[dayone1]

1) are you going to sell your trade flow to Citadel / market makers like Robinhood and your competitors do? That's the dirty secret way of making money that you seem to have completely excluded. The reality is that adds up to substantial "invisible" fees that the investor has no transparency over because you sell your trade flows to them and they make a higher than normal spread. And the whole "doesn't matter if we sell your trade flows, the rules require you to get best execution" is a farce and everyone in the industry knows this - otherwise there is no reason why Citadel or Virtu would bid billions of dollars to just buy the trade flow.

2) Are you going to rebate your borrow fees back to investors? This is the other dirty secret way of making money. Many people don't realize that you can earn lending fees by lending your shares out for people looking to short stocks, and those add up to substantial amounts over time for a scaled asset manager. Do you keep this instead of rebating it fully back to your customers?

3) If the answer is no, you don't sell trade flows and yes, you will rebate your borrow fees, can you make a lifetime commitment that you won't go back on your word? Many people who start in this industry say they won't sell trade flows and then after they reach scale they change the footnotes and agreements and starting selling trade flows.

[wrsh07]

Pfof is woefully misunderstood

In general, citadel wants to pay to trade with retail investors because it knows it isn't going to face adverse selection. So it will give them tighter bid/ask ratios (this is better for the customer) than they would get if they were trading in the open market, citadel isn't going to get hosed by one of them (because there's no adverse selection)

It's win win win

[taway789aaa6]

> PFOF and excessive off-exchange trading persist because so many trading platforms rely on the revenue it generates, essentially productizing their clients. Defenders of PFOF have claimed that retail brokers who route to high-speed traders (in exchange for PFOF) provide better price execution for investors and that it’s a net positive, despite creating an inherent misalignment between these platforms and their customers, and despite public evidence to the contrary. Leaning on the flawed argument that they categorically provide retail customers with best price execution quality, there is little by way of self-regulation to foment change or prevent applications designed to optimize transaction volume (i.e. speculation and day trading) and risky activity (i.e. margin and options trading). Further, their ability to claim best execution is part of the flaw of the system, as even within the current structure better outcomes are possible on an order-by-order, and aggregated basis.

https://advocacy.urvin.finance/advocacy/we-the-investors-pfo...

Not a win win.

[throwacomment]

Yes, PFOF is woefully misunderstood but its very much not win win win.

The reason its bad is because its anti-competive and gives them information that no-one else has access to.

By trading against you, Citadel prevents any other potential market maker from trading with you. With less competition, the spread widens and even after price improvement, you're paying more.

PFOF also tells them who they are trading against but anyone else who just sees a quote doesn't know that.

Generally, things are very zero sum so wins all around are very unlikely. But some thinking is needed to track where the value loss and gains are.

[lldb]

It is not a win. In a recent study, Robinhood with Citadel has the worst price improvement (execution quality) of any brokerage on the market. I’ve personally observed this - Robinhood might “improve” by 1/10 of a cent from NBBO while Fidelity is frequently closer to the mid.

[wrsh07]

Here's the money stuff excerpt: https://marginalrevolution.com/marginalrevolution/2021/02/th...

> I feel like most of what I read about payment for order flow is insane? Otherwise normal people will start out mainstream explainer articles by saying, like, “Robinhood sells your order to Citadel so Citadel can front-run it.” No! First of all, it is illegal to front-run your order, and the Securities and Exchange Commission does, you know, keep an eye on this stuff. Second, the wholesaler is ordinarily filling your order at a price that is better than what’s available in the public market, so “front-running”—going out and buying on the stock exchange and then turning around and selling to you at a profit—doesn’t work. Third, because retail orders are generally uninformative, the wholesaler is not rubbing its hands together being like “bwahahaha now I know that Matt Levine is buying GameStop, it will definitely go up, I must buy a ton of it before he gets any!” The whole story is widely accepted but also completely transparent nonsense.

[nobodywillobsrv]

Adverse selection goes both ways. If PFOF leads to adverse selection against your flow then it's not win-win. You might say you are willing to trade of adverse selection up to the cost of the fees, but then you are trading a known fixed fee for an unknown stochastic penalty. And also who sets the fees?

The entire thing is adversarial and it's really just a choice of game you choose to play.

[WiSaGaN]

It's not. Centralization of liquidity is better for everyone. HFT thrives on fragmentation of liquidity. HFT is not wrong, but fragmentation of liquidity is.

[neximo64]

Distorted incentives

[hn_throwaway_99]

> If the answer is no, you don't sell trade flows and yes, you will rebate your borrow fees, can you make a lifetime commitment that you won't go back on your word?

To be honest, why would you even ask that? "Lifetime commitments" are ridiculous. It's simply not a promise that any founder or business owner could ever make. Businesses get sold, circumstances change, etc. It's better to just accept that as a risk factor and decide whether or not you'd be comfortable taking on that risk.

[BobaFloutist]

>Businesses get sold, circumstances change

Is there really no way to put a binding bylaw in incorporation papers that will survive a sale? Something like a land-use covenant, but for a corporation?

I'm not sure that's necessary for this particular case, but for something like private data exposure I've been playing with the idea that it's the only way to actually trust a company with your data.

[rcMgD2BwE72F]

>Businesses get sold, circumstances change, etc.

More importantly, founders also lie about their intent.

It's easier to trust owners when they commit and are ready to go to court over their promises. Ever heard of Lavabit? https://en.wikipedia.org/wiki/Lavabit

It's never ridiculous to ask. What's ridiculous is for founders to make their customers believe they're ethical when they're not. Let's ask then, and you don't have too high expectations.

[rancar2]

1 and 2 are volume based hence 3 once the volume is there.

To the OP dayone1: What’s your concerns with 3 exactly? Double’s structure is innovating on the fee front like an extreme Vanguard 2.0, so overall the structure (even if 3 takes place like Vanguard) is still the best deal on the market for an individual.

[wbl]

The reason people pay for trade flow is the same reason they sit at the table of drunks when playing poker.

[TeaBrain]

It's more like paying for the privilege of operating a monopoly on poker tables, with the guarantee that the rake will be kept low, so that the operator is not competing with other entities for the customers' rake. A market maker's competition to collect the spread is with other market makers, just like a casino's main competition to collect the customer's rake would be a different casino.

[dehrmann]

It's slightly different. With poker, you play with drunks because they make mistakes. With order flow, you want trades from small fish who don't have any special knowledge so you market make and not be taken advantage of, yourself.

[rs999gti]

> sell trade flows

This is the real reason for low/no broker fees. Don't believe any broker that says they will input orders without taking their cut otherwise they (automated or not) would not exist.

[shred45]

> they make a higher than normal spread

Is this known for sure? I thought the value of this order flow to them was the lack of adverse selection.

[shmatt]

I dont know the reasoning behind this comment, but YC isn't a charity. The investment was made with the hopes of making 100x return without customers paying fees. Obviously there are other cashflows in play

[mguerville]

Or the investment was made under the assumption the business model to gain traction isn't the same as the future one that generates cash flow. Plenty of company start with a free or cheap product then up their pricing once the value is proven and there's a percentage of their users that fears the switching costs

[is_true]

Maybe they are expecting for an exit from a company buying them and then raising fees

[TuringNYC]

>> are you going to sell your trade flow to Citadel / market makers like Robinhood and your competitors do?

Is that really a problem if you're still getting NBBO (https://en.wikipedia.org/wiki/National_best_bid_and_offer)

Could you explain the downside of selling order flow if you're getting no worse than the current NBBO?

[ddulaney]

For 1 — dude, please back off the “[the rules] are a farce”.

Citadel and friends pay to trade with you because they think you’re dumb and they can make money off you. They’re giving you or your broker a better deal because they think they’re smarter than you. That’s all it is. They’d rather trade with you than with the median person on the market. Because they think you’re dumb.

You’re welcome to be insulted by that. It’s an insulting thing. But it’s not some grand conspiracy.

[shred45]

Its not the median they are worried about, its the 99th percentile. They _dont_ want to trade with Optiver, 2 Sigma, etc, or some hedge fund thats working a massive trade.

Trading with a highly sophisticated counterparty can be very costly and undo the small profit they have made from thousands of other trades.

[gruez]

>Citadel and friends pay to trade with you because they think you’re dumb and they can make money off you. They’re giving you or your broker a better deal because they think they’re smarter than you. That’s all it is.

More to the point, just because they're smarter than you, doesn't mean you're taking a loss by trading with them. The public markets are shark tanks, and it's better for both sides to avoid it. Market makers can make money off the spread (eg. buying at $3.14 and selling at $3.16 and pocketing the difference) without the risk of getting run over by a hedge fund, and retail traders benefit through tighter spreads, which the market makers can offer because they know the typical retail trader isn't a shark.

[taway789aaa6]

The "farce" is that when a market maker like Citadel purchase your order flow, the orders are typically not routed to the lit market (e.g. NYSE, IEX, etc) but instead routed to "alternative trading systems" (ATS) e.g. "dark pools" where your purchase has no effect on the price of the security.

This breaks the whole idea of a "market" where every buy puts upward pressure on a price and sales put downward pressure. Thus, a "farce".

That's not even getting started on the "farce" that is an ETF and how they are balanced/re-balanced.

Gotta love brokers that don't have your best interest in mind. Who needs best execution? /s

[nick3443]

Be careful lending out your shares (for example on ibkr) you can lose your qualified dividend status.

[throwacomment]

Does anyone rebates 100% of the borrow fee or did that initially?

[maest]

PFOF is good for the customer.