Robinhood Is Making Even More Trades Free, Taking on the Options Market

ajacobson

ajacobson

Robinhood Is Making Even More Trades Free, Taking on the Options Market
By
Julie Verhage
December 13, 2017, 9:00 AM CST
  • ‘Completely changing’ stock-options trading is stated goal
  • Online platform says it has more than 3 million accounts
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The New York Stock Exchange (NYSE)

Photographer: Michael Nagle/Bloomberg
Robinhood Financial LLC is seeking to do for options what it did for stocks: make trading free.

The Palo Alto, California-based startup, which operates online as a brokerage like ETrade Financial Corp., announced Wednesday that it is offering free stock-options trading. Robinhood said it has more than 3 million customer accounts after three years in operation. It is working to keep attracting users whose uninvested cash generates interest for the firm, and who may graduate to its for-pay services.

“We view this as completely changing the way that consumers trade and invest in stock options,’’ co-founder Baiju Bhatt said in an interview. “When we look at the landscape right now, we see a lot of room for improvement. It’s extremely expensive to trade options.”

The firm started out by offering free stock trading. Rather than making money on each trade, it relies on products like Robinhood Gold which lets users trade on margin and get access to extended trading hours.

Trading options is traditionally more expensive than trading stocks. While brokerages can charge $5 to $10 for equities trades, options cost between $20 and $50, depending on specifics like the size of the contract.

Bhatt said that he expects the product to perform well, based on customer inquiries and surveys by the firm. He said the company plans to introduce more services in 2018.

“There is a lot of overlap between the people that said they wanted options as well as the people that trade more actively and use services like Robinhood Gold,” Bhatt said.
 
I have a problem with 'free'...you get what you pay for. -- People kind of like to and want to pay.

I went from Etrade when I started out, then TradeKing (now/acquired by Ally) ...I'd like to try InteractiveBrokers, see what all the praise is about.
 
I would also assume the fine print has some restriction/limit on SPX and VIX where there are exchange fees - not certain how they would create a free schedule for products with fees. Obviously the rest of it is PFOF, but in a world where almost everything is electronic and you've sold the flow it is pretty much all the same execution.
The other possibility is like the original OptionHouse model where it was all you could eat for a fixed price and they internalized SPX as much as possible.
 
ajacobson said:
but in a world where almost everything is electronic and you've sold the flow it is pretty much all the same execution.
The other possibility is like the original OptionHouse model where it was all you could eat for a fixed price and they internalized SPX as much as possible.
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Couldn't disagree more with these statements. Do you think a market order directed to the Box exchange would yield the same fill as one sent to the CBOE? I don't think so.

You also cant really internalize SPX flow very well, especially the smaller quantity you would expect to see here. All orders in the SPX would have to be crossed in the pit (and have the opportunity to be bettered) or exposed to the market electronically before being crossed (with the same opportunity to be bettered) You can't simply "internalize" an order and cross it within the brokerage.
 
I remember over a year ago I caught an interview on CNBC with their CEO I think it was.

They asked for some stats like who was trading with them and most their clients we’re between the age of 20 and 30 and the average account size was below 3k or something like that.

It was mainly people who were new to trading and wanted to dabble at day trading on their free time during the day on their app.

At this time they didn’t offer margin accounts and I think now margin accounts are their fee service.

They mentioned they made their money from collecting interest on cash balances.

Seemed like a crazy business model to me but their still around. Didn’t seem to me like they were getting any large accounts though and don’t think that’s their target demographic.
 
FSU said:
Couldn't disagree more with these statements. Do you think a market order directed to the Box exchange would yield the same fill as one sent to the CBOE? I don't think so.

You also cant really internalize SPX flow very well, especially the smaller quantity you would expect to see here. All orders in the SPX would have to be crossed in the pit (and have the opportunity to be bettered) or exposed to the market electronically before being crossed (with the same opportunity to be bettered) You can't simply "internalize" an order and cross it within the brokerage.
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When I was a market maker, index options were worth the most in PFOF because it was nearly impossible for their to be information asymmetry.
 
"Couldn't disagree more with these statements. Do you think a market order directed to the Box exchange would yield the same fill as one sent to the CBOE? I don't think so."

Under NBBO it would have to fill at best or it would ship. A market order on a multiple listed product is the easiest part of the options world to fill. Doesn't make much difference where it goes. For some names, they trade every exchange and every model. Market orders almost always get routed to PFOF models, not maker-taker.

Peak6 did, in fact, discover they couldn't internalize SPX well - no matter how well their machines worked - probably a big part of why OptionHouse couldn't continue the "all you can eat model"

Big SPX customers migrated over and used to kid about putting OptionHouse out of business. Now with VIX it has to be especially difficult. Hard to trade a product with about half a buck in exchange fees for free unless you limit your mix.
 
ajacobson said:
Under NBBO it would have to fill at best or it would ship. A market order on a multiple listed product is the easiest part of the options world to fill. Doesn't make much difference where it goes. For some names, they trade every exchange and every model. Market orders almost always get routed to PFOF models, not maker-taker.
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Suppose the market on both the box and cboe are 1 dollar wide. I agree that with NBBO the order would have to fill at least the best price quoted, but in my experience the auction system is far more robust at the cboe, yielding you a better price improvement on a market or limit order.
 
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