I'm lost. So what? Everybody sells order flow. That's what an internalizer does. Robinhood takes retail stock-picking trade orders and executes them for free. For free. Schwab charges like $5 a trade. Where's the customer downside?
Also: "Vanguard steadfastly refuses to sell customer order flow"? Why would they? They're barely a brokerage at all.
Matt Levine on Citadel's internalizer business and its SEC drama:
I'm also stuck at the "so what", but for different reasons. What is order flow? I'm guessing that the statement "companies pay for your trades" means they're selling a list of what you trade on and for how much, but what does that mean and what risks does that expose for me? What benefits do the buyers get from knowing my trading history?
I feel like the article was written for people who already understand the ins and outs of trading, which I'm going to guess Robinhood users don't. Is there an ELI5 of why I should be concerned?
I don't use Robinhood, but I still got nearly nothing from this article other than the author says he's not a conspiracy theorist, which tends to mean they're actually pushing a conspiracy theory.
At many (maybe most?) consumer brokerages, your brokerage doesn't actually place orders on actual markets. The markets are super complicated! The job of a modern brokerage is to take customer orders, maintain customer accounts, handle expensive telephone support, and pay internalizers.
Internalizers do the job you might think of as the core brokerage job. They take raw order flow from brokerages, track the actual prices of securities on exchanges, maintain an inventory of their own, and decide where orders should execute. It's an extremely technical job. Citadel is, I think, still the biggest player here?
The most important thing to understand about retail order flow is that it is dumb money. The sharks that market professionals worry about do not as a rule place orders with Schwab or Robinhood. In particular, if you make a market in a particular stock, and an order routed from Robinhood comes in, you don't have to worry that it's a whale moving a giant block of that stock in advance of some fundamental or technical news item you're 2 seconds behind on.
As a result, an internalizer can tune its pricing for retail orders: retail customers get better pricing, because the internalizer can access a better spread (the difference between the lowest price they'll sell for and the highest price they'll buy for).
What tptacek says is pretty much the gist of things.
The issue for some is that because their order(s) are not reaching an actual exchange, the fill (price @ which the trade(s)) is/are executed may not be the best, and that meaningful price discovery is hampered.
Both may be correct, however, and I'm loath to say this, the average person lacks the capacity to really compete for the best fill price on a given trade. This is due to asymmetries (speed, data, etc.,). And so, generally, they are as tptacek says, "dumb money," who at best catch and ride a wave.
Anyway, you may want to take a look at the following TD Ameritrade sites on fills[1] and order execution[2]. They aren't deep dives, just a flavor...
Good find. Thanks for posting this. Just closed my account with Robin Hood. Hadn't used it for awhile but this puts the cherry on top. I always felt that when investing with Robin Hood the fill price was terrible. This confirms why.
The last few paragraphs contain the “so what?” Even so, it doesn’t really explain. It just says that HFTs exploit their retail customers. Does anyone know how?
Your comment implies maybe the benefit can be found in unfair bid ask prices. Are they doing something like:
1. Buy their own shares of xyz.
2. Execute your buy order. Which drives up the price per share fractionally.
3. Sell their shares of xyz.
This is total speculation. I have no expertise in this area.
Yes very similar. By knowing the orders Robin Hood sells to the HFT firms prior to execution they are better able to exploit the market bid and ask sizes and orders and Robin Hood customers could end up with worse fill prices
And that's different from all the other retail brokerages, which charge trading fees and route their orders to Citadel like everyone else does, how?
Also, what kind of trading are you doing with Robinhood where you're sensitive to the theoretical 1-2 cents this supposed Citadel trade is taking out of your hide? Would you be happier if Robinhood just charged a 2 cent trading fee?
At https://investor.vanguard.com/investing/online-trading/order..., if you 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.
It also says "Vanguard Brokerage does not receive compensation for directing order flow in equity securities".
But the SeekingAlpha article criticizes Robinhood for routing to Citadel, calling it a "market makers that also have high frequency trading arms". So Vanguard routes to similar companies, but doesn't receive compensation? That doesn't really seem better for the customer to me. What am I missing?
Full article: https://outline.com/xN5HTG
https://news.ycombinator.com/item?id=17956740
Dupe
Warning for those clicking through to that thread. There are many many comments about front running that are 100% wrong.
I'm lost. So what? Everybody sells order flow. That's what an internalizer does. Robinhood takes retail stock-picking trade orders and executes them for free. For free. Schwab charges like $5 a trade. Where's the customer downside?
Also: "Vanguard steadfastly refuses to sell customer order flow"? Why would they? They're barely a brokerage at all.
Matt Levine on Citadel's internalizer business and its SEC drama:
https://www.bloomberg.com/view/articles/2017-01-17/fast-trad...
I'm also stuck at the "so what", but for different reasons. What is order flow? I'm guessing that the statement "companies pay for your trades" means they're selling a list of what you trade on and for how much, but what does that mean and what risks does that expose for me? What benefits do the buyers get from knowing my trading history?
I feel like the article was written for people who already understand the ins and outs of trading, which I'm going to guess Robinhood users don't. Is there an ELI5 of why I should be concerned?
I don't use Robinhood, but I still got nearly nothing from this article other than the author says he's not a conspiracy theorist, which tends to mean they're actually pushing a conspiracy theory.
At many (maybe most?) consumer brokerages, your brokerage doesn't actually place orders on actual markets. The markets are super complicated! The job of a modern brokerage is to take customer orders, maintain customer accounts, handle expensive telephone support, and pay internalizers.
Internalizers do the job you might think of as the core brokerage job. They take raw order flow from brokerages, track the actual prices of securities on exchanges, maintain an inventory of their own, and decide where orders should execute. It's an extremely technical job. Citadel is, I think, still the biggest player here?
The most important thing to understand about retail order flow is that it is dumb money. The sharks that market professionals worry about do not as a rule place orders with Schwab or Robinhood. In particular, if you make a market in a particular stock, and an order routed from Robinhood comes in, you don't have to worry that it's a whale moving a giant block of that stock in advance of some fundamental or technical news item you're 2 seconds behind on.
As a result, an internalizer can tune its pricing for retail orders: retail customers get better pricing, because the internalizer can access a better spread (the difference between the lowest price they'll sell for and the highest price they'll buy for).
What tptacek says is pretty much the gist of things.
The issue for some is that because their order(s) are not reaching an actual exchange, the fill (price @ which the trade(s)) is/are executed may not be the best, and that meaningful price discovery is hampered.
Both may be correct, however, and I'm loath to say this, the average person lacks the capacity to really compete for the best fill price on a given trade. This is due to asymmetries (speed, data, etc.,). And so, generally, they are as tptacek says, "dumb money," who at best catch and ride a wave.
Anyway, you may want to take a look at the following TD Ameritrade sites on fills[1] and order execution[2]. They aren't deep dives, just a flavor...
[1] https://tickertape.tdameritrade.com/trading/stock-market-int...
[2] https://www.tdameritrade.com/trade/orderexecution/inc_faq.ht...
Good find. Thanks for posting this. Just closed my account with Robin Hood. Hadn't used it for awhile but this puts the cherry on top. I always felt that when investing with Robin Hood the fill price was terrible. This confirms why.
It does? How?
The last few paragraphs contain the “so what?” Even so, it doesn’t really explain. It just says that HFTs exploit their retail customers. Does anyone know how?
Your comment implies maybe the benefit can be found in unfair bid ask prices. Are they doing something like: 1. Buy their own shares of xyz. 2. Execute your buy order. Which drives up the price per share fractionally. 3. Sell their shares of xyz.
This is total speculation. I have no expertise in this area.
Yes very similar. By knowing the orders Robin Hood sells to the HFT firms prior to execution they are better able to exploit the market bid and ask sizes and orders and Robin Hood customers could end up with worse fill prices
And that's different from all the other retail brokerages, which charge trading fees and route their orders to Citadel like everyone else does, how?
Also, what kind of trading are you doing with Robinhood where you're sensitive to the theoretical 1-2 cents this supposed Citadel trade is taking out of your hide? Would you be happier if Robinhood just charged a 2 cent trading fee?
At https://investor.vanguard.com/investing/online-trading/order..., if you 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.
It also says "Vanguard Brokerage does not receive compensation for directing order flow in equity securities".
But the SeekingAlpha article criticizes Robinhood for routing to Citadel, calling it a "market makers that also have high frequency trading arms". So Vanguard routes to similar companies, but doesn't receive compensation? That doesn't really seem better for the customer to me. What am I missing?