
Why ‘Free Trading’ on Robinhood Isn’t Really Free - angpappas
https://www.wsj.com/articles/why-free-trading-on-robinhood-isnt-really-free-1541772001
======
palakchokshi
> The difference is often less than a penny. But it adds up for larger trades.
> Schwab, for instance, says that for orders of 500 to 1,999 shares of S&P 500
> companies, the average savings from price improvement is $10.80.

Ok and Schwab charges $4.95 for trades. So an investor ends up saving $5 per
trade. S&P 500 companies stock price ranges from $20 to $1200 so to buy 500
shares of a company with $20 price per share would mean you spend $10000
resulting in a saving of 0.05%. On the other end of the spectrum you spend
$600,000 resulting in a savings of 0.0008% assuming that when they say
"average savings" they mean "average savings" per trade and not per share.

Just to put the whole thing in perspective.

~~~
justinsaccount
> average savings from price improvement is $10.80.

I wonder if they lie about this like Fidelity does.

If the market on some product is 100.00/100.06 with a mid price of 100.03, and
I route an order at the mid price that is filled at 100.02 that is then a
price improvement of 1 cent.

On Fidelity I've noticed they calculate everything off the asking price, and
would say my price improvement was .04, which is not really right.

~~~
esoterica
Fidelity isn't lying. The price improvement IS .04, not .01.

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

> The opportunity for "price improvement" – which is the opportunity, but not
> the guarantee, for an order to be executed at a better price than what is
> currently __quoted publicly __

It 's measured with reference to the quote, not your order price. Think about
it, if you sent a limit order for $20.02 and got filled at $10.02, did you get
$10 of price improvement?

~~~
justinsaccount
> if you sent a limit order for $20.02 and got filled at $10.02, did you get
> $10 of price improvement?

Yes. That's a rather extreme example, but If I route a limit order for X and
get filled for Y, my price improvement is X-Y, not the asking price - X. I
guess it depends on if you consider the price of something to be the mid price
or the bid/ask price.

As far as I am concerned Fidelity IS lying. The market on the thing could be
100.00/100.10, with a LAST trade price of 100.05. I route a limit order for
100.05 and get filled at 100.05 and fidelity claims I got price improved by 5
cents, which is bullshit.

edit: also, that page you linked and quoted is specifically talking about
market orders:

> Here's an example of how price improvement can work: Let's say you enter a
> market order to sell 500 shares of a stock...

------
Bedon292
The article links directly to the FAQ, but doesn't mention this which is on
there, and I think is very relevant:

How much does Robinhood make in rebates?

Robinhood earns ~$0.00026 in rebates per dollar traded. That means if you buy
a stock for $100.00, Robinhood earns 2.6 cents from the market maker. Other
brokerages earn rebates and charge you a per-trade commission fee on top of
this.

------
whoisjuan
Newsflash. Every trading platform is doing this, including the ones that are
charging 5 and 10 USD per trade.

~~~
beatgammit
I thought Interactive Brokers did their own thing, so they might not be doing
this.

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CompelTechnic
My intuition has always been that the smaller your portfolio, the better deal
it is for you to use Robinhood. So it certainly has its place for an
underserved class of investors.

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samontar
Well, if you receive your shares at the limit price, it hardly matters to you,
does it?

~~~
justinsaccount
Ask a few Robinhood users what the difference between a market order and a
limit order is...

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gruez
isn't this (payment for order flow) regulated by the SEC? specifically, the
broker must provide a price that's at least as good as the NMS. so it's not
like you're getting a worse price on trades

------
justboxing
> It’s a controversial but legal practice in the brokerage industry called
> payment for order flow.

and then

> But that’s only if the broker passes that benefit, which brokers call “price
> improvement,” down to the customer.

> It’s unclear whether Robinhood gives customers that benefit

So the customer is not benefiting in this case, yet it's not illegal, just
"controversial".

...Like a whole lot of other things on Wall Street, where crime is legalized
and so none of the suits go to jail.

~~~
seibelj
> Wall Street, where crime is legalized and so none of the suits go to jail

Crime is not legal on Wall Street nor anywhere else in America. If you don't
like the laws, we have a system to change them. It seems like you disagree
with the finance profession, whose purpose is to efficiently move and allocate
capital.

~~~
Sohcahtoa82
I feel like you're being deliberately naive.

When people talk about crime being legal on Wall Street, they're referring to
the many cases of fraud on the scale of billions of dollars that result in no
jail time for the people involved. Sometimes there will be fines, but the
fines are significantly less than the amount of money the bank profits from
the fraud.

For a couple quick examples that immediately come to mind, see everything that
led to the 2008 crash, or Wells Fargo creating checking and credit card
accounts without permission.

~~~
justboxing
> they're referring to the many cases of fraud on the scale of billions of
> dollars that result in no jail time for the people involved

Yes, this exactly is what I meant. Laws are written and passed that legalize
what would otherwise be criminal conduct, and on the other side, the SEC will
simply levy fines on fraud and no-one goes to jail [1].

Usually the fines, even if it's millions, is just a blimp on the quarterly
profits of the wall street entity in question.

> BNP used a network of banks in the Middle East, Europe and Africa with their
> own clearing codes to mask dollar-based transfers connected to Sudanese
> companies. Employees also removed information from wire transfers that could
> have revealed the identity of the countries blacklisted by the United
> States, according to the complaint.

Source: France’s BNP Paribas to pay $8.9 billion to U.S. for sanctions
violations => [https://www.washingtonpost.com/business/economy/frances-
bnp-...](https://www.washingtonpost.com/business/economy/frances-bnp-paribas-
to-pay-89-billion-to-us-for-money-
laundering/2014/06/30/6d99d174-fc76-11e3-b1f4-8e77c632c07b_story.html)

In this case, BNP Paribas officials at the highest level were involved in
laundering money for the Sudanese Government, directly working with Govt
officials. This directly translated to funding genocide in the South Sudan war
(by way of the Sudanese Govt purchasing weapons and killing people). Yet not a
single person went to jail from BNP Paribas. The fine they paid is nothing
compared to what they make in yearly profits.

~~~
charlesdm
US sanctions or not, I'm sure they did not make $8.9 billion on those
transactions.

The Sudanese government could likely still purchase weapons with euros or
roubles.

The only situation where sanctions are effective (for now) is when countries
need to sell commodities into USD, i.e. oil. But that is also changing as the
dollar becomes less of a global reserve currency.

------
lawrenceyan
You can tell by how there is pretty much zero mention of the fact that this is
an industry wide practice which every single brokerage does the strong bias of
this article. Except with other brokerages too by the way, they’re also
charging you another $4.95 for their “services” they’ve provided.

Now just because payment for order flow is done by every brokerage doesn’t
mean it’s necessarily okay to do in my opinion. I have some qualms about it,
but the issues are complex. The market makers brokerages route their orders
provide liquidity and stability that without their existence would result in a
far more volatile market.

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srinivasan
> if you’re trading hundreds or thousands of shares at a time, you’re better
> off elsewhere

Exactly. Any price improvement other brokerages can offer should be considered
net of their fees. Because flat fees per trade are regressive, smaller
investors are better off on Robinhood.

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Immortalin
This is pretty standard practice, we are able to offer flat-rate comission-
free trading here at KloudTrader for the same reason. Cleared through Apex via
Tradier. You give up some control over routing and liquidity etc. for zero
commission per trade

Shameless plug:
[https://KloudTrader.com/Narwhal](https://KloudTrader.com/Narwhal)

------
slededit
I discovered this early on. I was using an ultra discount broker at $1 a trade
and my friend was with Fidelity. We both placed our orders at the exact same
time and he got a price that blew away the difference in commission (hundreds
of $ better). After that I moved everything to Fidelity.

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lee101
I found trading on other platforms the exchange fees can eat most if not all
the profits :/

Plug: to make good data driven trades check out
[https://bitbank.nz](https://bitbank.nz) a machine learning prediction
platform

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jimkri
Lately it feels like there has been more negative news articles about
Robinhood. It's been super popular with the younger investors, and I have a
feeling that the larger investment platforms are starting to realize that
Robinhood is not a joke, so might be trying to bring up anything that is
negative.

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acchow
Based off the content in the article, shouldn't the title be "Why free trading
on Robinhood may not be really free"?

