Robinhood Faces SEC Probe Related To Deals With High-Speed Traders

Whoops…

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Can’t see the full article but get the jist of it.

I’m sure someone said there’s a rumour they’re looking to IPO, and if true it’s probably good if this is dealt with first.

Yes, but depends whether it is something that could be dealt with, If your business model is around selling your clients order flow to market makers to generate revenues, then you’re in trouble. If it icing on the cake, then its a hiccup,

I have the same linger questions regarding Freetrade. The lack of transparency, the delay in real time prices, the rate you are dealt at not matching the indication. I want my services to make money, but I need to know how they make money from me.

Think that’s an unfair comparison, its illegal to sell order flow for profit in the UK as far as I know, the prices are 15 minute delayed and several people have checked the order book and its been correct.

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It is illegal do also do it in the US as well hence the SEC probe.

I am not comparing, despite the similarities in the businesses.

However I am saying that the level of transparency is wanting. For example, not showing live prices, at least in the execution process is a big red flag for me. Trying to pretend that it’s not relevant for long term investing is attempting to confuse the issue which I thoroughly disagree with. Its like saying buy a house but don’t worry about the actual price as it will go up in the long run. As these platforms are also educating a new generation of investors, this is both bad practice and contrary to the concept of transparency.

I am sure others will disagree. I am biased from having worked in front office financial markets for a long time and in a lot of places.

Can you provide a link, please, saying that payment for order flow is illegal in the US? Googling easily reveals the opposite.

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No, it’s not. It’s literally Robinhood’s business model.

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How much do the LSE, NYSE, NASDAQ, EURONEXT, etc, charge stockbrokers for this?

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I’m not going to go far down this path as I am no expert and stand to be corrected but let me clarify.

From what I understand it is illegal if you are routing order flow through an execution broker because it earns a better execution margin rather than executing at NMS (NBBO) prices, regardless of executing agent.

Further I believe that you have to explicitly disclose and make investors aware that the broker is being compensated for the execution of their trades from a third party.

FINRA regulations require best-ex : the most advantageous terms for the customer. If you are selling client order flow to HFT, of which it is public knowledge that they front run client orders (buying before and then selling to), then there is a violation.

I believe it is still accepted in the US where you disclose to a client that you are being compensated and that you are still dealing at the best bid or offer in the market, but that is not what we are talking about here.

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no idea.

US markets have a different price for retail and a price for professionals.

I think Google shows live prices for a lot of stocks now, so it can’t be expensive for one quote when you execute.

It’s very expensive. Stock exchanges make the vast majority of their revenues from selling access to their data feeds.

With reference to your earlier comment about the way Freetrade makes money there is no comparison with Robinhood. Freetrade do not sell order flows to HFT. The price you are shown is the freely available price (ie delayed by 15 minutes). Freetrade execute your order at the best available price which is obviously going to be slightly different to the one shown.

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I take your word for it as I don’t know. On another platform I pay $10 pm for live data feeds that are waived if I pay a level of commission. All I want is a live price when I execute, as I don’t know what has happened in those 15 mins but it may be relevant to my decision making.

For example - you own a stock and there is bad news (earnings, litigation, fraud etc). Happens daily. No stop loss and your screen says price unchanged. You can bail, but what if the stock is actually down 10%, 25%, 50% only to recover? What if you delay and you could have got out for a 5% loss immediately only to see it drop 85% that day as the news sinks in? ($LK)

I’ve seen them both. It’s never important until it is.

I mean if the news is that bad the door is likely to be shut anyway with limited buyers being in the market. This puts forward the idea that we should all be monitoring our portfolios daily, if not hourly, when this has been shown to consistently produce poorer results? The idea behind Freetrade is long-term investing right?

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Most of the time your counterparty is an algo, who is not biased in the way that humans are. The only time I have personally ever actually experienced this was during the flash crash, which was the only time I’ve actually been spooked by the markets.

Yes I agree with your premise about FT users and LT investing, and that’s why i specified at execution time and not day to day monitoring etc. That said, many of the shares I see mentioned on these boards are hot stocks, not your stable blue chips (whatever that means) and not really suitable for LT investing unless you are treating them as lottos. If you are ‘playing’ in them then I think you need some form of more frequent monitoring and alert process.

Who designs algorithms? Having worked on algorithm back testing they are, by the very nature of their design, limited by the human being who designed them. Too often they have to be disabled during volatile times as these algorithms are incapable of responding in reasonable ways.

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Freetrade are very transparent on how they make money. See their FAQ article here:

https://help.freetrade.io/en/articles/1772008-how-does-freetrade-make-money

As for Freetrade not having live pricing, I agree it’s not ideal, but Freetrade is constantly improving so hopefully this is something we’ll see over time.
Until then I’ve recently learned just to flick back and forth between Freetrade and Trading212 as Trading212 shows actual live prices (as opposed to say Google’s static live prices).

I would recommend reading Flash Boys by Michael Lewis if you’re interested in the subject. It covers the rise of High Frequency Trading.
Payment for order flow is legal in the US, and by the sounds of the article, the SEC is just probing why Robin Hood didn’t disclose this to customers until 2018. My guess is it’ll be a slap on the wrist fine and everyone will move on.

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