Unless you have a viable scalping model, this isn't a good practice for a retail trader. It sounds good in theory, but I learned the hard way trying buy bids/sell offers. It resulted in missing some very profitable trades. IMO penny wise, pound foolish.
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Citadel, KCG and Robinhood
- Thread starter InfoTech
- Start date
Unless you have a viable scalping model, this isn't a good practice for a retail trader. It sounds good in theory, but I learned the hard way trying buy bids/sell offers. It resulted in missing some very profitable trades. IMO penny wise, pound foolish.
I'm all for punishing these firms for wrongdoing but the government could be overreaching here. What they are doing is purchasing dumb order flow and providing a benefit to these folks for it (the benefit being commission free trading)
If you are a good trader, this is great. In some instances, having your order go through a dark pool/internalizer is a good benefit to you. In others, its a big disservice. If you can identify the situations, you can cut down your trading costs. Here is a guide of when to look for price improvement through dark pools/internalizers and when to avoid it
http://www.beathft.com/?p=75
I'm not a US citizen so I can't trade with Robinhood but I'd bet that if I could I would find some instances where it would increase my profits. I wouldn't trade it for every order (that would be crazy) but I would find situations where I could add it to my toolbox. For a good trader, this type of deal is great
Now, if they are breaking laws then of course, they must pay for it. But this could be just a situation where there is appeareance of wrong doing. At the end of the day, dumb retail will lose all their money. its just a matter of who will take that money
If you are a good trader, this is great. In some instances, having your order go through a dark pool/internalizer is a good benefit to you. In others, its a big disservice. If you can identify the situations, you can cut down your trading costs. Here is a guide of when to look for price improvement through dark pools/internalizers and when to avoid it
http://www.beathft.com/?p=75
I'm not a US citizen so I can't trade with Robinhood but I'd bet that if I could I would find some instances where it would increase my profits. I wouldn't trade it for every order (that would be crazy) but I would find situations where I could add it to my toolbox. For a good trader, this type of deal is great
Now, if they are breaking laws then of course, they must pay for it. But this could be just a situation where there is appeareance of wrong doing. At the end of the day, dumb retail will lose all their money. its just a matter of who will take that money
If you are sending out small or medium sized orders to take liquidity (and everybody has to send out liquidity taking orders sometimes), having the order be commission free is like a guaranteed price improvement (the improvment being the lack of commission in the trade). If you are a smart trader this can be a good option in some situations
I'm all for punishing these firms for wrongdoing but the government could be overreaching here. What they are doing is purchasing dumb order flow and providing a benefit to these folks for it (the benefit being commission free trading)
If you are a good trader, this is great. In some instances, having your order go through a dark pool/internalizer is a good benefit to you. In others, its a big disservice. If you can identify the situations, you can cut down your trading costs. Here is a guide of when to look for price improvement through dark pools/internalizers and when to avoid it
http://www.beathft.com/?p=75
I'm not a US citizen so I can't trade with Robinhood but I'd bet that if I could I would find some instances where it would increase my profits. I wouldn't trade it for every order (that would be crazy) but I would find situations where I could add it to my toolbox. For a good trader, this type of deal is great
Now, if they are breaking laws then of course, they must pay for it. But this could be just a situation where there is appeareance of wrong doing. At the end of the day, dumb retail will lose all their money. its just a matter of who will take that money
The beathft.com article strikes me as poor advice as the authors don't seem to understand that there's a huge difference between 1) internalizers/wholesalers (buying order flow from brokers who are supposed to be looking out for their clients' interest, but may not be), and 2) dark pools in the more conventional sense, which are an "unlit", non-exchange trading venue that matches equally-empowered counterparties (in theory -- although this trust has been surrepetitiously violated; see e.g. the Pipeline and ITG dark pool scandals).
With respect to the internalization/"wholesaler" system (1) above, the "benefit" claimed for the retail trader in terms of "price improvement" is vastly overstated. If a retail trader were to intercept just one midpoint order on a 5c spread stock, they would receive 250 times the de minimis price improvement typically offered by wholesalers. That's $2.50 vs $.01 on 100 shares.
But the biggest damage from the internalization/wholesaler model comes from the increased spreads. This has little to do with "smart" or "dumb" money, and far more to do with the ability of wholesalers to pay to jump the queue. Because Citadel/Knight in their wholesaling business can pay a de minimis fee to jump the queue on someone who takes the risk to post liquidity in the open (and therefore bear the risk), the wholesaler "business model" dramatically increases spreads and reduces liquidity at any given price point.
This queue-jumping ability is enjoyed only by members of an oligopoly -- it wouldn't be nearly so profitable if it weren't. And guess who's paying for those oligopoly profits enjoyed by these firms? Hint: it's not just coming out of thin air.
But don't take my word for it -- here's what Citadel had to say on the topic in 2004, before they themselves had built/acquired the massive wholesaling business they've got today:
Can't beat 'em, join 'em, I guess?As more and more brokers engage in the practice of internalization, bid-ask spreads in the public markets will continue to be wider than they otherwise would, quoted liquidity will continue to fall and the role and value of the public markets will be greatly diminished. Furthermore, as bid- ask spreads widen in response to internalization, aggressive broker-dealers will be able to internalize an ever increasing portion of their order flow, sending only the most challenging of orders into the market place for execution - and only further worsening thesituationcorrodingthevalueofthemarket. Inthelongrun,unfettered internalization will result in substantially poor executions for all retail and institutional investors. The SEC's efforts in other areas have contributed to narrower spreads in recent years; addressing internalization in the markets will have the effect of narrowing spreads even further.
We believe that the potential long-term impact of internalization is so corrosive to our national market system that the Commission should take every possible step to curtail this business practice.
The points that you raise call for market structure reform, whicn I'm in favor of. But as a trader we have to trade the market that we have not the ideal market. Smart traders will use dark pools, internalized orders and commission free trading in some instances for some purposes and decrease their trading costs as a result. Its about being informedThe beathft.com article strikes me as poor advice as the authors don't seem to understand that there's a huge difference between 1) internalizers/wholesalers (buying order flow from brokers who are supposed to be looking out for their clients' interest, but may not be), and 2) dark pools in the more conventional sense, which are an "unlit", non-exchange trading venue that matches equally-empowered counterparties (in theory -- although this trust has been surrepetitiously violated; see e.g. the Pipeline and ITG dark pool scandals).
With respect to the internalization/"wholesaler" system (1) above, the "benefit" claimed for the retail trader in terms of "price improvement" is vastly overstated. If a retail trader were to intercept just one midpoint order on a 5c spread stock, they would receive 250 times the de minimis price improvement typically offered by wholesalers. That's $2.50 vs $.01 on 100 shares.
But the biggest damage from the internalization/wholesaler model comes from the increased spreads. This has little to do with "smart" or "dumb" money, and far more to do with the ability of wholesalers to pay to jump the queue. Because Citadel/Knight in their wholesaling business can pay a de minimis fee to jump the queue on someone who takes the risk to post liquidity in the open (and therefore bear the risk), the wholesaler "business model" dramatically increases spreads and reduces liquidity at any given price point.
This queue-jumping ability is enjoyed only by members of an oligopoly -- it wouldn't be nearly so profitable if it weren't. And guess who's paying for those oligopoly profits enjoyed by these firms? Hint: it's not just coming out of thin air.
But don't take my word for it -- here's what Citadel had to say on the topic in 2004, before they themselves had built/acquired the massive wholesaling business they've got today:
Can't beat 'em, join 'em, I guess?
The beathft.com article strikes me as poor advice as the authors don't seem to understand that there's a huge difference between 1) internalizers/wholesalers (buying order flow from brokers who are supposed to be looking out for their clients' interest, but may not be), and 2) dark pools in the more conventional sense, which are an "unlit", non-exchange trading venue that matches equally-empowered counterparties (in theory -- although this trust has been surrepetitiously violated; see e.g. the Pipeline and ITG dark pool scandals).
This distinction does not matter in a risk averse framework where the trader decreases exposure to third parties (whether be it dark pools or internalizers) in situations where a 'leak' or law breaking behavior will hurt him (when he has a big order, is in a hurry to liquidate or the stock is volatile) but increases in situations that are opposite of that (small orders, not in a hurry, slow moving stocks)
By using internalization, you're simply transferring more wealth and control to the two aforementioned wholesaling firms. The flow they get is not toxic -- certainly in comparison to what anyone else setting a bid or ask must bear.As a matter of fact, the more smart traders use things like commission free trading/internalized orders the more toxic that order flow will become. Thats a good way to 'get back' at them
In an ideal world for the wholesaler/internalizer cartel, 100% of all trades are internalized. With the exception of (rightly illegal) insider trading, there's almost no way to "get back at them" at that point -- you take whatever price they give you, and they are the exclusive liquidity providers, maximizing spreads and minimizing liquidity. At that point they become a "transaction tax" on everyone else. In fact they become more like it every day -- witness Citadel's interest in buying Automated Trading Desk, when Citadel's wholesaling already has a higher market share than many exchanges (and this is Citadel using its own account to trade against retail orders, as opposed to an exchange, whose job is matching other people's orders).
Robinhood does offer MARKET, LIMIT, STOP LOSS, STOP LIMIT order types ...Customers who use services such as Robinhood are paying that spread each time.