Robinhood Making Millions Selling Out Their Millennial Customers to HFTs

IEX?

Yeah, I don't see the problem. Unless and until customers are manifestly paying exorbitant effective fees compared to typical brokers, there's nothing to be upset about and little reason to intervene.

Transparency is concerning (as are all pricing strategies that try to hide the ball), but in the world of finance this doesn't rank very high in the opaqueness department. As you say, if you're not the customer you're the product. Especially in the context of a service that is actually performing real-world, meaningful transactions on your behalf (as opposed to publishing funny comments to internet memes), you have to be hopelessly naive to believe you're not remunerating them with your own money.

There are plenty of hopelessly naive people out there, but you don't slap down a business strategy simply because it could steal from these people. You wait around until its clear the harms outweigh the benefits, otherwise the market in every product or service would be limited to minimizing the potential harm to the dumbest among us.

That's a very negative and dangerous view to hold. You're blaming someone for being exploited because of their lack of knowledge. Not everyone can know everything and they shouldn't be expected to in order to participate in the global economy.

Robinhood markets themselves that they are taking from the rich and giving to the poor. Their behaviour is the exact opposite of that! They're actually more like loan sharks or payday loans.

HFT is front running.

It means they are handing over your transaction to HFTs, who can then see your transactions ahead of everyone, and buy the stock right before and then sell to you for a higher price. Imagine you just issued a BUY order at market price; they can buy at $99.9 and sell to you for $100, making a $0.01/stock profit. Rinse and repeat millions of times per day.

This is very similar to "front running" [1], but because a) this happens privately and in small quantities, and b) it is not necessarily privileged information, it's considered legal by the SEC. But it is highly questionable for sure.

"Flash Boys", by Michael Lewis [2] is a great read, and goes into detail on the world of high frequency traders, and how they operate.

[1] https://en.wikipedia.org/wiki/Front_running

[2] https://www.amazon.com/Flash-Boys-Wall-Street-Revolt/dp/0393...

1) You use a mobile phone with, 20ms? latency

2) The price displayed to you is 20ms late

3) You accept order at this price

4) The actual price might be less, so a firm can buy it and sell it slightly higher.

5) You get a fill at a better price than you thought.

- There is a premium to Robin Hood vs other apps because most users are on mobile, where latency is likely to be higher.

> The stock price is the same for the buyer on RobinHood or does RobinHood raise the price in anticipation?

What this article is suggesting is that if you are going to place an order for some stocks and, all else being equal, if you place that order with Robinhood there is a chance that the price for you the buyer is slightly higher (you probably care about this) and/or the price that the otherwise-would-have-been seller receives is slightly lower (you might not care about this).

I think the implicit assumption is that HFT firms place a negative externality on the overall stock market in a manner which CAN distort the value of holding the set of equities being traded. As a hypothetical example, if 90% of Robinhood customers bought into a pump and dump scheme, and HFT wrote the algorithm to perfectly go long at the perfect time, and accordingly sell at the perfect time, then the less educated investors would essentially be subsidizing the HFT firms ability to turn a hefty profit. This kinda isn’t so much a problem by itself. It’s when the dump in the pump and dump is exacerbated by the HFT firms, which wipes out all of the Robinhood investors positions: Robinhood facilitated trading -> millennials bought into a false hype -> HFT knew this could happen and wrote an algorithm to capitalize on the inevitable correction, and slurped up the mismatched price difference contributed by these investors.

If this is the implicit assumption, the article still falls victim of a slippery slope fallacy by letting readers believe “if Robinhood does this, what other companies can sprout up to encourage HFT exploitation?” Regardless, the article points to a good discussion in the direction of “at what point do we expect HFT to be the only way to benefit from the stock market?”

I see the issue after digging in more. The problem is that Robinhood claims they make money by investing in fund with extra savings, however they failed to address how they are "really" making the money. I always doubted how they make money and now I know.

What's even more surprising is that other company like E-Trade costs money AND they sell it to HFTs.