
Robinhood Making Millions Selling Out Their Millennial Customers to HFTs - dawhizkid
https://seekingalpha.com/article/4205379-robinhood-making-millions-selling-millennial-customers-high-frequency-traders
======
forkLding
Better explanation for the layman:
[https://startupsventurecapital.com/robinhoods-
exceptionally-...](https://startupsventurecapital.com/robinhoods-
exceptionally-clever-business-model-arbitraging-privacy-776663d4d855)

Some detailed links on payment for order flow:

[https://www.sec.gov/fast-
answers/answerspayordfhtm.html](https://www.sec.gov/fast-
answers/answerspayordfhtm.html)

[https://www.sec.gov/fast-
answers/answersmktmakerhtm.html](https://www.sec.gov/fast-
answers/answersmktmakerhtm.html)

[https://www.sec.gov/reportspubs/investor-
publications/invest...](https://www.sec.gov/reportspubs/investor-
publications/investorpubstradexechtm.html)

[https://hub.ipe.com/find-research/white-papers/payment-
for-o...](https://hub.ipe.com/find-research/white-papers/payment-for-order-
flow-in-the-united-kingdom/hub.ipe.com/find-research/white-papers/payment-for-
order-flow-in-the-united-kingdom/10017800.fullarticle)

------
et2o
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

~~~
theredking
IEX?

------
stevenwoo
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...](https://www.cbc.ca/news/business/brad-katsuyama-says-his-aim-is-to-
make-trading-fair-1.2597414)

------
perennate
Is this really specific to Robinhood? If I go to
[https://investor.vanguard.com/investing/online-
trading/order...](https://investor.vanguard.com/investing/online-
trading/orders) 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](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?

------
s0rce
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!

~~~
wonthegame
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.

------
hippich
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.

------
annamargot
I don’t understand. What does it mean that they sell order flow to high freq
traders?

How are they fucking me?

~~~
rapsey
HFT is front running.

~~~
naveen99
How do you front run a limit order ?

~~~
guiambros
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.

~~~
refurb
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.

~~~
OldHand2018
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.

[1] [https://www.citadelsecurities.com/products/equities-and-
opti...](https://www.citadelsecurities.com/products/equities-and-options/)

~~~
nostrademons
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.

~~~
rapsey
> it was a Reg NMS violation to execute an order for a price worse than the
> best listed on an exchange at the time.

Orders take time to process. HFT guys are fast enough to react and make money
from it.

------
betadreamer
More info on HFTs.

Charlie Munger: HFT is Legalized Front-Running
[https://www.barrons.com/articles/BL-
SWB-27750](https://www.barrons.com/articles/BL-SWB-27750)

------
floridaexpat
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...](http://blog.themistrading.com/wp-
content/uploads/2015/03/What-Every-Retail-Investor-Needs-to-Know.pdf)

------
CyberDildonics
Still better than paying for trades and being front run I guess.

------
nickthemagicman
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.

~~~
OldHand2018
> 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).

------
justboxing
"Trade fast, die young."

Source: [2016]
[https://twitter.com/robinhoodapp/status/756262680537759744](https://twitter.com/robinhoodapp/status/756262680537759744)

------
betadreamer
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.

~~~
treyfitty
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?”

