your position too - within 10 minutes of market close. That sounds a lot more like protecting my investment, than a 60-90min window used to drain retail investors of their expiring options.
Edit: this page [2] still says "about an hour" to define the auto-exercise window. Click on the "What happens" dropdown under the first header.
> 10 minutes after they sold my position, it quadrupled in value
Former options market maker. A reliable source of alpha involved mining retail brokerage agreements--particularly the online-only ones, which were the bleeding edge at the time--for these sorts of shenanigans.
In some cases, the conflicts were clear. We paid a large brokerage for their options flow. They got a premium because, in part, they didn't automatically exercise in-the-money options at expiry. So you'd have a stream, on every expiry, of free money coming in. It always struck me as odd that one part of their business was profiting from another being deficient.
If you lost a meaningful amount of money, consider filing a FINRA complaint [1]. They will do a lot of the work for you. And they come after firms, even the big ones, with teeth. Particularly when there is a retail investor on one side.
I hear there's a much harder thing market makers do with ETFs rebalancing, but ETFs put a lot of effort into getting fair prices when they rebalance, so it's definitely harder.
> There is a nice representative who’s direct phone number I can call and always reach, she always answers, and gives me any info or help I need. She called me within a week of me opening the account just to say hi and walk me through my account settings.
The whole point of these new apps is that millennials don’t want to talk to you on the phone.
Just for the record, I'm 57 and I don't want to talk to you on the phone either. That said, if we do, it will be great if it is a nice experience and it will be very, very bad if it's the opposite.
Sure yeah, would I rather just have full-on admin access granted through some web dashboard to deal with it myself? Of course. I'll be the first to sign up for AWS Broker when they release VPBs.
But between having a rep proxy my account needs, or zero recourse for dealing with my account problems? I'm happy to make the phone call.
Having worked in a call center, I think it's more driven by the fact that labor and customer service costs are high and call centers are expensive to operate, so they try to not offer that as a support option.
Very few customer supports provide reasonably prompt written communications, though. And the trend of chatbots to try and help you first is particularly bad.
You can get through a chatbot with way less effort and chat text support I find less aggravating and focus stealing than voice support. On top of that, you get a written record!
Several law schools operate “clinics”[1] for investor rights and investor advocacy. You might consider contacting a few to see if they’re willing/able to help you resolve the matter with RH’s actions not aligning with their stated policy. Clinics usually offer their services for free or at a greatly reduced cost.
[1] Second and third year law students performing limited legal work under the supervision of an experienced attorney.
Robinhood does not have the same weight as larger brokerages, like Schwab, ETrade or Fidelity, so I would definitely expect it to perform worse on time-critical trades. By the same token, those large consumer and pension-fund focused brokerages would fare worse than internal trading desks and shops focusing on the HFT traders.
I would not use Robinhood for HFT or in general where I would care about the speed of trade execution.
True, fair take - but would you really consider a 2DTE position "HFT"? I run ethereum bots, IMO that is not HFT and Robinhood should at minimum have account representatives to manage client relations to be allowed to operate.
But they don't, because of everything that you said. They are lightweight by design, they are not for large investors, they are made for the retail space.
You can see this echoed in their featureset - for example, no historical date on options prior to purchase date, and only visible once you've purchased the contract. With Etrade or other institutional brokerages, you have access to full historical data for any contract or stock you are looking into. You are able to educate yourself and make much smarter decisions, without leaving their app.
Granted, the Robinhood app is much smoother. They dont' have an iPad app though, which was another big con for me.
Robinhood is for the general public. The general public has always been fleeced in the markets. Always. And always will be. Read any historical book on the markets, the public is getting fleeced. If you want to complain about execution or products or relationships you should get serious and become a trader, in which case you’ll immediately stop using Robinhood. If it makes you feel any better, almost every time you’re being fleeced there is a professional trader on the other side of the trade laughing at this dumb schmuck just giving their money away.
Indeed. For what it’s worth I don’t think Robinhood intentionally created a product that can serve its users up on a platter. Robinhood’s platform can still be used in a way that creates a lot of value for disciplined value investors with long time horizons so long as they are careful with their order types. I think they’re just not watching their blind spots in an industry that thrives off exploiting blind spots, and their efforts to grow their product are outpacing their efforts at being market savvy.
I also agree with this - maybe a hint of doubt is cast by their sketchy history w/ Plaid and collecting transactional data. But for the most part, I think Robinhood did open the doors to a new era of retail investment not accessible ever before. They've just been eaten by the very market they've helped create.
I think you nailed the sentiment well, basically blind spots in an industry that thrives off exploiting them.
Agreed, I would not consider it HFT. But I would still say that if the execution is time critical (that is, if delaying the execution an hour or two is important), Robinhood is not the right platform to use.
But even with this caveat, RH should still have a reasonable business model. I think the vast majority of individual investors have most trades that are not time critical. For those folks, having investment options that they would otherwise be priced out of may be a good thing. My 2c.
There's no good reason for any company putting itself up as a brokerage to have a 60-90 minutes window for any equity or options trade. They most definitely have the ability to cap that window, and cap it to a much smaller range. They just choose not to--probably so they have some plausible deniability or wiggle room to fleece people like the OP.
HFT does not refer to all intraday trading, but rather extremely latency-sensitive (subsecond) strategies. In markets where there is not a legal requirements, such as for US stocks, an HFT would not execute through a broker (not through Robinhood, not through Credit Suisse...they would execute directly with the trading venues they are trading in.)
I had a much more boring thing happen with a discount broker: they didn't execute a good until cancelled limit order in after hours. I kinda get it, but if I wanted to sell 100 shares of ZVZZT at $50 and it happens to hit $50.01 in after hours trading, sell it, or at least give me a check box to enable this.
I feel like beyond long term buy & hold saving / investing, you should probably be using something like IBKR lite or pro if you want fine grained guarantees like that.
Practically no one was harmed by this. A penny or two per trade. It’s more the principle of the matter than the actual costs. The fact that Robinhood was clearly lying is the most concerning thing.
Exactly. The people who were "harmed" by this were folks who tried to use Robinhood to do ultra-short-term (seconds-level) trading in an attempt to capture micro-swings, and Robinhood is a terrible platform to do that (and, honestly, people who thought Robinhood was a good platform to do that kinda deserve what they got ;)
For normal investors / traders / gamblers, this shouldn't make a difference. The reality is that most micro-swings in a stock are indistinguishable from random noise, so if a price "should" have been $10.05 and you paid $10.07 on Robinhood, it's just as likely that 5 seconds later you're at $10.03 as you are $10.11.
SEC doesn't look at direct investor harm to litigate so you won't find them trying to build such a case either.
They want a fair market that's about it.
> certain Robinhood orders lost a total of approximately $34.1 million in price improvement compared to the price improvement they would have received had they been placed at competing retail broker-dealers, even after netting the approximately $5 per-order commission costs those broker-dealers were charging at the time.
Agreed. Its even worse as it fits into their entire business model to capture young unsophisticated investors. An experienced investor would make one trade and notice the order execution was off, however when you specifically target an inexperienced investor its easier to get away with the con
An "experienced investor" would neither care nor, most likely, notice anything about this. Mostly because "experienced investors" aren't in the business of day trading. But also because nothing was "off" here. It isn't the Robinhood customer that is harmed by this, but institutional investors who, by this mechanisms, are excluded from the services of these market makers because they present a different risk profile.
I worked in HFT building trading platforms and it would be virtually impossible for me to see order execution being off using retail tooling.
In fact it takes incredibly sophisticated infrastructure to do it. The kind of infrastructure you build if you are a market maker who would like to pay for order flow.
Even the SEC doesn’t have the capabilities to check execution rates for every order. They rely on audits of smaller subsets of the orders in historical reports.
I agree. I used Freetrade and they delay all free trades until 3pm the next day. Obviously they are doing some nonsense to make a tiny bit of money from that, but it doesn't really matter to me any more than the 0.5% duty does because I'm not idiotic enough to make short-term trades. Just put the money in, forget about it and take it out years later. 0.5% will be irrelevant.
I don't think most people see Robinhood as a competitor to Schwab or eTrade. It's a competitor to mobile games. The millenial/zoomer cohort that primarily uses it are not investing for their retirements with it. It's a casino app used for entertainment.
Yea that’s what 401k and IRAs are for. Whether you like it or not, Robinhood has lowered the barriers to entry for actual investing. Sure, there are people that use it like a casino. But the lack of fees per trade and the ability to buy fractional shares opens the door for anyone to be able to start investing with even a small amount of capital. Go yell at clouds somewhere else.
You're right. But they're probably learning a thing or two and will be better investors when it actually matters — when it's real money.
Seems like the big brokerages should encourage Robinhood "gaming".
Speaking of which — would love to see a game (does it exist?) where you can play at an investor with pretend money and real market day to say numbers drive your winnings.
>Speaking of which — would love to see a game (does it exist?) where you can play at an investor with pretend money and real market day to say numbers drive your winnings.
Paper trading is definitely a thing, and there's plenty of apps that support it. The problem is people will never act the same with paper as they do with real money. It doesn't correlate at all. This is why Vegas odds tend to be far more reliable than polling numbers.
Yeah it is sometimes called fantasy stocks. Paper trading.
However no one treats that remotely the same as real money. Good chance whatever you do with fake money won’t matter much the second you have a big loss with your real money.
Is this just another piece of data confirming that it is a bad idea to place market orders? With a market order you are essentially saying to the broker "I want this stock right now, you can decide what the price is". With a limit order, it seems much harder to pull any tricks.
It seems like market orders are, and always have been, for chumps. Robinhood is just being more shameless about abusing them than previous brokers.
> It seems like market orders are, and always have been, for chumps.
It's not as simple as that. Market orders vs limit orders are a trade-off between immediacy and price. If you have an information advantage you may want to capture it as fast as possible and execute a market order (or a limit order that crosses the spread). The person on the other side with the standing limit order faces the risk of adverse selection (ie. they are only matched when their information is out of date and the price is too low or high). With a limit order you can avoid crossing the spread but you might either miss getting filled or only be matched when the price moves against you.
I think the first order assumption needs to be that the person with the information advantage is always the broker, not the retail investor buying a stock. Therefore, you should trade in a way to minimize this advantage. (I know you're using the term "information advantage" in a different sense, but I'd argue that type of advantage is swamped by the information asymmetry between the broker and retail client)
> "I want this stock right now, you can decide what the price is"
No this is too pessimistic, there are best execution rules which say the broker must get the best price possible. It can trade off exchange with a hedge fund, in a dark pool or internally with another customer, but the price must be better than that of the exchange bid/ask.
It seems obvious to me that these rules can be skirted by just time-compressing the process, since it's hard to prove whether an order was placed at, let's say, noon+5msec versus noon+15msec.
Suddenly, the popularity and profitability of HFT starts making a lot more sense.
Suddenly, the popularity and profitability of HFT starts making a lot more sense.
If you think that the profitability (what little there is left) of HFT is due to maliciously manipulating the time of customer order submissions than your understanding of how this system works is flawed.
I believe HFT is often used to front-run other trades. I don't think I'm crazy believing this, I would love to read something to convince me that this belief is wrong.
It's a pretty simple concept. Net orderflow moves the price in the direction of the flow. Having foreknowledge of net flows implies knowledge of future price changes. Front-running is just trading on that knowledge.
Here are some ways it happens:
1. A broker-dealer has client orders in its possession and trades ahead of them (classic front running)
2. A hedge fund with 2 portfolios trading correlated signals, one faster than the other (the Medallion-RIEF hypothesis)
3. Anticipate retails flows using behavioral advertising data or network intercepts from a statistically meaningful population (the Robintrack model)
There are more, but they all share the same flavour. I wonder if Robinhood is sending retail orders to anyone running strategy 3.
No it is not. Best execution is a lot more complex than market vs limit. The normal metric for best execution is "implementation shortfall" which is the difference between the market price at the "decision time" (when the order arrives at RH is the best they can do here) and the executed price.
Poor execution leads to a lot of shortfall, good execution leads to a small amount of shortfall and in some cases even negative shortfall.
You can think about execution slippage as being the "information impact" of trading and a good broker will attempt to minimise this cost along with other transaction costs (eg fees etc).
As others have commented there is NBBO( National Best Bid Offer) book that every broker has to respect.
Price improvement that the article talks about is totally upto the broker if they want to pass it back to the customer or not. Or if they have a deal with their buyer. This happens a lot more in over the counter markets like FX.
Overall Robinhood has been a net positive that disrupted & forced old retail investors trading platforms to go 0 commission
How much does this actually matter for the casual retail investor? I'll typically buy 5-10 shares of some ETFs every couple months via market orders (not on Robinhood), am I really getting bilked that bad?
Probably not in your scenario. But if you're making a larger order say $50k. you may see even like 0.5% difference in fill price between brokerages so $250. Also depends on liquidity of the stock being traded, if it's relatively low volume you may have even larger differences.
I think this is the main takeaway from the article. The whole time i read it I kept thinking, that this actually sounds like a good tradeoff for the average Robin Hood customer.
The way that this is bad is if you are a high frequency trader making micro-trades to capitalize on tiny upticks throughout the day. These rely on frequent 0.5% upticks to make money, so a 0.5% surcharge cancels out its effectiveness. Or someone who is pushing significant capital through the brokerage. If you are pushing $10k - $100k trades then this starts to really significantly hurt you. But then again, Robin Hood isn't really meant for you either. Schwabe, TD Ameritrade, Fedelity would work better for you.
But for the average Robin Hood investor, most of us are making a handful of trades a month at small volumes (yes, even $1,000 trade is a small volume). Most Robin Hood customers are trading even less. A single share here and there.
In the later case, this technique for revenue generation from Robin Hood is actually GOOD for its customers. Instead of paying a flat $7 trade fee that a larger investment firm might charge, you get a "free" trade that technically was marked up 0.5%. So on a $50 share, this means you pay $50.25, essentially a 25¢ fee. This is still better for Robin Hoods customers. And Robin Hood making money is actually a good thing for their customers, because it means they can stay around and continue to exist. Robin Hood serves a niche in the trading space that larger firms have no interest in serving. Robin Hood is starting to learn why the larger firms have no interest in this space, but if Robin Hood can figure it out, then it is good for the larger population that can benefit from its service.
it probably doesn't matter for something like an S&P 500 ETF. the intraday movement is just going to be noise after a few months. if you're concerned, you can always set a limit order for the current ask price.
It matters much more for large orders, but there's always some additional risk with a market order regardless of size.
Depending on your broker, they may have built-in safety mechanisms for market orders. I use Fidelity and they have a price improvement feature. They basically execute your order at the best possible price available at that time.
Was going to ask the same thing. I bought modest amounts of a couple of ETFs, and my broker (IBKR) flashed several big warnings about using a market order. I figured it probably didn't matter much since I'm planning to buy and hold, but a more cautious person would probably have done the limit order.
I dunno. What’s your strategy? Mine is to eke out as much as I can out of what little I have, so I use limit orders to keep within my strategy. Market orders would fuck that up.
I mean you are providing free sell options to the market if your limits are below the current price. I‘m not sure thats much better.
I just place limits way above the current price to get a market order with no risk at getting rekt by a bug or a sudden market movement
While your analysis is correct, providing free sell options is a second-order effect, whereas a market order is a first-order effect. I think such second-order effects are much harder (though not impossible) for people to game.
I never really thought about it like that, but it makes sense.
I’ve always been more of a long term dividend investor so micromanaging my trades isn’t something that I tend to spend much time worrying about. If it’s a good investment, it’s a good investment.
If you're buying something with low liquidity (e.g. an ETF with low AUM or a small-cap stock) the bid/ask spread can be huge. When I first started investing/speculating I made the mistake of putting in market orders without checking the spread. That resulted in me paying $1 or more per share above the last quoted market price. E.g. the last market quote was $65, but the going ask was $66. After-hours market orders (even on large-cap stocks or high AUM ETFs) can also cause some nasty surprises.
Limit orders are a risk management technique. Your limit order will not fill if you can’t get the price you want. A market order is subject to microstructure fluctuations such as flash crashes.
All things being equal if you don’t care much about execution costs limit orders that cross the market are what you want.
I feel like the brokerage I was using would make the purchase at market close (Vanguard index funds). I assume at the market closing price? That gets rid of a flash crash danger anyway.
I agree with placing limit orders instead of market orders, but if an illiquid stock is quoted at 20.00 to 20.10, placing a limit order to buy at 20.10 is not much different from a market order, at least for a small number of shares. It's possible some brokers will offer more price improvement than others in this trade, filling you at less than 20.10.
Thinking about it, I never used anything else than limit orders. Not saying much, so, as I maybe used that to sell like 4 times in tha last one year and half.
If you dig a layer deeper on payments for order flow, the majority of that revenue comes from options trading. Because they're more opaque, options carry fatter margins versus stock. Not surprisingly, Robinhood makes it very easy for users to trade options. Lucrative for Robinhood, but potentially risky for investors. More thoughts on that below.
I think Robinhood is total trash, but this is exactly what every single other free brokerage does. If you don't pay for your trades, someone else has to pay for them.
This is true for ETrade, TDA, Schwab, TradeStation, TastyWorks, and friends. Your order flow must be sold to give you free trades. It's operationally impossible to be any other way since everyone, at minimum, is required to pay fees to the exchanges. Someone needs to pay for you, and a broker sure as hell isn't doing that for free.
> this is exactly what every single other free brokerage does
Kind of, but the article specifically mentions that Robinhood is getting 4x more money than the industry average, in exchange for giving users worse prices:
> Typically, the SEC found, payments for order flow equal about 20% of the average price improvement that investors realize on their trades. But Robinhood insisted on receiving what amounted to 80% of the improvement: 4 times the customary level.
> When Robinhood made that demand, the principal trading firms with which it was negotiating informed the company that something had to give. If Robinhood were to take that much of the proceeds for itself, then “there would be less money available for the principal trading firms to provide price improvement for Robinhood’s customers.” In other words, Robinhood explicitly was informed that more for it meant less for its customers. The company accepted those terms.
The economics don't quite work the way you describe.
The brokerage is forwarding your flow to one of it's partner broker-dealers who is providing the actual execution service. Those BD's would happily take this flow for free (as evidenced by the fact that they now _mostly_ pay for it). The executing BD, not the brokerage, is on the hook for trading fees _if_ they need to execute the order in the public market - which is rare as they mostly internalize that flow. The executing BD's business model is based on the assumption that the flow is not particularly toxic and that at scale, the profit margin per share exceeds any execution costs.
The larger point stands though: from the perspective of the executing BD the payment for order flow + price improvement are both costs, which they want to cap. If you dial up PFOF, you naturally get less price improvement.
But essentially if you are using their “pro” service, which charges commissions then no. If you are using their “lite” service with zero-commission then maybe.
I've stated this before and got downvoted in other posts: RobinHood is a gambling platform. It is run fast and loose by its managers.
I am glad the SEC came down on it. This is actually a very minor penalty and more like a slap on the wrist than anything else. But it shows at least that there is some scrutiny of what RH tells its customers.
I have raised FINRA complaints in the past about this company for their poor order handling. I encourage anyone else to do the same when they see something wrong with RH or any other trading platform.
RH needs to massively increase its controls as well as investor education.
I think this penalty is also a massive day of reconing for their business model. They need to move to more of a full service broker - like all the other old-school firms. There's no money in order routing such as this. They need to boost their account size and attract higher quality users focused on investing - not gambling.
>Overall, Robinhood’s investors may not have been harmed by their decision. The SEC identified $34 million that Robinhood customers lost by not receiving best execution, which is much less than the money they saved by forgoing trading commissions. (That said, their losses might also be much higher. That $34 million comes only from “certain” transactions, which might be the tip of the iceberg that the SEC possessed the ability to measure.) They were, however, duped.
This seems like the financial equivalent of Facebook/Google. Free to use, but you are the product the company profits off of. I'm not really seeing an issue if there is no measurable _net_ harm to the investors.
The authors conclusion is not reflective of the SEC findings.
>certain Robinhood orders lost a total of approximately $34.1 million in price improvement compared to the price improvement they would have received had they been placed at competing retail broker-dealers, even after netting the approximately $5 per-order commission costs those broker-dealers were charging at the time.
> They need to boost their account size and attract higher quality users focused on investing - not gambling.
This seems like one of those companies that can't both carry out their business and say what that business actually is. In any industry there's the official story of how it makes money--obsessing with quality is a common stated goal--and then there's the actual nitty gritty of how it gets the impression of that quality without going to all the expense.
"The SEC’s order officially censures Robinhood for its actions, fines the firm $65 million, and requires that the company work with an independent consultant to ensure that henceforth it will satisfy its duty of best execution."
So, could this mean that Robinhood's business model just went bust? If they are getting the majority of their revenue from, and they will now be required to provide, presumably, some form of execution that is closer to best execution, then the other firms they are trading with will lower the money that RH receives, no? Naturally it may not matter - they are a SV darling and have quickly made Schwab et al look like dinosaurs.
Their interface pales to anything else. Download TDAs think or swim platform for a look at what could be. The only piece Robinhood does better is the SV gamification that lures investors who won't notice their orders are off
As a huge ToS fan, Robinhood did the gamification so well it forced TD/ToS to add better (simpler) PnL features to their apps. And there really wasn't anything special about their main graph either, it's just simple.
Interactive Brokers offers a cost plus commission structure, where your trades pay the exchange commission (or collect the rebate, if you are providing liquidity) and they just take on a ~$1 fee per trade on top. Very few "regular Joes" actually want that - what you don't realize is that exchange fees vary a LOT, each exchange easily has dozens of different rates depending on security, time of trade execution, the state of the order book at the time, and order type. Placing a market buy order when the book is sell-heavy? The exchange will actually pay you for that. Going the other way? That's a very expensive order. What if you take the order to a different exchange where the book is more balanced but the price is worse for you? It might make sense when you factor in the difference in commissions. This is why online brokerages exist, to abstract all of this complexity away.
What does democratize mean in this use case? Running direct access to exchanges isn't cheap, someone has to pay. Most "democratizing" seems to end up being opaque fees that naive customers don't realize (i.e. Robinhood)
How exactly is your magic API going to allow you to transfer money to and from the exchanges? An exchange is in the business of running a matching engine, not accepting customer deposits.
>That, regrettably, is what it discovered. The SEC’s investigation revealed the secret behind Robinhood’s high order-flow revenues: The company charged principal trading firms much more than the going rate. Typically, the SEC found, payments for order flow equal about 20% of the average price improvement that investors realize on their trades. But Robinhood insisted on receiving what amounted to 80% of the improvement: 4 times the customary level.
>When Robinhood made that demand, the principal trading firms with which it was negotiating informed the company that something had to give. If Robinhood were to take that much of the proceeds for itself, then “there would be less money available for the principal trading firms to provide price improvement for Robinhood’s customers.” In other words, Robinhood explicitly was informed that more for it meant less for its customers. The company accepted those terms.
There's a missing logical step here: if 80% fees mean there is less money available, so will 20% fees. So is it just that payment for order flow is inherently bad for the customer, and RH are the worst of a bad bunch?
I am starting to become convinced that most VC backed companies either are scammy from the start or quickly become scammy. Basically they are given a lot of money to “disrupt” a market. So they first have to have to show a lot of growth. The easiest way to do that is to offer for free (or deeply discounted) what used to cost money. So the growth numbers go up. Eventually, they need to be able to start showing a profit. However, the original, most obvious way of monetizing customers is gone, so then the company begins doing shady stuff to try to boost revenue.
This Morningstar provides information and analysis to investors, and predates the web by a decade (it was founded in 1984). It is most famous for rating mutual funds.
didn't the customers notice that they were given bad execution prices ? or would that be very hard to notice in practice ? (I'm not a trading expert obviously)
You'd only typically lose cents (if that; often enough you don't lose anything) per share. And there's no easy way to validate the price is "fair," since share prices are so fluid.
It's also a fairly victimless crime, as the article notes (although it downplays this); in practice, it seems users typically saved more money thanks to Robinhood's zero-fee trading than they lost in less optimal pricing for their trades. The problem here wasn't that payment-for-order-flow is bad — even Schwab does it for their zero-fee trading platform, and in practice it's often a good tradeoff — the problem is Robinhood lied about it.
And the fact that RH kept a far larger portion of the price improvement as their kickback. As the article mentions, the standard brokerage cut is 20% from the price improvement.
RH demanded 80% of it for themselves. Sure, their customers still got a better price than available in the lit exchange(s) but they were bilked by the 4x hidden commission.
To add to this, the swing is really wild. I’ve been tinkering with crypto trades manually through the app to get a hang for it, and limit orders still only tend to go through after you’re a few cents away from the market price, but if you naively do a market buy it will be 50-60 cents off in the wrong direction.
I immediately noticed when I switched brokers how much better the prices were, even on limit orders. When I used Robinhood I was 19 years old with no way to know better, aka their dream client
For a buy scenario. If a stock is trading at $20, other brokerages would execute a market order at $19.9997/share where Robinhood would execute a market order at $20.09/share. I noticed this also would occur but less noticeable on limit orders
They've openly said they were selling order flow since the very beginning, so I can sort-of understand the downvotes.
Read any second post by Matt Levine over at Bloomberg as to why selling of order flow isn't necessarily bad, and probably quite ok, for retail customers. But the gist is: fulfilling retail customer orders is lucrative for market-makers because they do not run the risk of fulfilling some order that is part of a larger, institutional, trade that will make the market move against them a short time later.
Everybody knew they were selling order flow. Almost all brokerages are selling order flow, and it's not a problem per se.
The difference is Robinhood is taking a larger percentage of the payment than most others. If you provided that information months ago, it may have been a worthy comment.
The article says: "investors greatly prefer paying indirect fees, through opaque arrangements, to paying explicit costs". This is not true.
Investors prefer paying indirect, opaque fees to paying explicit fees AND indirect, opaque fees. They simply assume that they are being charged the opaque fees no matter what. As this article demonstrates, they are generally correct about that.
By deriving revenue from order flow rather than a per-transaction fee, they’ve effectively made trading fees progressive. That is, a college student getting their wet buying a few shares of Apple pays less than someone moving around $100k‘s worth of equity from one index fund to another.
The SEC decision seems a little harsh on Robinhood. If RH had executed all of its customers orders on the public exchanges, instead of routing any to brokers, it would be in the clear (and a lot of people would be saying how great it was that RH didn't take payment for order flow). Directed orders are absolutely fine.
But because they chose to shop around for better prices than they could have achieved with directed orders, they had an obligation to pass on more of that price improvement to the customer. How much more? It's not clear. Seems like the SEC is hinting at "roughly as much as everyone else does" - brokers shouldn't be allowed a business model that subsidises low trading fees with high PFOF.
Other brokers subsidise their low or zero trading fees by collecting interest on their customers' cash balances. This only works when the balances are relatively large. The SEC's approach arguably encourages transparency, but I don't find either business model particularly transparent - the bigger effect is to discourage brokers targeting smaller clients.
As a matter of law, brokers have a duty to seek what’s called “best execution”, meaning they’re required to both shop around for better prices and pass all of the price improvement they can find onto their customers. Payment for order flow is still kosher in many circumstances; there's no clear duty to go to the people offering it and demand price improvement instead. But what you definitely can’t do is accept a worse deal (or stop trying to find better deals) in order to protect your payment for order flow revenue stream.
It’s fair to say that this rule cuts off some interesting business models which might better serve different market segments, but that’s largely the point. In the SEC’s judgment, the potential for abuse is too high if stock brokers start acting like retail stores.
> As a matter of law, brokers have a duty to seek what’s called “best execution”, meaning they’re required to both shop around for better prices and pass all of the price improvement they can find onto their customers.
That's the definition of best execution as it applies to undirected orders. But you can also offer your clients direct execution on the exchange, in which case you don't have to (and must not) shop the order around. If RH had done that, they'd be in the clear.
Yes, I understand that retail brokers aren't usually in the business of directed orders (because shopping round the orders is in the interest of both them and the client).
No, because if they do direct execution, that means they don't send the orders to the brokers who are giving them the PFOF. If you send it direct to NYSE or Nasdaq, the exchange charges you, not pays you.
> Payment for order flow is still kosher in many circumstances; there's no clear duty to go to the people offering it and demand price improvement instead. But what you definitely can’t do is accept a worse deal (or stop trying to find better deals) in order to protect your payment for order flow revenue stream.
This seems like a distinction without a difference. If you accept any payment for order flow you're always implicitly rejecting a hypothetical alternate arrangement where you agree to give up all PFOF in exchange for better price improvement.
I don't think I understand what's wrong with this model. If I wanted to actively trade, I'd still prefer Robinhood's zero commission model, even if it meant that my buy price was slightly higher. $10 a trade vs. pennies? Sign me up, we both win. What am I missing?
There is nothing wrong with the Payment For Order Flow model. Virtually every retail broker does it.
What you're missing is that Robinhood is not the only commission-free brokerage. I'm sure you'd rather have no commissions and 80% of the price improvement instead of no commissions and 20% of the price improvement.
The real problem is that Robinhood advertised they have THE BEST EXECUTION compared to other brokers, set up a Committee to ensure they have THE BEST EXECUTION, and then that Committee somehow failed to notice that Robinhood clearly doesn't have THE BEST EXECUTION because they're taking an 80% cut of price improvement, instead of 20% like everyone else.
I was looking to see if anyone caught this. It seems that Robinhood would be better for someone not investing a lot of money. If I execute a trade for $1,000,000 a small difference in stock price makes a difference and its better to pay a straight $5.00 commission with the lowest price possible. However, if I buy a single share for $50, that $5 commission is now substantial. This seems like a very clever way to compete and offer a better service to poorer people.
Unless I'm missing something the boomer either didn't catch that, or chose not to acknowledge it. As a millennial I'll assume his best intentions and that this isn't an attack on a successful company business model that he's receiving a kickback for to de-legitimizing Robinhood.
Person A places a trade which ends up executing at a certain time that causes the person to lose money.
Person B places a trade, then there’s some breaking news about the COVID vaccines and the market fluctuates, and then the trade is executed. Person B makes more money than expected because it took longer for the trade to execute and there was time for the market to change.
I see. I assumed that order flow implied something about timing (i.e. we send these orders to this broker who executes the order in an untimely fashion causing an inferior execution price).
It's more like this: the NBBO bid for a stock may be $10.00, which is effectively a worst-case for "best execution", which is what a broker is obligated to provide if I place a market sell order.
The broker may be able to route order that to a venue that will execute at $10.05; this is potential price improvement for the seller.
The potential price improvement is split between the broker and the customer. This is what "payment for order flow" really means. The broker routes the order to a particular trading venue in exchange for a cut of the potential price improvement, with the rest going to the customer.
What's worth knowing about Robinhood is a) they did not disclose that they were being paid for order flow and b) that they contracted to receive a much larger cut of the potential price improvement than was typical; e.g. other brokers might take $0.01 of that improvement, whereas Robinhood was taking $0.04.
PFOF or paying for order flow is a strange way to make money. There are other attempts at normalizing this sort of behavior, free trades and apis over at alpaca.markets is another example of it.
> you can move companies from Wall Street to Silicon Valley, and replace cynical baby boomers with optimistic millennials (Robinhood’s co-founders are in their mid-30s) who issue rousing mission statements, such as Robinhood’s promise to “democratize finance for all,” but ultimately the underlying math does not change.
can anyone put this on layman terms, from what I understood
1) a robin hood trader submits order
2) robin hood routes it to principal trading firm for a small amount
3) principal trading firm executes trades and makes profit by selling or matching order on other end? (this i got from a high frequency trading book )
so robin hood was fined because, they got more money for this? or customers have to pay more for a stock since it goes via robin hood, how the customer was affected ?
> or customers have to pay more for a stock since it goes via robin hood, how the customer was affected ?
That one.
It's a bit complicated but the gist is the price Robinhood customers pay for their securities is worse than it could be due to the deals RH has with their trading partners.
In the UK, Morning Star is the name of the Communist newspaper (not throwing shade, it was founded by the Communist Party of Great Britain in 1930). So whenever I see a link to this site I wonder what I'm about to read.
I don't see how this is an indictment of day trading (not that I recommend it). Fees are not specific to "how" you trade (e.g. day trading vs buy-and-hold), for one thing. But also, many brokerages don't have any fees at all. Successful day traders will be using limit-orders for which the issue described in this article would not exist.
> This tale also illustrates the point that you can move companies from Wall Street to Silicon Valley, and replace cynical baby boomers with optimistic millennials (Robinhood’s co-founders are in their mid-30s) who issue rousing mission statements, such as Robinhood’s promise to “democratize finance for all,” but ultimately the underlying math does not change. Sometimes, a business decides that its fortunes may diverge from those of its customers. Caveat emptor.
This was completely unnecessary, but true.
And now, please permit me a hearty laugh at the expense of millennials...
LOLOLOL
However, I know people that have used robinhood, I’m upset that they were affected, and I don’t blame millennials.
Legitimate criticism of Robinhood:
-the app crashes at the worst possible times
-they gamify the investing process too much
-they have no customer service
Everything else is pretty much just sour grapes or outright smears.
I agree to some extent, but only because I think most SEC regulations have the effect of creating walled gardens for established players rather than protecting investors. But you can always apply Godel’s incompleteness theorems (capital markets edition).
Because they're not doing the reading, and it's a lot more fun to talk about "front-running" than about what's actually happening, and "fun" has a lot of power on message boards.
Seems like a reasonable question to me. Leandro Andrade got 25-to-life for stealing $150 worth of kids' video tapes from K-Mart. But if some guys in suits steal (at least!) $34 million and they get a sternly worded letter from the SEC telling them to be best.
Lawyer Ken White, aka Popehat, regularly points out that laws about crimes appear to vary quite a bit based on how much a lawmaker can imagine that they might see the sharp end of the law. Seems like that's in play here.
The SEC appears to disagree with you, and given that they're the experts, I'm going with them. Robinhood ended up with at least tens of millions of dollars of customer money that they shouldn't have, and were covering it up with lies.
Yes, it was inaccurate in the same sense that it was inaccurate for 7-year-old me said the candy bar must have accidentally fallen into my pocket at the store.
A false statement that covers up one party gaining at another's expense is something that I'm going to presume is a lie. Especially when that false statement is made prominently, over and over. Calling that an inaccuracy strikes me as another convenient inaccuracy.
Because these are white collar crimes. The people writing and voting on criminal legislation are white collar as well, as are the prosecutors and judges in the courts.
So when deciding upon what punishment would be proportionate to the crime, there tends to be more empathy with the defendants as they are part of that same 'in group'.
You want people to go to jail for incorrect FAQ page? PFOF is not illegal, and the price improvements investors got are fine. It's just that Robinhood didn't properly disclose that they weren't getting the best execution.
As a Robinhood user with a finance degree, I have never experienced any issues with order execution or misrepresented prices that are passed on to the investor. In fact, I use the TD Ameritrade Think or Swim app for charts and research and I regularly compare the spreads between Robinhood and Ameritrade. Robinhood regularly has lower spreads that are actually executable. Quite honestly, I feel like the old school brokers are padding their spreads so that they can offer “free trades” like Robinhood.
This article feels like a smear to me. As a knowledgeable investor, I can say that however Robinhood makes their money, hasn’t had any significant impact on the performance of my investments. Quite the opposite. By not incurring fees per trade and by allowing fractional shares, I was able to start with a much smaller amount of capital.
This headline is nonsense. The article basically comes down to: Robinhood users may get slightly worse prices on trades.
If your trades comes down to a cent or two, you shouldn't be using Robinhood. If you're actually investing, and not a high frequency trader, Robinhood is great.
From the article: "The SEC identified $34 million that Robinhood customers lost by not receiving best execution, which is much less than the money they saved by forgoing trading commissions." The article literally confirms that the saved money on trading commissions is far more than the money lost on slightly worse executions.
I commented above[1] that the author seems to have misunderstood. The SEC Order[2] actually says the opposite:
> ... certain Robinhood orders lost a total of approximately $34.1 million in price improvement compared to the price improvement they would have received had they been placed at competing retail broker-dealers, even after netting the approximately $5 per-order commission costs those broker-dealers were charging at the time.
"(That said, their losses might also be much higher. That $34 million comes only from “certain” transactions, which might be the tip of the iceberg that the SEC possessed the ability to measure.)"
Seems like we are having the same discussion we had in previous bubbles. Robinhood, to put it simply, represents the retail investor market.
What’s the first rule of fight club? The stock market is not for retail investors. When the retail investor shows up (represented via the prominence of a Robinhood or a Etrade once upon a time), you’ve entered ‘time to get real’ territory.
Their entire customer base will be gone once things get ugly, so don’t even worry about how they make money since they are going to have bigger problems inevitably.
What happened the last time everyone’s mom became a real estate agent pre-2008? These things are symptom of a fantasy playing out.
The spread on most trades is probably in the range of 50c on low liquidity shares and $1 on low liquidity options.
Perhaps the reason RH collects more in revenue from order flow is because they:
1) get paid more for their order flow on a per trade basis
2) they don't collect any fees from options driving down revenue
3) they charge less for margin fees with less users using margin
There are any number of reasons, but to say that you're getting royally screwed is a massive stretch in my mind. Prior to RH fees were outrageous. The fees are still outrageous on my self-directed 401k. I'm not getting $10 in losses from bad execution.