As we saw above, Robinhood’s main revenue source comes from selling customer trade data to other firms. This is a controversial practice known as “Payment for Order Flow” (PFOF in financial regulatory lingo).
It's only controversial among people who don't understand how market transactions work.
The article is a bit confusing. There's "PFOF" which is basically middle-man profit taking. That's not particularly shocking unless it's egregiously delayed. But then there's selling data to high frequency traders.
This sentence in the article conflates these two very different things...
> As we saw above, Robinhood’s main revenue source comes from selling customer trade data to other firms. This is a controversial practice known as “Payment for Order Flow” (PFOF in financial regulatory lingo).
I am not getting this? Is it the case that ordering stock shares from a market maker like Citadel is identically selling data to high frequency traders?
FWIW, I admit I don't _really_ understand how market transactions work, and I definitely don't feel alone!
The article is a bit confusing. There's "PFOF" which is basically middle-man profit taking.
Not really. The middle-man profit taking (aka market making) will exist even without PFOF, it will just move onto the open exchanges. The only difference would be that the market makers would have to offer worse spreads because they can't separate "dumb" order flows from "informed" order flows. This is an overall negative for retail traders but a net positive or neutral to hedge funds/institutional traders.
Payment for order flow can certainly be controversial among people who understand the market. Also, there are plenty of people who understand the market who find the concept of the market controversial.
Your circles might all be comfortable with PFOF, but I wouldn't say it is controversial only with those who don't understand the market -- it's dismissive of contrary opinions.
Comments
It's only controversial among people who don't understand how market transactions work.
The article is a bit confusing. There's "PFOF" which is basically middle-man profit taking. That's not particularly shocking unless it's egregiously delayed. But then there's selling data to high frequency traders.
This sentence in the article conflates these two very different things...
I am not getting this? Is it the case that ordering stock shares from a market maker like Citadel is identically selling data to high frequency traders?FWIW, I admit I don't _really_ understand how market transactions work, and I definitely don't feel alone!
Not really. The middle-man profit taking (aka market making) will exist even without PFOF, it will just move onto the open exchanges. The only difference would be that the market makers would have to offer worse spreads because they can't separate "dumb" order flows from "informed" order flows. This is an overall negative for retail traders but a net positive or neutral to hedge funds/institutional traders.
PFOF is banned in Canada: https://www.gbm.scotiabank.com/content/dam/gbm/market-insigh...
PFOF creates huge conflicts of interest between brokers and market markers.
That is why RH was fined $65M by the SEC.
https://www.sec.gov/news/press-release/2020-321
Payment for order flow can certainly be controversial among people who understand the market. Also, there are plenty of people who understand the market who find the concept of the market controversial.
Your circles might all be comfortable with PFOF, but I wouldn't say it is controversial only with those who don't understand the market -- it's dismissive of contrary opinions.