SPX is probably unique because it has to cross on the CBOE and so there might not be a lot of opportunity on exchange fees, etc.
A firm like Robinhood may have to eat those losses as a cost of doing business.
Robinhood Is Making Even More Trades Free, Taking on the Options Market
- Thread starter ajacobson
- Start date
SPX is probably unique because it has to cross on the CBOE and so there might not be a lot of opportunity on exchange fees, etc.
A firm like Robinhood may have to eat those losses as a cost of doing business.
This is an interesting detail. Robinhood has described the way they make money is this: they round up the uninvested cash you have in your account and collect interest on it. I haven't heard of them giving your orders a less-competitive price in the bidding process. I am new at this. Are we talking about small things like a penny? That is a micro-trading game that is way outside of my league.
It could add up if the pennies add up. If you try to buy 100 shares at $40.00 per share, but get it at $40.06, then that is the same as getting it for $40.00 share with a $6.00 commission. But if it is one of those fractions of a pennies game... that's something for the elite high frequency traders to make money on. I wouldn't really notice the difference between $40 and $40.00125 per share if I'm doing a buy.
I still like the competition. I remember living in an area where there was not enough competition for rental housing. The housing owners let their properties deteriorate and wouldn't spend money on renovations. Their properties would rent anyway, so why spend a dollar? Then a big new apartment complex got developed in a prime area. That created new supply in the market, and is forcing apartment owners to upgrade their residences from quasi-slumlord status.
If nothing else, I hope this competition compels Interactive Brokers to upgrade their currently hideous interfaces.
Last edited:
"you have in your account and collect interest on it."....sorry, not much of a model in this interest rate enviro.
RH is a PFOF model. I believe someone actually posted their document spelling it out. Too lazy to search. There is No Free Lunch.
You can't fill worse than NBBO for simple market order. A broker can't shave a penny to pay for execution.
If you are free you either make money from payment/rebates you don't pass on - stock loan rebates - interest rate spread on free cash or simply all the interest on free cash if you don't give any of it back.
The belief that you earn money off of bad fills is bullshit. Even if you internalize you still have to match or improve on the NBBO. Rare exceptions.
Between stock loan rebates and exchanges rebates, very few brokerage houses with scale are paying anything to trade competitive products. It will actually get cheaper to now that rates are going up. Hard to tell who will pass it. Some pioneer in the e-commerce space will cut prices and then everyone will step in line.
Ten year goes to 4% and stock trading will approach or go to free at the firms with scale.
If you are free you either make money from payment/rebates you don't pass on - stock loan rebates - interest rate spread on free cash or simply all the interest on free cash if you don't give any of it back.
The belief that you earn money off of bad fills is bullshit. Even if you internalize you still have to match or improve on the NBBO. Rare exceptions.
Between stock loan rebates and exchanges rebates, very few brokerage houses with scale are paying anything to trade competitive products. It will actually get cheaper to now that rates are going up. Hard to tell who will pass it. Some pioneer in the e-commerce space will cut prices and then everyone will step in line.
Ten year goes to 4% and stock trading will approach or go to free at the firms with scale.
It's not about exploiting bad fills. It's about paying 32 cents for an option worth 35 cents (when the bid/offer is 30 at 40) instead of paying 34 cents. And having the opportunity to even consider paying 34 cents in first place - because there is a seller in the market.
Btw - as a retail trader, I have no problem with PFOF. Commissions are hard money, quality fills are soft money.
The “pay for flow” model is not about making money on filling the customers at prices worse than NBBO. It’s about being able to decide if you like to take the order or not before it gets exposed to the general market. Some of those trades will be delta trades (e.g. OMM might want to get long delta due to expectation of mean reversion in the next 100ms), some of it might be due to their Vega axes etc. This way, the OMM is able to add positive selection to his trades, since he has the informational advantage.
Now, it sounds like no loss to the customer, but if you are giving up positive selection bias to another market participant, eventually it will add up to negative selection bias in your own results. Here is a non-market example. There are two street vendors that sell fruit and veggies on the East 86th street. I use them to buy some avocados. The first guy insists on picking the fruits himself while the other one allows direct access to the inventory. The second guy is marginally more expensive, but...
Now, it sounds like no loss to the customer, but if you are giving up positive selection bias to another market participant, eventually it will add up to negative selection bias in your own results. Here is a non-market example. There are two street vendors that sell fruit and veggies on the East 86th street. I use them to buy some avocados. The first guy insists on picking the fruits himself while the other one allows direct access to the inventory. The second guy is marginally more expensive, but...
PFOF is the real deal. Retail order flow has a great value. As long a the retail trader is getting the right price at the right time, and the broker (RH in this case) is getting paid for the PFOF, then everybody win.