6 ms·

My understanding is that if you trade through a platform like this, that's monetizing through order flow, you're getting screwed by HFTs. I.e. AFAIK Robinhood d

by malanj 9y ago

My understanding is that if you trade through a platform like this, that's monetizing through order flow, you're getting screwed by HFTs. I.e. AFAIK Robinhood doesn't need to be selling the data to HFTs (which they don't do), for you to get screwed by them. Anyone here in the space who can quantify the "hidden" cost you incur because of more sophisticated traders trading against you? It feels like working with a broker who's explicitly charging you might actually be cheaper if you take this "cost" into account?

supster 9y ago
All the major retail brokers sell their order flow, so you generally eat this cost no matter who you use. In addition, the hidden cost is fractions of a penny on the dollar (so still better than the $5-7 a regular broker charges per trade anyways).
- mr_turtle 9y ago
  What's the long play then? Surely Robin Hood isn't absorbing the the transaction fees as a loss leader just to increase it's user base? If that's the play, any other company can emulate that.. The incentive seems to be this may cause a price war with existing brokerages.
  - user5994461 9y ago
    If I have to guess a business model: They get a good deal on the commission and they get enough money from the gold subscribers to cover the commissions across all users. A fix subscription package is user friendly and easy to understand. It can be "better" for business than a variable commission on trades.
  - supster 9y ago
    The long play is that it actually doesn't cost significant money per trade at an institutional level. The only reason the other major brokers charge you money is because it covers their brick and mortar retail costs (e.g. Scottrade) and it adds to the bottomline (e.g. Etrade). So Robin Hood is actually just giving this surplus to the consumer instead of keeping it for themselves, and building a user base / brand in the process. Eventually once they have enough users, they will start to up sell you for other services (e.g. checking/savings, margin trading, options trading, check writing etc).
    - skylark 9y ago
      But how is competing on price a business model in and of itself? Surely Etrade can do the same thing, right?
      - supster 9y ago
        So majority of the brokers have brick and mortar operations that can't afford to compete on price. That leaves only the online brokers. Then the next step is to build a brand that attracts customer trust/loyalty, which is what Robinhood seems to be doing and to build a really nice experience which they do with their slick apps. Once customers (generally young ppl who are first time investors) are invested in the Robinhood platform, then Robinhood can up sell them on additional features/services (margin, options, API access etc). So sure Etrade could compete on price (I doubt they would want to since it would immediately hit the bottom line vs a new company not depending on broker fees), but if you look at it from a long term perspective eliminating broker fees is just step 1.
  - deleted 9y ago
    [deleted]
  - mywittyname 9y ago
    The long play seems to be deliver retail stock trading at the lowest possible price. There's a lot of money to be made even if they don't try to maximize profits. Plus, I bet they are banking on the existing brokerages not responding until things are too late for them. Most brokerages offer free trades and other perks, but limited to "high-value" customers. They won't drop trading fees until they absolutely have to, but by that time, their low-value customers will all be gone.
  - scott00 9y ago
    There aren't actually any transactions fees to absorb. Wholesale brokers (think Citadel) pay retail brokers (think Robin Hood) for the privilege of executing their orders.
    - cturner 9y ago
      I found 'RHF SEC Rule 606 and 607 Disclosure' on their disclosures page. https://www.robinhood.com/legal/ https://www.robinhood.com/legal/
    - hn9780470248775 9y ago
      Why?
      - scott00 9y ago
        Because, for the most part, retail investors are not well-informed investors and are willing to cross the bid-ask spread. To simplify dramatically, suppose Citadel thinks the fair value of a stock is 25.185, the market is 25.18-25.19, and a Robin Hood customer wants to pay 25.19 to buy 1 share of the stock. If they buy from Citadel, Citadel makes $0.0050 on average. Given those basic economics, it makes sense for Citadel to pay, say $0.0018, to make sure that the Robin Hood customer buys from them instead of from Knight.
  - lurker456 9y ago
    Their end game is being bought by a larger financial org. RH is capturing a user base that has eluded more established institutions for a long time.
    - mr_turtle 9y ago
      Oh damn, then it's just opening short/long term trading to a new segment of people that wouldn't otherwise do it. That's like 100% casino/poker bonuses during the poker boom.
iampims 9y ago
HFTs don't work that way.
iampims 9y ago
HFTs don't work that way.
rl3 9y ago
http://blog.alphaarchitect.com/2015/03/16/shedding-light-on-payment-for-order-flow-insights-from-emmet-peppers/ http://blog.alphaarchitect.com/2015/03/16/shedding-light-on-... Although that article reads like an ad for Interactive Brokers, it offers a bit of insight on the subject. Namely how aggressive limit orders in an order flow situation will be less likely to fill in the face of desirable price movement, thus incurring an opportunity cost.
scott00 9y ago
You'll actually get better fills from HFTs operating on purchased order flow than you would if you went directly to market. Also, there's nowhere you can go that won't sell your order flow on undirected orders. But if you don't like it, you can always send it directly to a particular exchange, regardless of who your broker is.
webninja 9y ago
Day trading is hazardous to your health and your wealth and more-so with the increase in HFTs. But the buy and hold for long-term strategy works very well. Use limit orders and you won't be paying any "hidden" costs. For example, Lets say you put in a Market Order for 1 share of GOOG. Currently the price per share is about $900. It could fill immediately at $900, or it could fill immediately at $930 with that $30 premium. If instead, you place a Limit Order for 1 share of GOOG for $900.02, you will only buy 1 share of GOOG for $900.02 or less which effectively cuts out any "hidden" costs. Limit orders are almost always better. Fun fact: All Robinhood market orders are actually placed as limit orders 5% above the market price. This is to limit investor risk.
- jameskegel 9y ago
  Can you substantiate the last paragraph somehow with a source on this statement?
  - webninja 9y ago
    Yes, Robinhood Order Types: https://support.robinhood.com/hc/en-us/articles/208650386-Order-Types https://support.robinhood.com/hc/en-us/articles/208650386-Or... Edit: Now only market buy orders are converted into limit orders. Market sell orders remain as market sell orders. They must have changed their policy in this last year.

by malanj 9y ago

supster 9y ago

All the major retail brokers sell their order flow, so you generally eat this cost no matter who you use. In addition, the hidden cost is fractions of a penny on the dollar (so still better than the $5-7 a regular broker charges per trade anyways).

mr_turtle 9y ago
What's the long play then? Surely Robin Hood isn't absorbing the the transaction fees as a loss leader just to increase it's user base? If that's the play, any other company can emulate that.. The incentive seems to be this may cause a price war with existing brokerages.
- user5994461 9y ago
  If I have to guess a business model: They get a good deal on the commission and they get enough money from the gold subscribers to cover the commissions across all users. A fix subscription package is user friendly and easy to understand. It can be "better" for business than a variable commission on trades.
- supster 9y ago
  The long play is that it actually doesn't cost significant money per trade at an institutional level. The only reason the other major brokers charge you money is because it covers their brick and mortar retail costs (e.g. Scottrade) and it adds to the bottomline (e.g. Etrade). So Robin Hood is actually just giving this surplus to the consumer instead of keeping it for themselves, and building a user base / brand in the process. Eventually once they have enough users, they will start to up sell you for other services (e.g. checking/savings, margin trading, options trading, check writing etc).
  - skylark 9y ago
    But how is competing on price a business model in and of itself? Surely Etrade can do the same thing, right?
    - supster 9y ago
      So majority of the brokers have brick and mortar operations that can't afford to compete on price. That leaves only the online brokers. Then the next step is to build a brand that attracts customer trust/loyalty, which is what Robinhood seems to be doing and to build a really nice experience which they do with their slick apps. Once customers (generally young ppl who are first time investors) are invested in the Robinhood platform, then Robinhood can up sell them on additional features/services (margin, options, API access etc). So sure Etrade could compete on price (I doubt they would want to since it would immediately hit the bottom line vs a new company not depending on broker fees), but if you look at it from a long term perspective eliminating broker fees is just step 1.
- deleted 9y ago
  [deleted]
- mywittyname 9y ago
  The long play seems to be deliver retail stock trading at the lowest possible price. There's a lot of money to be made even if they don't try to maximize profits. Plus, I bet they are banking on the existing brokerages not responding until things are too late for them. Most brokerages offer free trades and other perks, but limited to "high-value" customers. They won't drop trading fees until they absolutely have to, but by that time, their low-value customers will all be gone.
- scott00 9y ago
  There aren't actually any transactions fees to absorb. Wholesale brokers (think Citadel) pay retail brokers (think Robin Hood) for the privilege of executing their orders.
  - cturner 9y ago
    I found 'RHF SEC Rule 606 and 607 Disclosure' on their disclosures page. https://www.robinhood.com/legal/ https://www.robinhood.com/legal/
  - hn9780470248775 9y ago
    Why?
    - scott00 9y ago
      Because, for the most part, retail investors are not well-informed investors and are willing to cross the bid-ask spread. To simplify dramatically, suppose Citadel thinks the fair value of a stock is 25.185, the market is 25.18-25.19, and a Robin Hood customer wants to pay 25.19 to buy 1 share of the stock. If they buy from Citadel, Citadel makes $0.0050 on average. Given those basic economics, it makes sense for Citadel to pay, say $0.0018, to make sure that the Robin Hood customer buys from them instead of from Knight.
- lurker456 9y ago
  Their end game is being bought by a larger financial org. RH is capturing a user base that has eluded more established institutions for a long time.
  - mr_turtle 9y ago
    Oh damn, then it's just opening short/long term trading to a new segment of people that wouldn't otherwise do it. That's like 100% casino/poker bonuses during the poker boom.

iampims 9y ago

HFTs don't work that way.

iampims 9y ago

HFTs don't work that way.

rl3 9y ago

http://blog.alphaarchitect.com/2015/03/16/shedding-light-on-payment-for-order-flow-insights-from-emmet-peppers/ http://blog.alphaarchitect.com/2015/03/16/shedding-light-on-... Although that article reads like an ad for Interactive Brokers, it offers a bit of insight on the subject. Namely how aggressive limit orders in an order flow situation will be less likely to fill in the face of desirable price movement, thus incurring an opportunity cost.

scott00 9y ago

You'll actually get better fills from HFTs operating on purchased order flow than you would if you went directly to market. Also, there's nowhere you can go that won't sell your order flow on undirected orders. But if you don't like it, you can always send it directly to a particular exchange, regardless of who your broker is.

webninja 9y ago

Day trading is hazardous to your health and your wealth and more-so with the increase in HFTs. But the buy and hold for long-term strategy works very well. Use limit orders and you won't be paying any "hidden" costs. For example, Lets say you put in a Market Order for 1 share of GOOG. Currently the price per share is about $900. It could fill immediately at $900, or it could fill immediately at $930 with that $30 premium. If instead, you place a Limit Order for 1 share of GOOG for $900.02, you will only buy 1 share of GOOG for $900.02 or less which effectively cuts out any "hidden" costs. Limit orders are almost always better. Fun fact: All Robinhood market orders are actually placed as limit orders 5% above the market price. This is to limit investor risk.

jameskegel 9y ago
Can you substantiate the last paragraph somehow with a source on this statement?
- webninja 9y ago
  Yes, Robinhood Order Types: https://support.robinhood.com/hc/en-us/articles/208650386-Order-Types https://support.robinhood.com/hc/en-us/articles/208650386-Or... Edit: Now only market buy orders are converted into limit orders. Market sell orders remain as market sell orders. They must have changed their policy in this last year.