Comment by dawhizkid | Hacker News Reader

Comment by dawhizkid | Hacker News Reader

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According to this analysis https://seekingalpha.com/article/4205379-robinhood-making-mi... HFTs pay Robinhood significantly more for their order flow than other brokerage firms i.e. claiming almost 12x more than E-Trade makes ($260 per $1m in orders vs $22 per $1m). If this is true (I haven't independently verified but these fees must be published publicly by law), then clearly HFTs are getting something more from RH than they are from other brokerages.

The author goes on to say "Robinhood is well on their way to making hundreds of millions of dollars in cash income by selling their customers' orders to the HFT meat grinder. High-frequency traders are not charities. The only reason high-frequency traders would pay Robinhood tens to hundreds of millions of dollars is that they can exploit the retail customers for far more than they pay Robinhood."

I read that analysis when it came out. I'm not sure how accurate it is... in the end Robinhood still needs to make money since they aren't charging the typical per trade commissions.

You can probably back out what the HFTs margin is on this stuff by looking at public financials... KCG was public for a while.

Why would HFTs pay so much more for order flow from Robinhood vs other online brokerages?

Because individual retail traders are (a) generally uninformed and (b) relative to institutions, have very small positions they want to move in the market. Those orders are intrinsically more valuable, because they aren't risky to make markets for.

Essentially, your trades have a lower cost basis than those of institutions. But the markets are generally priced assuming institutional traders. So if firms know you're not an exchange they can save some money on you, and Robinhood literally passes some of those savings to you.

(I don't love Robinhood or anything, but the model makes perfect sense.)

It might simply just be that's the terms that Robinhood reached with the firms? Paying 0.2c/share and giving 0.2c/share price improvement is fairly similar from the perspective of a market maker as just paying 0.4c/share, and Robinhood might be funding themselves by having firms only compete on payment for orders and not on price improvement.

On a more meta level, my firm suspects that Citadel is trying very hard to price other players out of the market even if it's at the cost of their current profitability, so they might be driving up the terms of newly minted deals. I don't work on the retail desk so I don't know.

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