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A controversial part of Robinhood’s business tripled in sales thanks to high-frequency trading firms
- Thread starter Banjo
- Start date
I am not sure that's how it works. Are all RH orders not-held? That would be possible but surprising given the regulatory scrutiny. It is even more unlikely to be 1-30 seconds since Rule 661 requires execution at NBBO or better within a second, IIRC.You get executed at the NBBO, but is it at the NBBO at the millisecond the order was placed? No, they hold your order artificially for 1 - 30 seconds and execute your order at the NBBO of their choosing. Let's see: I place an order to buy 50k shares and then mysteriously and by a complete coincidence, the NBBO goes up by 10 ticks in 5 seconds. I get executed 5 seconds after placing the order at the NBBO. The only problem is that it's not the same NBBO that existed when I placed the order 5 seconds ago.
This is what a PFOF model looks like as far as I know (see disclaimer below). A customer sends a market or a limit order. Citadel or KCG gets the first look (from my understanding, the flow buyer pays for that optionality regardless of the outcome) and decides if it fits either their book or their alpha model. Some of resulting orders are outright gaming the order book (e.g. a customer can get an improvement on a small order, while they would now gain queue priority thats probabilistically more valuable) and some of it is simply "oh, yeah let's fill this guy cause we know the touch is going to shift any moment now". If it's a limit away, it's valuable from information perspective since you know that if you are done and don't like it, you can fill the customer order at a negligible loss.
Disclaimer: Thankfully, I do not deal with PFOF, so everything I know I learned by osmosis from my HFT colleagues.
Yeah, you definitely lose money. It's just front running pure and simple. The SEC and FBI should get involved and shut these businesses down for good.
You get executed at the NBBO, but is it at the NBBO at the millisecond the order was placed? No, they hold your order artificially for 1 - 30 seconds and execute your order at the NBBO of their choosing. Let's see: I place an order to buy 50k shares and then mysteriously and by a complete coincidence, the NBBO goes up by 10 ticks in 5 seconds. I get executed 5 seconds after placing the order at the NBBO. The only problem is that it's not the same NBBO that existed when I placed the order 5 seconds ago.
Here's what happened: I got front run by 10 ticks while these fuckers were laughing their fucking asses off. Free money, with the SEC and FBI nowhere to be seen.
Just imagine placing a CME futures order and getting an execution 5 seconds later. There is no technological reason why stock trades today or 20 years ago take an infinity to execute while futures don't. It's because you need time to front-run. You can't do much front-running if they delay the execution by 10 milliseconds, but you can definitely do a lot of front-running if you delay by 10 seconds. Imagine if you delayed/buffered order flow by 1 hour or 1 day and then you got to choose and pick any "NBBO" price from that time window as the execution price.
I remember trading stocks in the late 90's in my Datek account. They were good because they only promised to front-run you by a maximum of 10 seconds ("Guaranteed execution in under 10 seconds") while for other brokers it was much longer than that. Except for NYSE stocks, that was like sending an order into a black hole and you had no idea if you would get a fill in 1 minute or 2 hours. That's because the specialist's job was to front run you. He took as long as he wanted, ignored cancel requests if he felt like it and halted the stock whenever he felt like it for however long he wanted and then reopened at a price of his choosing. The NYSE was just a front-running operation (is it still?).
Let’s say you are actually trading 50k shares.
In stocks that are liquid and low dollars I have never had this issue (when I trade 50-100k shares through my podunk PFOF happy broker).
In illiquid stocks I have, but it’s 10 cents. But that cost is embedded into the risk premium.
Your giving the pfof provider a free stop to lean against their trading or front running.Let’s say you are actually trading 50k shares.
In stocks that are liquid and low dollars I have never had this issue (when I trade 50-100k shares through my podunk PFOF happy broker).
In illiquid stocks I have, but it’s 10 cents. But that cost is embedded into the risk premium.
Your giving the pfof provider a free stop to lean against their trading or front running.
I get lower commissions.
You think you get lower commissions- good for you.I get lower commissions.
You think you get lower commissions- good for you.
Well I pay a fraction of what the dma brokers charge which (as said before) is a real cost savings. It’s unclear how much that option I’m selling is worth (a soft cost).
He does get lower commissions, thats an indisputable fact. He might or might not increase his total cost of trading.You think you get lower commissions- good for you.
FWIW, I've only heard of one retail broker that explicitly does not get involved in PFOF and that's IB. In fact, that's there current selling pitch "IB does not sell its order flow". Predictably, that's because they're giving access to their ATS to liquidity providers (i.e. HFTs) and now get paid "commissions or commission equivalents". Optically it's better but IRL it's the same thing.
Well I pay a fraction of what the dma brokers charge which (as said before) is a real cost savings. It’s unclear how much that option I’m selling is worth (a soft cost).
Do you do TCA(Transaction Cost Analysis) on your executions? If you're unclear on the cost of your broker's routing procedures, why not quantify it?
He does get lower commissions, thats an indisputable fact. He might or might not increase his total cost of trading.
FWIW, I've only heard of one retail broker that explicitly does not get involved in PFOF and that's IB. In fact, that's there current selling pitch "IB does not sell its order flow". Predictably, that's because they're giving access to their ATS to liquidity providers (i.e. HFTs) and now get paid "commissions or commission equivalents". Optically it's better but IRL it's the same thing.
Fidelity doesn't.