[allenz]

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.

Full order: https://www.sec.gov/litigation/admin/2020/33-10906.pdf

[vslira]

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?

[tptacek]

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.

[willdearden]

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.

[sesuximo]

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.

[hef19898]

Thanks for answering my question how Robinhood, Traderepublic and so on make money.

[smithza]

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.

[ram_rar]

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.

[toast0]

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.