If you know what other people are doing you can cut in front of them.
You can beat someone to the punch who may have traded better than the limit.
It’s worth $26 on a 100K transaction for the HFT firms. So let’s say it’s worth $50 to them. Not s big deal if you buy and hold forever. If you day 20 times a year because you think it’s free, that $50 times 20 becomes $1000, or 1% of your stake.
Imagine you place a limit order at $101. The HFT sees the stock dropping to $100. The HFT then has the option to buy the stock at 100 and sell to you for 101, making $1/stock profit.
On the other hand, imagine the stock is currently trading at 105. The limit order will hang there, waiting for the price to drop below the limit you specified (and either never gets executed, or then becomes the flow above). Rinse and repeat.
Note they don't need to make money in every transaction, but the bigger the order flow, the more opportunities they have to make profit on top of traders.
The exchange is where the orders are executed, but the exchange doesn't execute the orders. The market makers do that job.
Look at the companies listed in the disclosures. Citadel appears to have the largest share in all of the examples listed. Their website [1] claims that:
We act as a specialist or market maker in more than 3,000 U.S. listed-options names, representing 99% of traded volume, and rank as a top liquidity provider on the major U.S. options exchanges, executing approximately 39% of all U.S.-listed retail volume, making us the industry’s top wholesale market maker.
Citadel is paying Robinhood to put your limit order into their system at the NYSE or NASDAQ or whatever other exchange and then they handle the execution of it. Also, I don't believe that this article is claiming that Citadel et al are the high frequency traders, but that the high frequency traders are connected to their platforms and profiting (in some unspecified manner) from the orders that come in.
It's been over a decade (2007) since I dealt with order books, but when I was looking at this (writing a product to detect trade-throughs), it was a Reg NMS violation to execute an order for a price worse than the best listed on an exchange at the time.
...OTOH, what that product revealed was that Reg NMS violations were pretty rampant and the SEC wasn't interested in doing anything about it. You may have difficulty enforcing this.
Interesting. So basically RobinHood has so many buyers and it lets them see a bunch of trades for a stock right before a large subset of these trades happens, then they HFT trade microseconds before the trade happens and ride the wave upwards? Or vice versa downwards?
It means they are handing over your transaction to HFTs, who can then see your transactions ahead of everyone, and buy the stock right before and then sell to you for a higher price. Imagine you just issued a BUY order at market price; they can buy at $99.9 and sell to you for $100, making a $0.01/stock profit. Rinse and repeat millions of times per day.
This is very similar to "front running" [1], but because a) this happens privately and in small quantities, and b) it is not necessarily privileged information, it's considered legal by the SEC. But it is highly questionable for sure.
"Flash Boys", by Michael Lewis [2] is a great read, and goes into detail on the world of high frequency traders, and how they operate.
As long as it's 1 cent no single individual will care. As long as it's less than what a person would pay per trade elsewhere then both sides sort of win I guess...
The problem I suppose is the poor chaps don't know this is what is happening.
This doesn't sound like it's fucking me, though. I'm still getting the stock for exactly what I asked, correct? I mean, hasn't Robin Hood always been upfront that they make money on the discrepancy between what buyers are willing to pay versus what sellers are willing to take? It's still a free service to me.
hasn't Robin Hood always been upfront that they make money on the discrepancy between what buyers are willing to pay versus what sellers are willing to take?
No, they are quite clear on how they make money and that is not it. They, officially, make money on interests and a subscription service [1].
What's so bad about this? Other trading firms are also using HFTs. I assume Robinhood is making more because they have more trading than other companies. It sounds like a good strategy. I don't see a red flag in this.
I think the implicit assumption is that HFT firms place a negative externality on the overall stock market in a manner which CAN distort the value of holding the set of equities being traded. As a hypothetical example, if 90% of Robinhood customers bought into a pump and dump scheme, and HFT wrote the algorithm to perfectly go long at the perfect time, and accordingly sell at the perfect time, then the less educated investors would essentially be subsidizing the HFT firms ability to turn a hefty profit. This kinda isn’t so much a problem by itself. It’s when the dump in the pump and dump is exacerbated by the HFT firms, which wipes out all of the Robinhood investors positions: Robinhood facilitated trading -> millennials bought into a false hype -> HFT knew this could happen and wrote an algorithm to capitalize on the inevitable correction, and slurped up the mismatched price difference contributed by these investors.
If this is the implicit assumption, the article still falls victim of a slippery slope fallacy by letting readers believe “if Robinhood does this, what other companies can sprout up to encourage HFT exploitation?” Regardless, the article points to a good discussion in the direction of “at what point do we expect HFT to be the only way to benefit from the stock market?”
I see the issue after digging in more. The problem is that Robinhood claims they make money by investing in fund with extra savings, however they failed to address how they are "really" making the money. I always doubted how they make money and now I know.
What's even more surprising is that other company like E-Trade costs money AND they sell it to HFTs.
I'm not really sure they need to be more transparent. In this day and age you have to realize if you aren't paying for the product you are the product. Basically the same with Facebook and Google. They are making money off of your use of the service. If this isn't obvious you shouldn't be buying and selling stocks!
Yeah, I don't see the problem. Unless and until customers are manifestly paying exorbitant effective fees compared to typical brokers, there's nothing to be upset about and little reason to intervene.
Transparency is concerning (as are all pricing strategies that try to hide the ball), but in the world of finance this doesn't rank very high in the opaqueness department. As you say, if you're not the customer you're the product. Especially in the context of a service that is actually performing real-world, meaningful transactions on your behalf (as opposed to publishing funny comments to internet memes), you have to be hopelessly naive to believe you're not remunerating them with your own money.
There are plenty of hopelessly naive people out there, but you don't slap down a business strategy simply because it could steal from these people. You wait around until its clear the harms outweigh the benefits, otherwise the market in every product or service would be limited to minimizing the potential harm to the dumbest among us.
That's a very negative and dangerous view to hold. You're blaming someone for being exploited because of their lack of knowledge. Not everyone can know everything and they shouldn't be expected to in order to participate in the global economy.
Robinhood markets themselves that they are taking from the rich and giving to the poor. Their behaviour is the exact opposite of that! They're actually more like loan sharks or payday loans.
I don't understand how this works?
The stock price is the same for the buyer on RobinHood or does RobinHood raise the price in anticipation?
I don't get it.
The stock price is the same for the buyer on RobinHood or does RobinHood raise the price in anticipation?
What this article is suggesting is that if you are going to place an order for some stocks and, all else being equal, if you place that order with Robinhood there is a chance that the price for you the buyer is slightly higher (you probably care about this) and/or the price that the otherwise-would-have-been seller receives is slightly lower (you might not care about this).
Robinhood is doing the opposite of IEX that Brad Katsuyama proposed and started some years back, in case anyone was unaware and looking for an alternative.
This has been happening since the beginning and is hardly anything new. However, I'm very pleased to see this getting more public attention even though not much will change especially given the lack of alternatives.
But at least those interested can educate themselves on how this all works.
So for a regular investor (not day trader or "scalper"), this means they potentially losing some change due to potentially poorer fill prices. TD Ameritrade charges $6.95 per stock trade. If you trade very few stocks at once, it actually might be more beneficial to use RH even with knowledge of worse fills.
On the other hand, if someone trades 1000+ of shares at once, they might have a better deal from "traditional" brokerages.
I personally just playing with the stock market in RH app with a very small amount at stake. And as a result, my orders are of 1-10 shares at most. At this level, I actually don't mind my orders being routed to HFTs if this is what takes to make RH free to trade.
Is this really specific to Robinhood? If I go to https://investor.vanguard.com/investing/online-trading/order... and follow the "View the quarterly reports" link, it shows that Vanguard routes orders to these companies: Citadel Securities, VIRTU Americas LLC, G1 Execution Services, UBS Securities LLC, Susquehanna Capital Group, Citigroup Global Markets
Edit: yet, the same report (as well as a document that the article links to) says "Vanguard Brokerage does not receive compensation for directing order flow in equity securities". So Vanguard routes to similar companies, but doesn't get compensation from them?
I don’t understand. What does it mean that they sell order flow to high freq traders?
How are they fucking me?
HFT is front running.
How do you front run a limit order ?
If you know what other people are doing you can cut in front of them.
You can beat someone to the punch who may have traded better than the limit.
It’s worth $26 on a 100K transaction for the HFT firms. So let’s say it’s worth $50 to them. Not s big deal if you buy and hold forever. If you day 20 times a year because you think it’s free, that $50 times 20 becomes $1000, or 1% of your stake.
Imagine you place a limit order at $101. The HFT sees the stock dropping to $100. The HFT then has the option to buy the stock at 100 and sell to you for 101, making $1/stock profit.
On the other hand, imagine the stock is currently trading at 105. The limit order will hang there, waiting for the price to drop below the limit you specified (and either never gets executed, or then becomes the flow above). Rinse and repeat.
Note they don't need to make money in every transaction, but the bigger the order flow, the more opportunities they have to make profit on top of traders.
Hopefully someone who knows more than me will come along, but can you front run a limit order?
Say the price of the stock is $101. You place a limit order for $100. HFT sees that but can’t do anything since the stock price is above the limit.
Stock price drops to $99.5. Your order is the executed by the exchange before the HFT can buy at $99.5 and sell to you at $100.
The exchange is where the orders are executed, but the exchange doesn't execute the orders. The market makers do that job.
Look at the companies listed in the disclosures. Citadel appears to have the largest share in all of the examples listed. Their website [1] claims that:
Citadel is paying Robinhood to put your limit order into their system at the NYSE or NASDAQ or whatever other exchange and then they handle the execution of it. Also, I don't believe that this article is claiming that Citadel et al are the high frequency traders, but that the high frequency traders are connected to their platforms and profiting (in some unspecified manner) from the orders that come in.
[1] https://www.citadelsecurities.com/products/equities-and-opti...
It's been over a decade (2007) since I dealt with order books, but when I was looking at this (writing a product to detect trade-throughs), it was a Reg NMS violation to execute an order for a price worse than the best listed on an exchange at the time.
...OTOH, what that product revealed was that Reg NMS violations were pretty rampant and the SEC wasn't interested in doing anything about it. You may have difficulty enforcing this.
Orders take time to process. HFT guys are fast enough to react and make money from it.
What is front running?
https://en.wikipedia.org/wiki/Front_running
Interesting. So basically RobinHood has so many buyers and it lets them see a bunch of trades for a stock right before a large subset of these trades happens, then they HFT trade microseconds before the trade happens and ride the wave upwards? Or vice versa downwards?
HFT and front running are two different things. HFTs could front run, but by definition don’t have to to be an HFT.
It means they are handing over your transaction to HFTs, who can then see your transactions ahead of everyone, and buy the stock right before and then sell to you for a higher price. Imagine you just issued a BUY order at market price; they can buy at $99.9 and sell to you for $100, making a $0.01/stock profit. Rinse and repeat millions of times per day.
This is very similar to "front running" [1], but because a) this happens privately and in small quantities, and b) it is not necessarily privileged information, it's considered legal by the SEC. But it is highly questionable for sure.
"Flash Boys", by Michael Lewis [2] is a great read, and goes into detail on the world of high frequency traders, and how they operate.
[1] https://en.wikipedia.org/wiki/Front_running
[2] https://www.amazon.com/Flash-Boys-Wall-Street-Revolt/dp/0393...
As long as it's 1 cent no single individual will care. As long as it's less than what a person would pay per trade elsewhere then both sides sort of win I guess...
The problem I suppose is the poor chaps don't know this is what is happening.
This doesn't sound like it's fucking me, though. I'm still getting the stock for exactly what I asked, correct? I mean, hasn't Robin Hood always been upfront that they make money on the discrepancy between what buyers are willing to pay versus what sellers are willing to take? It's still a free service to me.
No, they are quite clear on how they make money and that is not it. They, officially, make money on interests and a subscription service [1].
[1] https://support.robinhood.com/hc/en-us/articles/360001226106...
1) You use a mobile phone with, 20ms? latency
2) The price displayed to you is 20ms late
3) You accept order at this price
4) The actual price might be less, so a firm can buy it and sell it slightly higher.
5) You get a fill at a better price than you thought.
- There is a premium to Robin Hood vs other apps because most users are on mobile, where latency is likely to be higher.
What's so bad about this? Other trading firms are also using HFTs. I assume Robinhood is making more because they have more trading than other companies. It sounds like a good strategy. I don't see a red flag in this.
I think the implicit assumption is that HFT firms place a negative externality on the overall stock market in a manner which CAN distort the value of holding the set of equities being traded. As a hypothetical example, if 90% of Robinhood customers bought into a pump and dump scheme, and HFT wrote the algorithm to perfectly go long at the perfect time, and accordingly sell at the perfect time, then the less educated investors would essentially be subsidizing the HFT firms ability to turn a hefty profit. This kinda isn’t so much a problem by itself. It’s when the dump in the pump and dump is exacerbated by the HFT firms, which wipes out all of the Robinhood investors positions: Robinhood facilitated trading -> millennials bought into a false hype -> HFT knew this could happen and wrote an algorithm to capitalize on the inevitable correction, and slurped up the mismatched price difference contributed by these investors.
If this is the implicit assumption, the article still falls victim of a slippery slope fallacy by letting readers believe “if Robinhood does this, what other companies can sprout up to encourage HFT exploitation?” Regardless, the article points to a good discussion in the direction of “at what point do we expect HFT to be the only way to benefit from the stock market?”
I see the issue after digging in more. The problem is that Robinhood claims they make money by investing in fund with extra savings, however they failed to address how they are "really" making the money. I always doubted how they make money and now I know.
What's even more surprising is that other company like E-Trade costs money AND they sell it to HFTs.
I'm not really sure they need to be more transparent. In this day and age you have to realize if you aren't paying for the product you are the product. Basically the same with Facebook and Google. They are making money off of your use of the service. If this isn't obvious you shouldn't be buying and selling stocks!
Yeah, I don't see the problem. Unless and until customers are manifestly paying exorbitant effective fees compared to typical brokers, there's nothing to be upset about and little reason to intervene.
Transparency is concerning (as are all pricing strategies that try to hide the ball), but in the world of finance this doesn't rank very high in the opaqueness department. As you say, if you're not the customer you're the product. Especially in the context of a service that is actually performing real-world, meaningful transactions on your behalf (as opposed to publishing funny comments to internet memes), you have to be hopelessly naive to believe you're not remunerating them with your own money.
There are plenty of hopelessly naive people out there, but you don't slap down a business strategy simply because it could steal from these people. You wait around until its clear the harms outweigh the benefits, otherwise the market in every product or service would be limited to minimizing the potential harm to the dumbest among us.
That's a very negative and dangerous view to hold. You're blaming someone for being exploited because of their lack of knowledge. Not everyone can know everything and they shouldn't be expected to in order to participate in the global economy.
Robinhood markets themselves that they are taking from the rich and giving to the poor. Their behaviour is the exact opposite of that! They're actually more like loan sharks or payday loans.
Better explanation for the layman: https://startupsventurecapital.com/robinhoods-exceptionally-...
Some detailed links on payment for order flow:
https://www.sec.gov/fast-answers/answerspayordfhtm.html
https://www.sec.gov/fast-answers/answersmktmakerhtm.html
https://www.sec.gov/reportspubs/investor-publications/invest...
https://hub.ipe.com/find-research/white-papers/payment-for-o...
Still better than paying for trades and being front run I guess.
I don't understand how this works? The stock price is the same for the buyer on RobinHood or does RobinHood raise the price in anticipation? I don't get it.
What this article is suggesting is that if you are going to place an order for some stocks and, all else being equal, if you place that order with Robinhood there is a chance that the price for you the buyer is slightly higher (you probably care about this) and/or the price that the otherwise-would-have-been seller receives is slightly lower (you might not care about this).
More info on HFTs.
Charlie Munger: HFT is Legalized Front-Running https://www.barrons.com/articles/BL-SWB-27750
Robinhood is doing the opposite of IEX that Brad Katsuyama proposed and started some years back, in case anyone was unaware and looking for an alternative.
https://www.cbc.ca/news/business/brad-katsuyama-says-his-aim...
So there are two alternatives:
1) Trade for free at Robinhood and get front-run by HFTs
2) Pay $10 to trade at E*Trade or some other garbage company and still get front-run by HFTs
IEX?
This has been happening since the beginning and is hardly anything new. However, I'm very pleased to see this getting more public attention even though not much will change especially given the lack of alternatives.
But at least those interested can educate themselves on how this all works.
http://blog.themistrading.com/wp-content/uploads/2015/03/Wha...
"Trade fast, die young."
Source: [2016] https://twitter.com/robinhoodapp/status/756262680537759744
So for a regular investor (not day trader or "scalper"), this means they potentially losing some change due to potentially poorer fill prices. TD Ameritrade charges $6.95 per stock trade. If you trade very few stocks at once, it actually might be more beneficial to use RH even with knowledge of worse fills.
On the other hand, if someone trades 1000+ of shares at once, they might have a better deal from "traditional" brokerages.
I personally just playing with the stock market in RH app with a very small amount at stake. And as a result, my orders are of 1-10 shares at most. At this level, I actually don't mind my orders being routed to HFTs if this is what takes to make RH free to trade.
Is this really specific to Robinhood? If I go to https://investor.vanguard.com/investing/online-trading/order... and follow the "View the quarterly reports" link, it shows that Vanguard routes orders to these companies: Citadel Securities, VIRTU Americas LLC, G1 Execution Services, UBS Securities LLC, Susquehanna Capital Group, Citigroup Global Markets
Wikipedia says Virtu Financial is an HFT firm: https://en.wikipedia.org/wiki/Virtu_Financial
Edit: yet, the same report (as well as a document that the article links to) says "Vanguard Brokerage does not receive compensation for directing order flow in equity securities". So Vanguard routes to similar companies, but doesn't get compensation from them?