To add a bit of context: brokerages like Robinhood send buy/sell orders to national exchanges and to private trading firms e.g. high-frequency traders. Private firms provide price improvement: orders that execute at prices better than the national exchange. All brokerages have a duty of best execution, including a duty of price improvement. Brokerages can also receive payment for order flow from private firms, as long as it does not interfere with best execution. However, "Robinhood explicitly offered to accept less price improvement for its customers... in exchange for receiving a higher payment for order flow," which is illegal.
In order words: if I want to buy something that costs 100, the broker is free to get me a price of 95, but they were colluding with the players able to offer this discount to offer me 97 instead and pocket the extra 2, something like that?
There is a notional standard "best price", the NBBO, that a broker-dealer has to meet; you can't take payment to route an order somewhere that doesn't meet the NBBO.
But the NBBO captures pricing from all kinds of traders. Retail traders are cheaper to trade with than institutional traders, because retail traders aren't moving gigantic blocks of stock that are going to blow up the market makers that are facilitating the trading.
Everybody knows that retail traders are cheaper to trade with, and everybody knows where the retail trades come from: the retail broker-dealers. So market makers cut deals with retail broker-dealers: they chop up the cost savings between themselves and their customers, who get prices below the NBBO. That's called "price improvement".
What happened here is that Robinhood claimed in its marketing to be obtaining the best available prices for its customers. But it wasn't living up to that claim. Its upstream market makers made it clear to them that they could get more price improvement for their customers, if they took less in PFOF rebates.
The SEC filing suggests that Robinhood was offered 80/20 price-improvement/rebate, and instead took 20/80. The two big problems here: first, 20/80 is worse than other retail brokerages (virtually all of which do PFOF, because none of them are especially competent at actually executing trades) --- even if you factor in the lack of trading fees, and second, Robinhood had claimed in its own marketing that they did the opposite.
I work at a market maker, and what you say is mostly correct. However, I would like to add that retail customers get better prices not primarily because they move less volume (though this is certainly a factor), but because their order flow is significantly less toxic. Retail traders don't really know anything and their order flow contains less alpha, so market makers can quote better prices to them without getting run over.
It's very important for market makers to separate out order flows and assign a toxicity to each flow. This way, they can provide tighter spreads and better execution on less toxic flows while being a little looser for highly toxic institutional flows.
So roughly, the idea is that if I’m smart money (say a big hedge fund or institutional trader), behind any of my trades is an implication that I know something worthwhile. So my trades will move the market, and this can leave market makers holding the bag if prices move quickly.
But if I‘m the proverbial dentist, my trades are just noise that don’t signal anything real about the market. I can get better execution because market makers aren’t worried about my trades moving the price out from under them.
Although Im sure the improvement isnt that significant per trade, is it worth trying to game this to lower my toxicity, i.e. use odd lots, break up my trade etc?
You are putting it almost exactly how Matt Levine puts it.
I would just sneak in the point that, to my understanding --- and the previous commenter would know better than I do --- one of the big information advantages institutional traders have is simply the knowledge that their order is the first of 1000 identical orders they're about to follow up with.
Yes, this is also a good point. Retail trades are more likely to express real demand. When a retail traders puts in an order for 135 shares, say, it's most likely that's an accurate and complete signal of that traders intentions: they are looking to buy 135 shares. For institutional players, it could be an iceberg order: once the 135 shares are filled, the refill the order with another 135, again and again. So the actual orders they submit are less representative of their actual intent, making handling their trades much more risky.
What's the specific risk when handling these trades? Is it that the quoted price should be higher, given that there is more demand than there seems to be?
If that's the risk, though, it's not a risk of loosing money you have, but rather a risk of not making as much money as you could by selling at a higher price, right?
So let's say I'm quoting a tight spread and a small buy order comes in and I get hit. No problem. I don't adjust my quotes because that small of order will not impact the price. But now more orders are coming in from the same institution, buying more and more (basically one big meta-order broken up into small orders so as to conceal intent). If I don't realize that all of these small orders are from the same institution and that they actually represent one big order, I will probably lose money because I am treating each order in isolation. Everytime I sell to the buyer, the price goes up, making me lose money because my spread is too tight and I haven't identified the true intent of the buyer. Every time I sell, I am increasing my short exposure to the asset/derivative, so if the price moves up (against me), I am in a very real sense losing money.
If I can identify the meta order, I can shift my quotes up in order to compensate for the price impact all these small orders are going to have (remember, though they are individually small, they actually represent one big order).
So basically, market making is a game of predicting the short term future price of a security, and quoting buy/sell offers at appropriate levels. The less volatile and less toxic and more liquid a market is, the tighter I can quote. The more volatile and toxic a market is (and less liquid), the looser my spread must be. Remember that I'm not trying to make money on the directional moves of an asset (I'm trying to be "delta neutral"), but rather profit off of the bid-ask spread. My goal is to turn over inventory as quickly as possible (ideally buying and selling at the same exact time).
So if someone's buying a stock, the market maker actually takes a short position to make it available to the buyer? I was under the impression that market makers are just connecting market and limit orders with each other, is that not the case?
It's really complicated and I don't want to go into too much detail, but no, a market maker isn't "connecting" limit orders. A market maker is a market participant, just like me or you (well, sort of). They buy things and sell things, they don't have magical powers.
People get confused, but most hft firms utilize market making strategies. A market maker is just someone who puts limit orders on the book (making) vs taking liquidity off of the book (takeout). Anyone can be a market maker, and many firms do both market making and taking.
No, the exchange already matches a buy at market order to the best limit sell. A market maker is who is filling up the order books with offers to buy and sell at different prices under the hope that a regular trader will come in later with a trade the other direction at a better price.
FWIW InteractiveBrokers, in their Pro accounts (the one you pay albeit very low commission fees for) doesn't accept payment for order flow. Their Lite accounts (the one they launched to compete with RobinHood) do accept PFOF. [1, 2]
Makes sense, I'm just shilling; I like IBKR. Not, you know, their app or website. Their order execution, margin rates and other features (debit card, bill pay) are really solid.
I haven't check it honestly, I don't really trade equities - I mostly sell equity options and index futures options. I use IBKR because of their low margin rates (1.25% for a 300K margin loan at the moment), their low commissions and their generous portfolio margin allowances.
Depends on the size of your account and how you trade, and what you're looking to get out of it.
If you have an account value of over $110,000 IBKR will offer you the industry's lowest margin rates (as low as 0.75%, tax deductible) and very competitive order pricing, without PFOF. Of course with a substantial account you can ask any of them to match IBKR margin rates and they likely will.
I sell a lot of margin-secured put options for passive income, and having a 15% portfolio margin maintenance requirement gives me a lot of headroom -- not that I'd ever max it out, I just don't want to be anywhere close. Further the margin impact of out of the money options is also calculated generously.
They also offer access to basically any product in any market anywhere in the world. I sell index futures options in the US for instance, but if you want to trade on Canadian, European, Australian or Asian exchanges, it's just a button click away.
You can also practice tax-aware borrowing and use their debit card to make purchases against your margin, and also, they offer bill pay which works against your margin balance too. My personal economy involves holding a 6-month cash buffer in my bank account, and investing anything that comes in - and borrowing against it to pay bills. Then, I use the proceeds from my short-term options trades, and dividends from my longer-term positions, to pay them off.
I bought a house last year and long story short ended up not selling my condo, meaning to close I needed to not sell a chunk of my investments. Problem is, many had significant capital gains. I ended up just taking a margin loan for a blended rate of about 1%. I avoided capital gains, the margin interest is deductible, and my tech heavy portfolio has increased substantially in absolute terms and on a percentage return basis is crushing it.
I was comfortable with margin/leverage, for a few years I was very successful with a strategy of buying blue chip dividend stocks on margin and essentially running a credit spread trade- it's not for everyone.
But IB is outstanding compared to other brokers around things like this- it really excel for the "prosumer" niche.
You keep saying that a benefit of IBKR Pro is "no PFOF". That's true --- IBKR Pro is I think the only online retail brokerage that doesn't do that.
To my understanding, the only meaningful benefit to "no PFOF" is potentially better price improvement. Which is to say, if you place orders with Ameritrade, which is doing PFOF, you're going to get price improvement over NBBO, but with IBKR Pro, which doesn't, you might get even better price improvement.
In the IBKR Pro case, that's true: according to their advertised price improvement stats, you will get 1/3c of improved price improvement per share as a consequence of trading through them compared to the industry average. Your call whether a third of a penny is meaningful to you.
But in the general case, it might not necessarily be true that "no PFOF" is a benefit; it's all a question of the fees you pay and the price improvement you get with a given brokerage's routing, right?
Am I off here? My sort of baseline belief is that firms like Citadel and Virtu are in fact very good at executing retail orders, and that it'd be weird to have a goal of making sure your dumb retail orders were routed around them.
IBKR does some of its trading off-exchange like the PFOF types, but they do it in-house, not on a paid-for basis. If you see "SMART" in the routing of an order on IBKR pro, often that order went to one of their darkpools or was filled by them off-exchange (at a price better than the NBBO).
The price improvement per share also sometimes comes from exchange rebates that they pass through to customers.
Crispier fills. And you can choose which exchange you route your orders to so you can get rebates (maker/taker model). Getting paid to open/close options positions is genius.
Does Vanguard provide an api? I use them for my three fund portfolio but use td ameritrade for swing trading as I can automate my strategy. Would be nice to keep it all in vanguard.
(1) There are lots of different exchanges and trading venues, not just one.
(2) Electronic market makers have expertise in order execution and have invested huge amounts of money in software platforms to automate it, which they're effectively renting out to broker-dealers.
(3) Some of these firms have other sources of inventory they can clear trades against.
There are probably 10 other more important reasons I just don't know about.
What I think it comes down to is that order execution is a big job, and being able to effectively answer the phone and run the right billboards and TV ads is also a big job, and firms like Citadel and Virtu are good at the former and firms like Ameritrade are good at the latter.
>20/80 is worse than other retail brokerages (virtually all of which do PFOF, because none of them are especially competent at actually executing trades) --- even if you factor in the lack of trading fees,
(1) I don't think you can make a blanket statement about the split and trading fees. If I bought 1 stock for $100 this year I'm better off with the 20/80 split than a trade commission. Conversely, if I bought 10,000 shares @ $100 I would be better off paying a commission and getting a 80/20 split.
It's also not clear what's better for the consumer. If I'm paying a commission then I have to trade sub-optimally in order to batch trades. Maybe I'm better off being able to make a trade for free when I need it even if it costs me more in fees.
(2) This seems like an odd standard. I can take 20% as a rebate because everyone else does, but I can't take 80% because no one else does that. So maybe I can take 25% or maybe 30% or maybe 35% and that's ok. Where exactly is the line?
And if someone launches a competitor called Jesse James and they take 80% does that mean Robinhood is now ok? Or is two not enough? And if two is not enough then how many does it take?
I'm literally quoting the SEC here. 80/20 wasn't an example I came up with for funsies. They did the math; the outcomes were worse for RH customers. Which seems like it would have been OK, except that RH said the opposite thing in its promotional material.
More like broker 1 offered it to me for 95 and to pay Robinhood 1. Broker 2 offered it to me for 97 and to pay Robinhood 2. Robinhood took the offer from broker 2. No collusion necessary but they weren’t acting in the best interests of their customers according to stated offers.
I always thought that Robinhood's customers were not folks with the Robinhood app, but rather the association of their traffic with clearing houses like Citadel?
More like you want to buy something that would cost 100, and RH got paid 5 to send your order to a trading company, and that trading company executed at 101.
No. If you had a limit buy, Robinhood would never exceed your limit. Period. That would be highly illegal.
This is more like you want to buy something at 100. Robinhood then goes to the market and looks at all the vendors. The vendors are selling at various prices. Robinhood has a relationship with one of the vendors so they went there and that vendor was willing to sell at 98. However, a vendor down the street (that Robinhood doesn't like) would have been willing to sell at 97.
None of that is illegal. What the SEC is arguing here is that Robinhood didn't tell the customers this when they advertised "commision-free" trades. In Robinhood's eyes, they didn't charge a commission, so this was accurate. But in the SEC eyes, the customer was paying a "hidden" commission because they would get a slightly worse price than if they went with a different broker.
Imagine you are Fidelity... All of a sudden, you have Robinhood advertising "commission-free" and you just lost a good chunk of business from retail traders. You then complain to the SEC because the advertising here is not entirely accurate - the customers might have even gotten a better price with Fidelity - even if you add in the commission.
FTA:
> The order finds that Robinhood provided inferior trade prices that in aggregate deprived customers of $34.1 million even after taking into account the savings from not paying a commission.
Robinhood goes down to vendor street and into the shop of its preferred vendor, who is also the preferred vendor of most other brokerages. The vendor says "The street price on this item is $100, but we can get them for $95. We can get it to your customer for $97 and give you $1, or $98 and give you $2". Robinhood takes the $2, other brokerages don't, and Robinhood (crucially) lies about it, at which point the SEC gets mad.
I always wondered how these companies made money. My first suspicion was, that they "fed" stupid retail clients thay had no place in trading to the big fishes.
I learned so much in this thread, making it one of my favorites. And showing again why HN is the great thing it is.
Also, even I wasn't really right, RH and others sure found a way to price and sell an existing service better than incumbents. And in good disruptive tradition seem to have ignored certain regulations.
The "certain regulation" here is simply that you can't advertise to your customers that you're getting them the best possible deal when you have deliberately chosen not to give them the best deal. As the SEC points out: their pricing isn't better than traditional brokerages. This isn't like Uber, where the lie is that the low prices are subsidized by investors and will be jacked up later on down the road; here, the lie is taken directly out of the hide of RH customers.
That's true only if the service Robinhood is providing is giving customers good deals. It seems quite plausible that instead it is actually providing entertainment in the form of "free" trading. If this is the case, the lack of explicit commission is a key feature.
My post has no bearing on a limit. If you see 103 on your ui and tell RH to limit to 103 then RH is still obligated to do the best it can. If the best execution you could reasonably get is 100 and you execute below your limit but above 100, that’s illegal.
The limit in a limit order is really an orthogonal concept.
This is one way they make money. Robinhood is free because it makes interest on the money you ACH transfer in that sits while you make your decision on what to buy. They have a big bank account holding all of the user's funds and get interest on it. Of course they cannot make interest on the money traded for a stock though.
Does it mean that its always better to do limit orders as apposed to market order in RH? I'm guessing, its a lot more easy for RH to give you sub-optimal prices for market orders.
Assuming they don't change their practices, it's always better to use a different broker. Robinhood was the first to eliminate comissions, but now most brokerages have also eliminated comissions, so say thanks to Robinhood and then use an established broker.
I would expect market and limit orders to have been handled similarly. Market makers would like to trade with retail investors, and they're willing to pay X for that; if Robinhood takes 80% of X, and passes on 20% to clients as price improvement, and other brokerages pass on 80%, your limit orders may execute sooner at other brokerages (as your limit is effectively 0.6X higher/lower), or may end up executing with bigger price improvement.
If the SEC has gone through and has accounted for the 34 million in cost to consumers, why are they not having robinhood reimburse the customers for their lost money on the trades and then charging the additional 30 million on top for lying? Why does the SEC take all the money?
SEC doesn't work on behalf of consumers, it works on behalf of the federal government. Robinhood customers are still free to bring lawsuits against the company and those would be heard in courts.
The SEC's stated mission is "to protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation." I would equate Robinhood consumers with investors.
And plaintiff securities class action law firms are undoubtedly drafting complaints as we type.
The idea is that the SEC doesn't represent investors in court. They aren't suing for actual damages (losses) incurred by the investors. They are assessing Robinhood with a penalty (fine) for violating a regulation.
You can put a clause in your contract that prohibits someone from using specific legal action at your discretion? That sounds wild so I am interested. What is the justification for this? How could anyone basically preemptively and effectively exempt themselves from specific legal action regardless of wrongdoing? What would happen if the other party tried anyway?
Oh, this is extremely common in the boilerplate of almost every single contract and ToS I've read in my adult life (IANAL, just referring to the contracts I've signed or chosen not to sign that I've come across). If you look at something like the contract for your credit card, I guarantee you'll find a clause entitled "Arbitration", "Mediation", or something akin to that where it basically says "If something bad happens, you give up your right to sue us and instead agree to binding arbitration by a mediator of our choice." As for what would happen if one party tried to sue the other anyway, I think it would depend on the nature of the grievance. Again, IAN[even_close_to_being]AL.
An increasingly extreme Supreme Court has repeatedly expanded the ability of employers and service providers, including ISPs, to prohibit class actions in their contracts. Even retailers now attempt to compel their customers into forced arbitration.
You can put whatever you want in the contract. That doesn’t mean the court will honor it. That’s why TOS have severability clauses; so that the rest of the contract survives if a judge strikes down a clause as invalid during a lawsuit.
I would guess that since Robinhood has been found guilty of misleading customers it wouldn't be too difficult to say they were negotiating in bad faith.
Note: This is complete arm chair lawyering with no real world knowledge
If you're in the US, you should pay more attention to the contractual agreements you're entering into.
I would find it incredible that you haven't agreed to binding arbitration many times throughout the normal course of your financial and commercial activity.
Yes, and the extent that matters depends how much people care. Uber was nickel and dimed by a billion dollars in arbitration fees (significantly more than an expected class action valuation) -- the binding arbitration clause cuts both ways.
It’s about more than just the cash cost though. In many jurisdictions court cases decisions can create legally binding precedent. Arbitration typically does not, a critical advantage when Uber was very busy trying to make sure courts the world over never decided drivers are employees etc. Arbitration could never really make that distinction binding, risk a court might.
Mildly off-topic: What do you think about alternative systems (e.g. UBI) which decouple safety nets from employment? I'm still young and naive, but it seems like we could avoid the whole legal morass of contractor vs hourly employee vs salaried employee who must be paid for extra hours worked vs "real" salaried employee, state constitutional amendments requiring 7/8 supermajorities to overturn, having your health records privy to your employer, having to pay 2x (even accounting for employer contributions) for worse health coverage if you're not employed by _somebody_, and all the other garbage in our current system (forgive the USA-centric view).
I have a lot of opinions on this, too much for a comment really!
At root, legal systems in many western countries only really classify workers as employee/contractor vs self employed etc. The law has not caught up with modern working practices for the new type of gig-economy worker we have. I think a third class that lands halfway between employee and contractor needs to be legally recognized in many places - something that has some benefits and risks from both. Making this new class of worker is an extremely politically loaded decision - do they get holidays? do they get benefits? etc etc and that is really where the difficulties in fixing this start. In most western legal systems this would require some really major legislation to fix well too, and would be attacked by all sides along the way. It's just so hard to put right.
It's more about deterrent than returning the money.
The amount of money per customer is probably a few dollars at most. It wouldn't be efficient to return that money and would probably be better used for future cases and prevention.
Reading the SEC order it anticipates that Robinhood will be sued by clients (I think this is already happening, which may explain why there is no disgorgment ordered here).
Disappointing since they were already fined by FINRA for Best Ex. this time last year although on further reading this seems to relate to the same time period.
Interesting that Massachusettis also announced an enforcement action against them this week.
I don't know the answer in this specific case, but often in the case of small rewards like this, it's because administering the return of the money would consume a large fraction of it.
Presumably there are laws or regulations that dictate how much they can be fined for given behaviors by the SEC, and those laws and regulations do not cover the distribution of monies to injured parties.
I think this is just a practical consideration. Execution fees are typically less than a few cents per share and are often fractional. It's impractical to offer up dozens of single cent refunds for current and previous customers.
Also, just adding onto my own post, I worked on a trading desk for a large bank. Shortly before I arrived there was an issue with order marking (the details of which aren't as significant and were caused by a genuine mistake). The SEC made us go through every trade the desk had ever handled and identify which orders were marked incorrectly. It was so tedious and painful that the bank wanted to settle and pay a bigger fine if it meant not having to deal with all that nonsense. The SEC were unyielding. The moral of the story is that there is no negotiating with the SEC once they decide they've had enough of you. I'm not sure to what extent RH have institutional customers but institutions have a fiduciary duty to seek best execution. RH are on a real legal ledge here. I wouldn't be surprised if this is just the start of a very challenging era for Robinhood.
The sad truth of this is that this is just three letter agencies doing as three letter agencies does. I don't think anyone at the SEC was looking after consumers here. If they were, they would similarly investigate other brokerages with the same practices (which is many).
The SEC doesn't have infinite resources to investigate every possible case like this. As with most prosecutions, they just go after the most obvious/high-profile/egregious cases that have the highest probability of success.
That’s mostly because Congress writes the budget, and the President “spends” what is allocated to the SEC on the SEC (no surprise). So the SEC (and IRS) is/are kneecapped because Congress doesn’t give them enough money (either because they don’t want to, or the President doesn’t ask for enough).
The cynical take is that Congress profits from insider trading, tax evasion, etc. and want to prevent themselves from being investigated. Whether that’s true or not would be hard to prove.
This is a great question, and one that SCOTUS ruled on [1] earlier this year. I had hoped that the decision would result in the people who were wronged getting their money back, but it would seem not.
Anytime a company is fined by the SEC it has to post that at the top of their home page similar to how restaurants have t display health scores. Of course it would need to have a plain English requirement.
Bonus points for having web browsers flag such sites as well similar to how they can flag sites for being breached
But who would bring the suit to the courts? Just some random law firm starting a class action? We all know how that turns out (in terms of retribution[a]). There has to be a better way.
[a]: Because class actions technically aren’t about retribution, but discouragement
I haven't. But there are obvious power dynamics when large market actors can get people to waive their right to sue. There's a reason they're called "inalienable." They're not supposed to be self-alienable either.
One of many good reasons to worry about the composition of the SCOTUS - important cases effecting this very right are headed there, and this is the most "business-friendly" (as the euphemism goes) court in quite some time.
Too bad it is probably too late on these issues; we're approaching a situation where an increasing amount of "little people" law will be handled in arbitration.
Justice in the US has always provided the best justice money can buy. They're just starting to implement a sort of buyers-club.
> Justice in the US has always provided the best justice money can buy.
Alas, no. If this were really about money only, you could design a much better system. This ain't the best money can buy. (Perhaps look at some actual business-friendly jurisdictions for examples.)
Without the ability to sue for a breach, there is no reason to have a contract in the first place. The terms might as well say "each party can do whatever they want at any time."
> there are obvious power dynamics when large market actors can get people to waive their right to sue.
When this was all going down, RobinHood was a plucky startup being praised all around the valley, not a 'large market actor'.
> There's a reason they're called "inalienable." They're not supposed to be self-alienable either.
Not sure which founding father suggested the inalienable right to tort, but apparently he was overruled since it didn't make it's way into any founding documents.
Why is that weird? Attorneys in this are working on behalf of the US Government. If they feel like settling gets the best deal for the government, then they do that.
It can give the feel of extortion. Settle or else. There is quite a window where settling -- even when provably innocent -- is easier/cheaper than facing an agitated prosecutor.
Settling has nothing to do with a finding of truth.
Do you have any evidence to base this on? Robinhood could easily afford to go to court if they felt the evidence was on their side. $65 million is probably more than what they've ever made in profits, so if they can pay it off without blinking, chances are a court case would result in an even larger fine.
On the same token, it's doubtful that the SEC would proceed to charge Robinhood if they knew they couldn't make the case stick in court.
It would be nice if they hadn't gutted the Consumer Financial Protection Bureau and if they had the power to require them to reimburse customers.
There absolutely should be a department whose job isn't corporate financial games, but focused on the cost to the consumer and can require restitution for the consumer.
They don't actually care about the little people. It's more about keeping the company in check so it doesn't become a monopoly for retail thumb traders faster than the next closest competitors in that category can catch up (which would be Webull I guess?). It's also a reminder that, hey, there's a shitton of (old) money in this field, better not get cocky.
Possibly too cynical of a take, but I'll reiterate the SEC doesn't care about the people browsing WSB.
The SEC has regulatory capture issues. Way too close of ties with the people it is supposed to be regulating.
Take the example of this SEC investigator [0] whose boss got a call from one of those Wall Street hedge funds under investigation and suddenly he's fired! Mysteriously, that boss gets a job with the same firm a few months later. Oh, the kicker? The person who made that call from the hedge fund? Appointed to be the SEC chair in 2013 (she rejoined the hedge fund's counsel at the end of Obama's term in 2016).
They're not really teethed though. I grew up in DC and new plenty of parents who were ex-chief of staffs or whatever and they literally would tell me that they were working for a lobbying firm as a "consultant" because that was a loophole for getting around the "can't join a lobbying firm rules."
Nah, you just shut out good people who want to do good things but can't figure out rules or feel like the burden to doing good things or the potential penalty on technicality or slipup isn't worth it, and select for sociopaths who are adept at figuring out how to use rules (especially draconian ones) to their own advantage, spirit of the rule notwithstanding, because they WILL put up with the burden and the risk.
> Nor do I particularly want people too dull to figure out those rules to be making laws for our entire country?
You make it sound like there's only like 3 or 4 rules to follow.
> not work for a lobbying firm
it's not really clear ultimately how you're going to enforce that. Laws against lobbying are already treading close to violations of the freedom of speech and right to petition the government; if there are structural problems with how laws are getting enacted, I would suggest thinking about the structural problems in how we are governed more than trying to patch over the system with rules.
> I would suggest thinking about the structural problems in how we are governed more than trying to patch over the system with rules.
I agree with that, I disagree with the idea that lobbying regulations somehow select for unscrupulous individuals - nor was your argument for that idea particularly well-reasoned.
This is par for the course in most government agencies that regulate private business. The SEC gets tons of press and scrutiny (and it happens anyway!) but there are innumerable government agencies with similar issues. You can also downvote me, but anyone who has worked deeply with the government from the private sector is full of WTF stories.
It is common, but I would not go so far as to say "par for the course". Nor does the SEC get "tons of press and scrutiny" - indeed, you can see all of the positive op-eds written in places like the NYT and WaPo about Mary Jo White's appointment (with a few notable dissenters in Salon like Matt Taibi).
I did downvote you because you said I could, but this is absolutely true. But, it kind of should be true. Government employees need to strongly know the industry they’re regulating to regulate effectively. I can’t imagine someone with zero financial ties and only knowledge from school going to direct how the SEC does investigations any more than I can imagine the same happening at the FDA.
I don’t think there should be so much regulatory capture (there is), but I do think a revolving door of sorts for many positions is helpful from a perspective of knowing the regulated industry and acting with the best knowledge of regulating that industry.
I always wondered about the name 'Robinhood' since it applies taking from the rich and giving to the poor. Maybe it could be renamed to Sheriff of Nottingham.
Well, to be fair, before Robinhood came along it was still pretty standard to pay huge fees AND have your order flow sold. I wish they had been straightforward about what they're doing instead of explicitly lying on their website about where their money comes from, though.
It implies it, but doesn’t guarantee it. Everyone wants to be that hero in the narrative, and by the time the people figure out they have been shirked (but not directly lied to) your company has been acquired and you’re out with bags of money.
Clever, unethical and legal (by the thinnest margin)
I believe the idea is that they are taking access to finance from the rich and giving it to the poor. Commissions are often flat dollar amounts, so the more money you have, the less significant they are. Charging a percentage (which this is effectively doing) benefits small trades and hurts large ones. And I believe they still meet or beat market rates, they just find savings that they don't pass along to the traders. No doubt the Robin Hood of myth turned a profit as well.
> As the SEC’s order finds, one of Robinhood’s selling points to customers was that trading was “commission free,” but due in large part to its unusually high payment for order flow rates, Robinhood customers’ orders were executed at prices that were inferior to other brokers’ prices. Despite this, according to the SEC’s order, Robinhood falsely claimed in a website FAQ between October 2018 and June 2019 that its execution quality matched or beat that of its competitors.
Reading through the comments had me confused, but it really boils down to a misleading FAQ page. All of which is pretty damn funny because of how innocuous I view FAQ pages to be.
This is a very tame reading of the mistake. Telling customers that their stock orders would be executed at prices matching other firms, when in fact Robinhood was executing those orders at inferior prices -- that's a big misrepresentation. You're paying extra for something while being told that you're not.
I don’t get it. If you sell stocks at the market price it wouldn’t be the market price but something cheaper that RB would buy and then sell at the real market price?
Not Robinhood on the other end of the transaction, but yes.
If you and someone else both mashed SELL at the exact same instant, they'd get $48 for their stock and you'd get $47.99 and your confirmation screens would both say "we sold your stock at the highest price we could find".
In exchange for sending their customers to a place where they'd only get $47.99 instead of $48, Robinhood received direct cash payments.
That's not what happened here. Everyone gets cash rebates for directing orders. Robinhood just dialed those rebates in higher than other firms, while claiming not to have done that.
Retail orders generally trade with against market makers off-exchange, between the quoted market price. If the quote is Buy @ $1.00 x Sell @ $1.01, a retail order would be able to buy at a price like $1.0099.
That $.0001 savings is known as "price improvement". Separately, the market maker pays a negotiated ahead of time rate to Robinhood for sourcing the order, aka "payment for order flow".
A whole lot of financial/securities regulation revolves around messaging. You are allowed to do many things as long as you are transparent about them, conversely you have to be extremely careful about saying anything lest it be interpreted to mean something unintended.
I feel that if a company is paying a fine of 1M or more, someone should also be going to jail - otherwise there is not going to be any meaningful accountability.
> Robinhood agreed to pay $65 million to settle the charges. ... Without admitting or denying the SEC’s findings, Robinhood agreed to a cease-and-desist order prohibiting it from violating the antifraud provisions of the Securities Act of 1933 and the recordkeeping provisions of the Securities Exchange Act of 1934, censuring it, and requiring it to pay a $65 million civil penalty.
A slight quibble, Robinhood and the SEC settled. There was no fines issued.
I do think that the threat of being sent to jail would be a much better deterrent than the threat of losing 2x the money gained by doing something illegal.
Get that law passed, bearing in mind that half the country is represented by a political party that is opposed in principle to financial regulations of almost any sort.
Agreed. Same as 2008 crash. The executives that made these decisions are most likely ending up ahead on their fat salaries. We’ve got to hold decision makers accountable.
How is this company still around? How many times have they been in trouble with some government agency, SEC or other?
From pretending to be a bank[1], to having a bunch of accounts looted and no ability to stop it[2], now this, and I'm sure others I'm forgetting right now.
It seems this company is really not a smart place to park any serious amount of money with. They don't take their responsibilities very seriously; carelessly flaunting the law and financial regulations.
> The order finds that Robinhood provided inferior trade prices that in aggregate deprived customers of $34.1 million even after taking into account the savings from not paying a commission.
$65M penalty for $35M in misbehavior. That is how you get Wall Street to pay attention. More like this please!
Unless the likelihood of getting caught is less than 50% in which case this was still the smart financial move for the company based on expected value. The way to get people to pay attention is to hold people involved in corporate misdeeds personally liable.
No, much more than $34M in misbehavior. Hurt customers by $34M over what they would have been charged if they had paid commissions.
So Robinhood took money from its customers to this extent: all the cash as if its customers were paying commissions, and also $34M, and for that they're being fined $65M, which will probably be negotiated down to $2M or something like that.
The 34 million calculation is only for "certain" orders. I think this means some trades would be advantageous under the RH model (small trades where a $5 fixed commission would overwhelm any percentage), some trades would be disadvantageous under the RH model (very large value trades), and they only summed the comparative fees on the disadvantageous trades.
This might make sense: if users were knowledgeable and had multiple brokers, they may execute at the better trade-specific broker for each trade, so adding up just the potential bads gives some perspective. But on the other hand, it's not a perfect indicator for Robinhood's net gain as its omitting trades where Robinhood's structure leads to lower commission.
> the SEC is one of the branches of government that I trust almost as much as the FDA
Hm. I made this comment elsewhere but:
The SEC has big structural problems. Way too close of ties with the people it is supposed to be regulating.
Take the example of this SEC investigator [0] whose boss got a call from one of those Wall Street hedge funds under investigation and suddenly he's fired! Mysteriously, that boss gets a job with the same firm a few months later. Oh, the kicker? The person who made that call from the hedge fund? Appointed to be the SEC chair in 2013.
The general purpose of the SEC is to investigate, fine and in general "stop" financial crimes in the financial market. This, in theory, requires said investigators to be smarter than the perpetrators or at least somewhere on par. While these folks are paid really well on average... this isn't "fuck you money" like on Wolf of Wallstreet. Even "poor fuck you money" is better than what they make. While I won't dismiss the need for a lot of attorneys and accountants in their profession, 333 examiners doesn't seem adequate against a $440k average salary industry with 176k employees 2018 numbers (https://www.osc.state.ny.us/sites/default/files/reports/docu...). Unless there's much more overlap than I'm imagining.
I mean seriously, if you're smart enough for the financial industry, you need to have a much higher moral code to take the less than half rate of average salary compared to the people you're investigating. Which I'm not knocking. I always respect people who take a moral high ground stance and try to do some actionable good, especially if it's at a detriment to their own wallet. It's just, expectations need to tempered with their overall capabilities. On top, agreeing with you on structure, what kind of hell do some of these folks experience working in a government environment? How many get salty real fast and get all pissed off from the shit they deal with bureaucratic wise along with shitty pay compared to the industry's employee?
There was a line from Burn Notice that I've always attributed to this, "Fighting for the little guy is for suckers". So yea, can we all really trust the SEC? Maybe... but can you really blame them by too much regarding "issues" granted that most of any industry, especially tech & finance, is about jumping to the next better paying job? I mean think of this scenario, "You're going to get fined no matter what happens today. But I can reduce it by half if a moving box full of cash magically appears on my back porch."
Correcting people when they use wrong pronouns is distracting but I get it, but can we at least not correct people for not using the right variety of neutral pronouns?
Those always confuse me even more. Is OP the top level comment or the post we’re commenting on? Different people seem to use it differently, which isn’t super useful for communicating. And is GP the comment two above yours or two above mine?
A good reason to trust the FDA is that they have contributed to the safest food in the world! Our strict food regulations in the USA make things like trichinosis very difficult to spread around.
What evidence is there that U.S. food is safer than Japanese food, or even say Canadian food?
I don't have strong evidence but I don't regard U.S. food to be particularly safe relative to most first world countries. It's not terrible by any means and you're right in that you won't get any immediate damage from anything you eat, but I suspect most other first world countries have food and safety and health standards that result in better health outcomes over a long period of time compared to U.S. food.
[EDIT] After doing some minimal research it appears my intuition is correct, at least with respect to foodborne illness, the U.S. is certainly good compared to poverty stricken nations, but compared to most of Europe, Canada, Australia it has much higher rates of foodborne illness:
The deaths in the U.S. is the highest, but what's even more interesting are the hospitalizations. U.S. hospitalizations are among the lowest and one has to wonder why that is given that it has the highest death rate. It wouldn't be unreasonable to suspect that because of how expensive the U.S. health care system is, Americans who do get sick avoid going to the hospital altogether. That is admittedly simplified speculation on my part, but it's a starting point for further investigation.
At a 10x difference, it should clue you in that something is wrong. Choice quotes from a UK Gov page:
> A report published by the FSA has found it is not possible to compare foodborne disease rates effectively between countries.
> The report concludes that attempting to accurately compare different countries’ foodborne disease rates is an almost impossible task. The only way you could attempt this would be for different countries to have the same type of study with the exact same study specifications, over the same time period. Even then, differences in underlying surveillance data available in each country could cause issues, particularly in terms of determining what proportion of IID cases are due to food.
Trichinosis is also very well controlled in many third world countries that just have a bunch of good local regulation agencies. The FDA shines more on the regulation of mass produced packaged food on an unprecedented scale. The only other countries that can independently feed their populations with mass produced packaged nutritious food are some Asian countries that also have rich governments. Even in Europe they piggyback on work that the FDA does via international cooperation.
Are you sure the current FDA is worth your trust? Or are you being cynical?
The pre-1962 FDA had perhaps the better regulatory framework: back then new drugs had to show safety, now they have to show safety and efficacy.
Off-label prescription show that efficacy requirements are not necessary in practice, and just needlessly delay drugs and make their development more expensive.
I for one am glad that pharma companies aren't allowed to peddle prescription meds that don't actually work. If there's some other use case for that drug (your "off label" application) then it will pass through the approval process with efficacy proven for that.
I think it's more of a dilemma that off label scrips aren't used more often. Since there's zero monetary incentive to prove efficacy for a second application and doctors generally prefer officially sanctioned uses, lots of patients miss out on helpful treatment.
They only cost customers $35kk in execution compared to other brokers. I suspect they will take a hit in revenue, but the order routing will still be valuable.
A limit order just specifies the maximum that you are willing to spend per share.
For example, putting in a limit order at $100 for a share of "X", means that you won't pay more than $100. If the best available price for "X" at the time is $98, and Robinhood gives you a share for $99, that is still an inferior execution.
Basically there are two ways broker-dealers that want to do business with Robinhood or similar firms can provide incentives:
1. Pay the flow provider (i.e., Robinhood) some amount per order/share
2. Provide price improvement over the prevailing market price to the end customer (which the provider can then use to market themselves as providing good execution).
Ultimately both of these are coming out of the broker-dealers bottom line, so the unit economics have to work - (1) and (2) have to leave a positive profit margin on average. Typically a firm like RH would be monitoring execution quality and negotiating price improvement requirements with the broker-dealer. This order finds that RH failed to do that, and likely as a result of their demand for high payment for the order flow, (2) was below their peers while they were stating otherwise in their marketing materials.
It is a shame that these types of tech companies are always churning up such bad publicity... they literally cannot afford to be making these sorts of unforced errors. It just makes it that much more difficult for all the innovative and honest startups who are trying to bring about positive disruption. cutting corners and misleading your customers is not innovation.
It isn't just finance startups. With one exception, every startup I've worked for has done something I considered at least sketchy. The difference is most of them didn't have a federal agency with teeth paying attention.
It is, honestly, something I struggle with a bit. I don't like it, but it seems like the state of play is that "a little bit" of cheating is expected, and those who don't are at least operating at a handicap. Exactly how wide that gray area is depends on who is advising you, and sometimes results in shops like early-Uber.
Bryan Cantrill has a talk on YT on ethics in software [1]. And as I remember it the take away is that the way we think about problems isn't very conducive to obeying the law, or being good to people in general. And I've got to say the amount of people I see thinking of regulations, social norms or morals as « cruft » is pretty alarming.
After reading about companies like Robinhood and Uber I basically take "disruption" to mean "breaking the law in order to attempt to gain a competitive advantage and hoping to get away with it".
Yeah, that’s not really the point. People are going to avoid using these types of services, whether it’s Robinhood or some other startup, if they think they are going to get scammed. It is bad form, and the thing is that they knew that people have been skeptical about their sources of revenue for some time now.
Every other discount broker sells order flow too, and they’ll approve you for options trading if you say you have enough experience. I’m not sure why you think Robinhood is any different than TD or Schwab.
Small fines will continue to encourage this behavior. Robinhood was clearly and consistently not acting in the best interests of its clients and misrepresented pricing. Now it’s worth billions.
they have agreed to bring in an "independent third party" although I have no idea how they can really remain independent when they're ultimately collecting a check from RH.
They are independent because there exists no preexisting conflict of interest between the third party and RH. That's what independent means in this case.
The fact that Robinhood routed to these wholesalers was always easy to see... it’s in their SEC rule 606 reports. This info was buried deep on their site, but you can alway use a search engine to find it. You just had to know where to look.
They took payment for order flow (PFOF). So do many of the cheap brokerages on the street.
To me, the funny part is that the old school wall st institutions Robinhood is supposedly disrupting do not take payment for order flow. Morgan Stanley and Merrill will not take it. They go for the best execution quality always.
Although, I do not agree that this practice is necessarily illegal... there’s a simple argument to make: by taking payment over price improvement the broker is able to provide a lower commission. The all in price could still be better for the customer. Robinhood is not skilled enough to navigate this issue though.
From a guy that used to run best ex at a wall st firm...
The article seems somewhat on the fluff-and-feathers side. It doesn't really explain anything. The only non-obvious thing it says is:
> Robinhood receives a fixed rate per spread (vs. a fixed rate per share by the other eBrokers). Rather than receiving simple payment by volume, Robinhood receives a percentage of the spread between the bid and the ask in each trade. This is interesting because while HFT proponents insist their practices narrow spreads, some critics maintain that high-frequency trading ends up widening spreads.
Unfortunately, what this excerpt claims as "interesting" makes no logical sense. The fact that RH is paid by HFT on the spread would suggest that HFT like to get order flow in stocks that already have a large spread. It is completely unclear how this is related to the claim that HFT tend to increase the spread.
The "traditional" interpretation is that HFT make money from creating liquidity. This means they take illiquid stocks (with large spread) and make them liquid (reducing the spread). Since they make money doing that, they are willing to pay for orders in illiquid stocks.
Is this the correct interpretation? I have no clue. But it seems the article's author has even less clue, and adds nothing of value to the discussion.
Payment for order flow trade never helps the consumer. RH accepted unusually large amounts of it. They harmed the consumers to the tune of $34m relative to normal practices. They lied about what they were doing.
This is incorrect. The benefit of order flow to the consumer is additional sources of liquidity. If a consumer submits an order to buy 500 shares of AAPL for $100, there may only be 100 shares available on the public market at that price in which case the price of AAPL will increase from $100 to at a minimum $100.01.
The way pay for flow works is that firms can execute against that order agreeing to fill any portion of it up to and including the full 500 shares.
Furthermore by agreeing to pay for flow, it's a criminal offense for my firm to use that information to front run the order by buying it on the open market without first executing against the client. The allegation made by the SEC against Robinhood is that some kind of indirect front running was performed and perhaps even facilitated by Robinhood.
The problem is that the SEC is pretty weak overall, and if their allegation is true then Robinhood should be punished much more severely than this $65M fine given that Robinhood and others likely profited at a minimum some $40M dollars.
The quality of comments in this thread is atrocious. I wonder what makes so many presumably technically trained people, to make confident claims about topics on which they very clearly have no bloody clue.
payment for order flow helps the consumer a lot. By separating toxic from non-toxic order flows, retail traders get much better price improvements than institutional traders.
Here's an analogy I once heard from Matt Andresen (founder of Island, one of the major early electronic exchanges). Equity markets are like a high-end clubs in Miami. A club that doesn't make any effort at "face control" at the door will find that it's ratio of guys-to-girls will continuously skew higher. And both groups will eventually stop going to any venue where the guy-to-girl ratio is persistently too high. However guys generally are willing to pay more than girls for entry, so it's a balancing act between maximizing short-term revenue and long-term brand value.
Similarly in any given market there's the ratio of informed trading to uninformed trading. Generally the former are large institutions, and the latter are small retail daytraders like the Robinhood customers. Since active management is a zero sum game, a venue with all informed traders is not a place you want to trade at.
By law the public exchanges are not allowed to segment order flow. Imagine a club that's legally prohibited from discriminating based on gender at the door. As you can imagine, the ratio at these venue is extremely biased towards informed traders.
Dark pools and internalizers are not bound by that restriction. However they're legally obligated to meet or beat the best price in the public market. (More on that in a second.) Retail brokers like Robinhood are essentially like club promoters, whose job is to get paid for bringing as many pretty girls to these venues as possible. And on the other side the informed traders at these venues (usually just the internal prop desk) pay big money for the privilege of trading somewhere with such a good ratio.
Is this a bad deal for the girls being herded by club promoters? To a first order approximation: no. At the very least they're getting free entry and drinks, instead of paying listed fees at the public venues. Sometimes they even get other perks like free meals or zero-commissions from the promoter. Still it feels exploitive because the promoter is making far more money off the girls than any fringe benefits they're getting.
As a second-order effect, the segmentation may degrade the overall ecosystem. Eventually all the girls wind up at the private clubs, and the public ones become ~100% dudes. Analogously the public lit exchanges have become highly toxic. Which is bad because market makers set prices based on the quality of the flow they interact with.
Remember that price protection on dark pools is based on the best price available at the lit exchanges. This creates a negative feedback loop. Dark venues can improve on prices at lit exchanges by segmenting order flow. Which forces lit market makers to worsen their prices. Which gives the dark venues even more of an advantage, allowing them to price out even more desirable order flow. Which then makes the lit order flow even more toxic, and the public quotes worsen. Which then drives even more flow to dark pools and internalizers...
Basically, if you want to buy AAPL at $100 and as your broker, I take that info and share it with someone else, such as an HFT, they will quickly (milliseconds/nanoseconds) buy AAPL and sell you at a higher price. So, while you expected to pay $100, you ended up paying $100.10.
Now that doesn't seem a lot to you but times the difference (10 cents) by volume and number of Robinhood customers placing orders and it can add up to be a lot.
The buy ahead of you scenario described in this comment is not what the allegations are in the filing (and wouldn’t work in practice because of the way exchanges work).
What is actually being alleged here is that Robinhood did not fulfill their obligation to secure the best price. There is a literal system in the US equities space that says what the best price for a symbol is across the exchanges.
The internalizer can arbitrage this system due to physics & CAP there on but they can also do it in more prosaic ways, by having previous inventory that is priced better or by simply taking the spread between an internal netting (thus internalizing it).
In any case it’s Robinhood who holds the fiduciary duty not the internalizer so if they aren’t getting appropriate execution they need to change their contracts with the internalizers, switch to a different set or send directly to lit exchanges (which destroys their business model & likely gives worse execution than a more fair internalization setup would).
This is wrong on several levels. First of all limit orders place a limit on the worst case price that can be executed but SEC rules impose a duty to execute orders at the best price. If there's a $100 buy order and the best price is 99 dollars, then there is a duty to fill the order at 99 dollars.
Second, the allegation made by the SEC, for which they most likely have very strong evidence, is that Robinhood didn't fulfill its duty to execute orders at the best price to the tune of some 30 million dollars.
Not a market order which majority of people on Robinhood are using market orders since they are the default. Most don't even know what a limit order is I'm guessing.
I disagree that your sentence fragment is all the press release says. I believe the press release says a lot more, such as Robinhood making substantial amounts of money from pay for order flow and Robinhood executing orders at prices that are not only worse than what is available on the market, but also worse than competing brokers, and this in spite of the fact that Robinhood advertises this to the contrary.
These facts taken together can not be used to "mean pretty much anything". These facts, along with the additional fact that the SEC is charging Robinhood of engaging in illegal activity, strongly suggest illegal activity involving pay for order flow that resulted in worse price execution to the customer.
If you think that means "pretty much anything" then we can simply agree to disagree on this matter.
> Robinhood executing orders at prices that are not only worse than what is available on the market, but also worse than competing brokers
This sentence doesn't make much sense given how PFOF works. It would make sense if it were flipped around and said "not only worse than competing brokers, but worse than what is available on the market" because brokers typically provide retail traders better than what is available on the market (assuming: public exchanges = market).
I agree with GP that the press release suggests that Robinhood was not giving worse prices than NBBO, but was instead giving prices better than NBBO (like every broker), but intentionally not _as good_ prices as other brokers, in exchange for greater PFOF.
I am not fundamentally against PFOF, but the "honesty" required on the part of the broker in situations like this has always troubled me, and it's interesting to see it rear its head. I think an ideal market structure might keep PFOF, but in a more public way, such that payments were more transparent/competitive in real time, and not something arbitrarily negotiated between brokers and wholesalers.
Despite what many apologists claim about front running being this very specific and formal type of activity that never happens because it's illegal and no one involved in finance ever commits crimes, the reality is that front running is not a technical term, neither in law nor in any academic or formal financial treatment.
Front running is an informal term that is used in many different domains to refer to when a principal acting on behalf of a client uses privately obtained information gained from that client to benefit at the client's expense. The term is used in finance, it's used in real estate dealings, heck there was even a scandal involving domain name registrars front running their clients:
> the reality is that front running is not a technical term, neither in law nor in any academic or formal financial treatment.
There is literally a FINRA rule with with front running in the name (5270). It doesn't have to be a technical term for it to still have meaning (outside of Michael Lewis's intent to change its meaning). It specifically refers to a broker trading based on the knowledge of their client's intent to trade. The examples you give actually are instances of the true definition. It doesn't really happen in equities because of how automated and smooth that market is, but it certainly happens in other areas of finance.
That's not what they charged with. What they charged with:
- You trying to buy 100 shares for $100 each
- Someone is selling 100 shares for $98 each
- RH supposed to fill order at best price ($98)
- RH didn't do that.
I wish the SEC would force companies to plead guilty instead of weasel out and pay a fine without admitting guilt. It doesn’t help anyone. If Robinhood is engaged in fraud or lying to their customers they should be forced to admit guilt and all the consequences from this. All this is is a slap on the wrist and political theater and I’m sick of it. I want some real teeth even if it results in less fine being paid. Or have them pay a crippling fine, one that takes away most of their cash. Something with meaning, not a meaningless fine
I confess I don't really understand the controversy here. I thought everyone who cared was already aware of how RH makes its money, and everyone who didn't was still getting a better deal per trade than they would have with traditional brokers. I ended up switching away from RH once my trades for big enough that other brokers were effectively taking less, but I'm still really grateful that I was able to learn the ins and outs of standard speculation with a $500 account
* Basically all of the brokerages make money this way.
* Robinhood took a bigger slice of the pie than the other brokerages did.
* Robinhood claimed in marketing materials that they were not taking more of the pie.
* Even factoring in the fee savings, Robinhood took so much of the pie that you'd get a better deal at other brokerages.
The issue on HN is always going to be a litigation about PFOF itself. But that's not the SEC's complaint here; rather, it's that when you enter into a PFOF rebate deal, you dial in profits for yourself against savings for customers. Everybody does that, but Robinhood both (1) turned the dial way towards themselves and (2) claimed otherwise.
The dollar amount that any Robinhood customer lost pales in comparison to the money they can lose when buying stocks in general ie gambling no way around it.
The entire industry as some may know is built on 'do your homework' and 'hold long term' is basically a big shared delusion gamble.
The majority of people will make money if the market goes up and lose money if the market goes down.
This is comical... As a Robinhood trader, I feel much less "misled" than I did when I was forced to invest in American Funds through an employers 401k plan. The mutual fund managers were scraping piles of money off my and my coworkers retirement nest-eggs and their mutual funds were consistently underperforming the market. The SEC couldn't be bothered to regulate where it matters, they're just gatekeepers and retail investors are not well liked by the power brokers.
More likely to help it, because it clears the cloud of an impending investigation and the outcome is a little blip.
Investors like things to be cleared up, even with damages, because the damages can be seen as a limited, tangible thing they can just write down and move past.
Their customer base is still worth a lot--think of all the odd-ball crypto derivatives Robinhood can pitch them. The $65MM may turn out to be a small cost of doing business.
I would say that $65M is a good investment from Robinhood perspective. As it has grown significantly since then due to this. The fact that SEC enforcement is 2 years in a high frequency world is in itself means it is just token enforcement. The trading world we should have enforcements as the trade happens.
This is why fintechs have to have strong legal & compliance teams, especially when you reach a certain size.
This reminds me of their debacle where they launched a checking product with a high interest rate and promising it was backed by the federal government...without ever asking the government if that was true.
This is probably why VC's have historically shied away from heavily regulated industries. It's just too easy for " insanely ambitious" founders to run afoul of the rules and laws. Fortunately for AirBnB, these rules and laws weren't enforced all that often.
This is inaccurate. Some of the most successful startups in recent memory made their bankroll by skirting regulations. It eventually catches up to them, but by then they've made a decent sized war chest to comply and plow forward. Eventually the startup just becomes the next established player. Rinse and repeat.
Yeah I mean, there is practically a cookie cutter framework for building successful startups based on industries with regulations that are protective or restrictive (depending on you look at it) enough to skew markets.
There's not that much that keeps you as a startup from thriving in a regulation heavy environment. In fact, most regulators aren't there to kill you. They just want to know you have a plan that builds towards compliance over time.
There is admittedly a difference in the stakes and severity of enforcement in different verticals; but it's more than possible to comply. In fact, zealous compliance can actually get regulations rewritten and unmask systemic fraud/non-compliance in established actors if you do it right. Everyone should be meeting the same goals, but if you have one company struggling to honestly do so, it's a sign to look into tge mechanisms other actors have in place and whether they actually do what is on the tin. EPA learned that indirectly the hard way with Dieselgate.
In AirBnB's case were there actually any preexisting rules? It would seem strange to have rules in place governing short term rentals before there was really even a market for that.
In resort/vaction areas, there were (and still are) cartel like systems in place. There are also restrictions on true "BnB" or "Inns" in that they were regulated like hotels are. You are definitely on to something in that the concept of a "short term rental" market has been sort of born out of AirBnB's existence but that segment is just a cross section of a larger market that has always existed, its just mostly been serviced by larger real estate developers, boutique hoteliers, hospitality management professionals, etc.
surely, you jest? A simple google search of AirBnB and illegal will more than satisfy your curiosity. And yes, a good portion of the laws broken are directly broken by the lessors, but many are also broken by AirBnB itself.
I mean laws that existed at the time AirBnB was started, which you seem to imply in your comment. I still think it's strange that the government can tell you how long of a duration you have to rent your property for, but it definitely is the law now.
Two years ago I left IT and started my own wealth management company...and now I'm back. I can tell you, the regulations on the retail side of finance are nonsense and help no one.
Like gun control, bad actors don't care about your laws. The only people who are regulated are the honest ones, and the amount of regulation can put them out of business, or even dissuade them from being has honest as they'd like.
If RH lied about how they're compensated, then they are certainly guilty, but the harm to consumers is just the tip of the iceberg. Consider how much RH has harmed all the honest financial advisors who had to compete with a "free" service that hides their cost to consumers.
If I had lied to one client about how I was compensated, bye bye license.
That's usually how regulation works. Regulation is a moat. You want it to be really really harsh and then be one of the first few on the inside.
Because by adding a flat startup cost to an industry you make it impenetrable to upstarts. Then you can use a venture-funded company to get inside the moat. But once there are a few inside, the next person investigating will realize that if they also enter the moat everyone will be commodified. They will lose their money too.
They'll have to compete and like Thiel says in Zero to One, you don't want competition.
Regulation is good for protecting your business and for helping big companies survive upstart disruptors.
The claim is that they sold that deal flow in a sub-optimal way that is expressly prohibited from them doing, and it led to consumers not getting the price that they, by law, should have been given.
If that’s indeed the case then we should throw the book at them. Breaking the law is different than selling a service for free and monetizing your consumers.
> Without admitting or denying the SEC’s findings, Robinhood agreed to a cease-and-desist order prohibiting it from violating the antifraud provisions of the Securities Act of 1933 and the recordkeeping provisions of the Securities Exchange Act of 1934
Oh, don't worry. Robinhood agreed to sign a piece of paper agreeing that it wouldn't break the law any more.
And just to be clear, this isn't the first time that Robinhood has blatently broken the existing laws and regulation.
The "infinite money" "glitch" is a situation which is straight-up codified to be not allowed (for obvious reasons). They were either incompetent or negligent.
They attempted to release a "bank account" product and claimed it would be covered by insurance which it would not be. Again, either incompetence, or negligence.
> The order finds that Robinhood provided inferior trade prices that in aggregate deprived customers of $34.1 million even after taking into account the savings from not paying a commission.
Sooooooo the fine is nearly 2x the cost to consumers due to malfeasance. That should cover your concern here.
No, much more than $34M in misbehavior. Hurt customers by $34M over what they would have been charged if they had paid commissions.
So Robinhood took money from its customers to this extent: all the cash as if its customers were paying commissions, and also $34M, and for that they're being fined $65M, which will probably be negotiated down to $2M or something like that.
Schwab also receives payment for order flow (AKA selling your orders): https://www.schwab.com/legal/order-routing-1. In fact, every retail brokerage I'm aware of receives payment for order flow. Schwab also has outages although not as bad as Robinhood was this year.
IBKR has two tiers. Their free "lite" tier (targeted at retail) receives payment for order flow. Their Pro tier (which charges a monthly fee) does not.
> An investment is an asset or item acquired with the goal of generating income or appreciation. Appreciation refers to an increase in the value of an asset over time. When an individual purchases a good as an investment, the intent is not to consume the good but rather to use it in the future to create wealth.
https://www.investopedia.com/terms/i/investment.asp
Buying Beanie Babies or tulip bulb futures or cryptocurrencies because you expect the value to increase over time is absolutely an "investment". They might be good or bad ideas to invest in, but they're without a doubt an investment.
I hate to break this to you but front running happens all the time in finance. In fact that’s the entire business model for bulge bracket trading desks. I know it’s easy to point fingers at RH but what they’re doing is very benign.
Actually, brokers like Schwab do have mobile apps. They might not be as polished or pretty as RH but a lot of the bigger brokers have mobile apps which let you trade from your phone.
Just FYI, Schwab does have a mobile app. I don’t like the vertical charting as much as Robinhood, but you can still trade stocks and options through it. If you want to trade bonds or some of the more exotic stuff you need the website.
It's very late stage capitalism for a company named robinhood to actually be stealing from the (relatively) poor to enrich themselves! You love to see it.
I believe this is to punish RH for offering zero commissions. Especially on options. I seriously think what RH offers, for anyone who’s traded options on the retail side, is a game changer.
Sometimes what's good for the 1 person isn't good for everyone.
For example, if a bank starts giving out 0% interest 100 year mortgages (with some fine print that gives them some obscure revenue source to make it possible for them to make such an appealing offer) the bank should still get in trouble in my opinion if the consumer isn't informed about how they're getting such an amazing deal, because you're removing the consumer's ability to make an informed decision.
I believe for this example to be correct, the bank would also be hiding in its documentation that you have to pay an annual $100,000 mortgage paperwork fee for this 0% loan.
The article states that RH cost its consumers more in bad trade execution than it saved them in commissions. How are you sure this didn't happen to you?
I trade in multiple platforms and I put in limit orders (RH doesn’t even allow market afaik). To be fair, I am probably not your typical trader since I’ve been a fintech developer in the past as well as have been involved in analyzing many SEC cases for/against major financial institutions. I will say this: it’s extremely hard to prove execution quality on options trading let alone doing it in 2020 when the market was so volatile.
I have sympathy for that sentiment, but in practice that train has long left the station.
My own comment wasn't a plea for government to interfere, btw. Just a cynical admission that active trading is bad for the vast majority of people.
(My own money is sitting in the most boring ETF I could find, but loaded with about 3x leverage. Given the regulatory requirements of the industry I work in, I wouldn't be allowed to trade actively anyway, but I don't feel like I'm missing out.)
What is the purpose of such small fines? Their valuation has gone from 1.3B in 2017 to 10.2B in August 2020 [0]. Only having to pay a $65m fine for that amount of growth sounds like a great deal. /s
Obviously it's more relative to their revenues but it still seems like peanuts.
The purpose of such small fines is to serve as a proportional deterrent to the misconduct they committed. The charge is that Robinhood falsely claimed their prices were lower than the competition; they shouldn't have lied, but that's hardly the crime of the century.
Full order: https://www.sec.gov/litigation/admin/2020/33-10906.pdf