11 ms·

1) are you going to sell your trade flow to Citadel / market makers like Robinhood and your competitors do? That's the dirty secret way of making money that you

1) are you going to sell your trade flow to Citadel / market makers like Robinhood and your competitors do? That's the dirty secret way of making money that you seem to have completely excluded. The reality is that adds up to substantial "invisible" fees that the investor has no transparency over because you sell your trade flows to them and they make a higher than normal spread. And the whole "doesn't matter if we sell your trade flows, the rules require you to get best execution" is a farce and everyone in the industry knows this - otherwise there is no reason why Citadel or Virtu would bid billions of dollars to just buy the trade flow. 2) Are you going to rebate your borrow fees back to investors? This is the other dirty secret way of making money. Many people don't realize that you can earn lending fees by lending your shares out for people looking to short stocks, and those add up to substantial amounts over time for a scaled asset manager. Do you keep this instead of rebating it fully back to your customers? 3) If the answer is no, you don't sell trade flows and yes, you will rebate your borrow fees, can you make a lifetime commitment that you won't go back on your word? Many people who start in this industry say they won't sell trade flows and then after they reach scale they change the footnotes and agreements and starting selling trade flows.

shred45 2y ago
> they make a higher than normal spread Is this known for sure? I thought the value of this order flow to them was the lack of adverse selection.
rs999gti 2y ago
> sell trade flows This is the real reason for low/no broker fees. Don't believe any broker that says they will input orders without taking their cut otherwise they (automated or not) would not exist.
ddulaney 2y ago
For 1 — dude, please back off the “[the rules] are a farce”. Citadel and friends pay to trade with you because they think you’re dumb and they can make money off you. They’re giving you or your broker a better deal because they think they’re smarter than you. That’s all it is. They’d rather trade with you than with the median person on the market. Because they think you’re dumb. You’re welcome to be insulted by that. It’s an insulting thing. But it’s not some grand conspiracy.
- shred45 2y ago
  Its not the median they are worried about, its the 99th percentile. They _dont_ want to trade with Optiver, 2 Sigma, etc, or some hedge fund thats working a massive trade. Trading with a highly sophisticated counterparty can be very costly and undo the small profit they have made from thousands of other trades.
- taway789aaa6 2y ago
  The "farce" is that when a market maker like Citadel purchase your order flow, the orders are typically not routed to the lit market (e.g. NYSE, IEX, etc) but instead routed to "alternative trading systems" (ATS) e.g. "dark pools" where your purchase has no effect on the price of the security. This breaks the whole idea of a "market" where every buy puts upward pressure on a price and sales put downward pressure. Thus, a "farce". That's not even getting started on the "farce" that is an ETF and how they are balanced/re-balanced. Gotta love brokers that don't have your best interest in mind. Who needs best execution? /s
  - shred45 2y ago
    Order flow in dark pools does impact the price of a security. The market maker will eventually need to trade out of that position. If there is aggregate buying pressure in the dark pool, they will adjust their quotes in both dark and lit markets.
    - taway789aaa6 2y ago
      > The market maker will eventually need to trade out of that position This is why Citadel has $60+ billion dollars of "securities sold not yet purchased" on their financial statements. They have sold $60+ BILLION of shares to investors and not yet bought the underlying securities. So when exactly will that $60 billion of buy pressure hit the market?
      - shred45 2y ago
        I don't think this really tells you anything, and it also will impact the quotes they are making, even if they are holding the position for now.
wrsh07 2y ago
Pfof is woefully misunderstood In general, citadel wants to pay to trade with retail investors because it knows it isn't going to face adverse selection. So it will give them tighter bid/ask ratios (this is better for the customer) than they would get if they were trading in the open market, citadel isn't going to get hosed by one of them (because there's no adverse selection) It's win win win
- wrsh07 2y ago
  Here's the money stuff excerpt: https://marginalrevolution.com/marginalrevolution/2021/02/the-wisdom-of-matt-levine-payment-for-order-flow.html https://marginalrevolution.com/marginalrevolution/2021/02/th... > I feel like most of what I read about payment for order flow is insane? Otherwise normal people will start out mainstream explainer articles by saying, like, “Robinhood sells your order to Citadel so Citadel can front-run it.” No! First of all, it is illegal to front-run your order, and the Securities and Exchange Commission does, you know, keep an eye on this stuff. Second, the wholesaler is ordinarily filling your order at a price that is better than what’s available in the public market, so “front-running”—going out and buying on the stock exchange and then turning around and selling to you at a profit—doesn’t work. Third, because retail orders are generally uninformative, the wholesaler is not rubbing its hands together being like “bwahahaha now I know that Matt Levine is buying GameStop, it will definitely go up, I must buy a ton of it before he gets any!” The whole story is widely accepted but also completely transparent nonsense.
  - deleted 2y ago
    [deleted]
  - 1oooqooq 2y ago
    it's already public that frontrunning is perfectly legal if you can do it with large volume as to not show intent of frontrunning one single person.
    - slt2021 2y ago
      yeah, Citadel's annual $30,000,000,000 profit is not coming out of thin air or just from bid-ask spread. Customers are being taken for a ride definitely
rancar2 2y ago
1 and 2 are volume based hence 3 once the volume is there. To the OP dayone1: What’s your concerns with 3 exactly? Double’s structure is innovating on the fee front like an extreme Vanguard 2.0, so overall the structure (even if 3 takes place like Vanguard) is still the best deal on the market for an individual.
nick3443 2y ago
Be careful lending out your shares (for example on ibkr) you can lose your qualified dividend status.
shmatt 2y ago
I dont know the reasoning behind this comment, but YC isn't a charity. The investment was made with the hopes of making 100x return without customers paying fees. Obviously there are other cashflows in play
- is_true 2y ago
  Maybe they are expecting for an exit from a company buying them and then raising fees
- mguerville 2y ago
  Or the investment was made under the assumption the business model to gain traction isn't the same as the future one that generates cash flow. Plenty of company start with a free or cheap product then up their pricing once the value is proven and there's a percentage of their users that fears the switching costs
hn_throwaway_99 2y ago
> If the answer is no, you don't sell trade flows and yes, you will rebate your borrow fees, can you make a lifetime commitment that you won't go back on your word? To be honest, why would you even ask that? "Lifetime commitments" are ridiculous. It's simply not a promise that any founder or business owner could ever make. Businesses get sold, circumstances change, etc. It's better to just accept that as a risk factor and decide whether or not you'd be comfortable taking on that risk.
- rcMgD2BwE72F 2y ago
  >Businesses get sold, circumstances change, etc. More importantly, founders also lie about their intent. It's easier to trust owners when they commit and are ready to go to court over their promises. Ever heard of Lavabit? https://en.wikipedia.org/wiki/Lavabit https://en.wikipedia.org/wiki/Lavabit It's never ridiculous to ask. What's ridiculous is for founders to make their customers believe they're ethical when they're not. Let's ask then, and you don't have too high expectations.
- BobaFloutist 2y ago
  >Businesses get sold, circumstances change Is there really no way to put a binding bylaw in incorporation papers that will survive a sale? Something like a land-use covenant, but for a corporation? I'm not sure that's necessary for this particular case, but for something like private data exposure I've been playing with the idea that it's the only way to actually trust a company with your data.
  - hn_throwaway_99 2y ago
    In the US, not that I'm aware of. I suppose it would be possible to add a "poison pill" ("If we change this, we'll pay everyone $X dollars") to then just make it a normal contract, but again essentially no company would be willing to do that because it extremely limits their options. Also, "forever" is a lot shorter than people think, it's only as long as the powers-that-be are in a position to enforce a contractual position.
    - 2y ago
wbl 2y ago
The reason people pay for trade flow is the same reason they sit at the table of drunks when playing poker.
- dehrmann 2y ago
  It's slightly different. With poker, you play with drunks because they make mistakes. With order flow, you want trades from small fish who don't have any special knowledge so you market make and not be taken advantage of, yourself.
  - slt2021 2y ago
    Except that unlike in casino, in stock market a Designated Market Maker can go against the crowd and "wait it out" any negative downfall. Lets say customers bought GME and GME shoot up. Citadel just waited out until the movement fizzled out. They were able to hold naked short position for prolonged period of time (basically printing fake shares) to artificially increase the float
- TeaBrain 2y ago
  It's more like paying for the privilege of operating a monopoly on poker tables, with the guarantee that the rake will be kept low, so that the operator is not competing with other entities for the customers' rake. A market maker's competition to collect the spread is with other market makers, just like a casino's main competition to collect the customer's rake would be a different casino.
  - wbl 2y ago
    Read Reg NMS before you opine on this. It's short!
    - TeaBrain 2y ago
      As long as the market maker is executing orders at the NBBO on their ATS, they shouldn't be in conflict with Reg NMS, even though they are the only operator with the ability to market make on their ATS. Paying for order flow allows market makers to avoid competition in capturing the spread at the NBBO, however small the spread may be, while also helping to guarantee liquidity to capture the spread on, by giving them the sole privilege to market make on those orders. Returning to the earlier poker table analogy, I mentioned that the operator with a local monopoly on poker tables, would be required to keep their rake low to keep their local monopolistic privilege, as an analogy to how market makers also have to keep their spreads in line with the NBBO (due to Reg NMS), in order to keep their privilege of executing orders on an ATS.
TuringNYC 2y ago
>> are you going to sell your trade flow to Citadel / market makers like Robinhood and your competitors do? Is that really a problem if you're still getting NBBO (https://en.wikipedia.org/wiki/National_best_bid_and_offer https://en.wikipedia.org/wiki/National_best_bid_and_offer) Could you explain the downside of selling order flow if you're getting no worse than the current NBBO?
throwacomment 2y ago
Does anyone rebates 100% of the borrow fee or did that initially?
maest 2y ago
PFOF is good for the customer.

shred45 2y ago

> they make a higher than normal spread Is this known for sure? I thought the value of this order flow to them was the lack of adverse selection.

rs999gti 2y ago

> sell trade flows This is the real reason for low/no broker fees. Don't believe any broker that says they will input orders without taking their cut otherwise they (automated or not) would not exist.

ddulaney 2y ago

For 1 — dude, please back off the “[the rules] are a farce”. Citadel and friends pay to trade with you because they think you’re dumb and they can make money off you. They’re giving you or your broker a better deal because they think they’re smarter than you. That’s all it is. They’d rather trade with you than with the median person on the market. Because they think you’re dumb. You’re welcome to be insulted by that. It’s an insulting thing. But it’s not some grand conspiracy.

shred45 2y ago
Its not the median they are worried about, its the 99th percentile. They _dont_ want to trade with Optiver, 2 Sigma, etc, or some hedge fund thats working a massive trade. Trading with a highly sophisticated counterparty can be very costly and undo the small profit they have made from thousands of other trades.
taway789aaa6 2y ago
The "farce" is that when a market maker like Citadel purchase your order flow, the orders are typically not routed to the lit market (e.g. NYSE, IEX, etc) but instead routed to "alternative trading systems" (ATS) e.g. "dark pools" where your purchase has no effect on the price of the security. This breaks the whole idea of a "market" where every buy puts upward pressure on a price and sales put downward pressure. Thus, a "farce". That's not even getting started on the "farce" that is an ETF and how they are balanced/re-balanced. Gotta love brokers that don't have your best interest in mind. Who needs best execution? /s
- shred45 2y ago
  Order flow in dark pools does impact the price of a security. The market maker will eventually need to trade out of that position. If there is aggregate buying pressure in the dark pool, they will adjust their quotes in both dark and lit markets.
  - taway789aaa6 2y ago
    > The market maker will eventually need to trade out of that position This is why Citadel has $60+ billion dollars of "securities sold not yet purchased" on their financial statements. They have sold $60+ BILLION of shares to investors and not yet bought the underlying securities. So when exactly will that $60 billion of buy pressure hit the market?
    - shred45 2y ago
      I don't think this really tells you anything, and it also will impact the quotes they are making, even if they are holding the position for now.

wrsh07 2y ago

Pfof is woefully misunderstood In general, citadel wants to pay to trade with retail investors because it knows it isn't going to face adverse selection. So it will give them tighter bid/ask ratios (this is better for the customer) than they would get if they were trading in the open market, citadel isn't going to get hosed by one of them (because there's no adverse selection) It's win win win

wrsh07 2y ago
Here's the money stuff excerpt: https://marginalrevolution.com/marginalrevolution/2021/02/the-wisdom-of-matt-levine-payment-for-order-flow.html https://marginalrevolution.com/marginalrevolution/2021/02/th... > I feel like most of what I read about payment for order flow is insane? Otherwise normal people will start out mainstream explainer articles by saying, like, “Robinhood sells your order to Citadel so Citadel can front-run it.” No! First of all, it is illegal to front-run your order, and the Securities and Exchange Commission does, you know, keep an eye on this stuff. Second, the wholesaler is ordinarily filling your order at a price that is better than what’s available in the public market, so “front-running”—going out and buying on the stock exchange and then turning around and selling to you at a profit—doesn’t work. Third, because retail orders are generally uninformative, the wholesaler is not rubbing its hands together being like “bwahahaha now I know that Matt Levine is buying GameStop, it will definitely go up, I must buy a ton of it before he gets any!” The whole story is widely accepted but also completely transparent nonsense.
- deleted 2y ago
  [deleted]
- 1oooqooq 2y ago
  it's already public that frontrunning is perfectly legal if you can do it with large volume as to not show intent of frontrunning one single person.
  - slt2021 2y ago
    yeah, Citadel's annual $30,000,000,000 profit is not coming out of thin air or just from bid-ask spread. Customers are being taken for a ride definitely

rancar2 2y ago

1 and 2 are volume based hence 3 once the volume is there. To the OP dayone1: What’s your concerns with 3 exactly? Double’s structure is innovating on the fee front like an extreme Vanguard 2.0, so overall the structure (even if 3 takes place like Vanguard) is still the best deal on the market for an individual.

nick3443 2y ago

Be careful lending out your shares (for example on ibkr) you can lose your qualified dividend status.

shmatt 2y ago

I dont know the reasoning behind this comment, but YC isn't a charity. The investment was made with the hopes of making 100x return without customers paying fees. Obviously there are other cashflows in play

is_true 2y ago
Maybe they are expecting for an exit from a company buying them and then raising fees
mguerville 2y ago
Or the investment was made under the assumption the business model to gain traction isn't the same as the future one that generates cash flow. Plenty of company start with a free or cheap product then up their pricing once the value is proven and there's a percentage of their users that fears the switching costs

hn_throwaway_99 2y ago

> If the answer is no, you don't sell trade flows and yes, you will rebate your borrow fees, can you make a lifetime commitment that you won't go back on your word? To be honest, why would you even ask that? "Lifetime commitments" are ridiculous. It's simply not a promise that any founder or business owner could ever make. Businesses get sold, circumstances change, etc. It's better to just accept that as a risk factor and decide whether or not you'd be comfortable taking on that risk.

rcMgD2BwE72F 2y ago
>Businesses get sold, circumstances change, etc. More importantly, founders also lie about their intent. It's easier to trust owners when they commit and are ready to go to court over their promises. Ever heard of Lavabit? https://en.wikipedia.org/wiki/Lavabit https://en.wikipedia.org/wiki/Lavabit It's never ridiculous to ask. What's ridiculous is for founders to make their customers believe they're ethical when they're not. Let's ask then, and you don't have too high expectations.
BobaFloutist 2y ago
>Businesses get sold, circumstances change Is there really no way to put a binding bylaw in incorporation papers that will survive a sale? Something like a land-use covenant, but for a corporation? I'm not sure that's necessary for this particular case, but for something like private data exposure I've been playing with the idea that it's the only way to actually trust a company with your data.
- hn_throwaway_99 2y ago
  In the US, not that I'm aware of. I suppose it would be possible to add a "poison pill" ("If we change this, we'll pay everyone $X dollars") to then just make it a normal contract, but again essentially no company would be willing to do that because it extremely limits their options. Also, "forever" is a lot shorter than people think, it's only as long as the powers-that-be are in a position to enforce a contractual position.
  - 2y ago

wbl 2y ago

The reason people pay for trade flow is the same reason they sit at the table of drunks when playing poker.

dehrmann 2y ago
It's slightly different. With poker, you play with drunks because they make mistakes. With order flow, you want trades from small fish who don't have any special knowledge so you market make and not be taken advantage of, yourself.
- slt2021 2y ago
  Except that unlike in casino, in stock market a Designated Market Maker can go against the crowd and "wait it out" any negative downfall. Lets say customers bought GME and GME shoot up. Citadel just waited out until the movement fizzled out. They were able to hold naked short position for prolonged period of time (basically printing fake shares) to artificially increase the float
TeaBrain 2y ago
It's more like paying for the privilege of operating a monopoly on poker tables, with the guarantee that the rake will be kept low, so that the operator is not competing with other entities for the customers' rake. A market maker's competition to collect the spread is with other market makers, just like a casino's main competition to collect the customer's rake would be a different casino.
- wbl 2y ago
  Read Reg NMS before you opine on this. It's short!
  - TeaBrain 2y ago
    As long as the market maker is executing orders at the NBBO on their ATS, they shouldn't be in conflict with Reg NMS, even though they are the only operator with the ability to market make on their ATS. Paying for order flow allows market makers to avoid competition in capturing the spread at the NBBO, however small the spread may be, while also helping to guarantee liquidity to capture the spread on, by giving them the sole privilege to market make on those orders. Returning to the earlier poker table analogy, I mentioned that the operator with a local monopoly on poker tables, would be required to keep their rake low to keep their local monopolistic privilege, as an analogy to how market makers also have to keep their spreads in line with the NBBO (due to Reg NMS), in order to keep their privilege of executing orders on an ATS.

TuringNYC 2y ago

>> are you going to sell your trade flow to Citadel / market makers like Robinhood and your competitors do? Is that really a problem if you're still getting NBBO (https://en.wikipedia.org/wiki/National_best_bid_and_offer https://en.wikipedia.org/wiki/National_best_bid_and_offer) Could you explain the downside of selling order flow if you're getting no worse than the current NBBO?

throwacomment 2y ago

Does anyone rebates 100% of the borrow fee or did that initially?

maest 2y ago

PFOF is good for the customer.