The saying goes if the service is free, you are the product.

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Whenever a young kid on my portfolio team (I worked on Wall Street for years) would say to me, "this is kind of like gambling" I'd always reply, "No, IS gambling, and the sooner you understand that the better you will be at this."

The insane urge to get rich overnight, without having to actually work for it, has ruined many a man over the centuries. Market speculation is America's favorite past time.

From the article: -- “It’s been famously said, ‘Never confuse a bull market with brains,’” he says, noting the S&P 500 is up nearly 64% since lows on March 23, right around the time the Robinhood’s numbers began zooming skyward."

Robinhood is just riding a wave of cheap credit, greed and stupidity. They are not the cause of the massive asset inflation this year.

On March 13, the Federal Reserve announced that it was slashing borrowing rates (for the Big Banks, not for you) to zero again, and resuming "Quantitative Easing," its gargantuan asset purchase program (of securities from banks at inflated prices, not from you.)

There's the real villain.

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Good God Almighty. This application is appealing to the very same cohort that believes that taking out $75,000 to $100,000 in student loans to obtain a degree in gender studies is a good deal.

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I can't tell you how interesting I found this. And that's not hidden whining about topic choice because, these days, frankly, I'm more interested in criticism of the media and "woke" than I am financial shenanigans. However, this pushed all my buttons.

I'd always wondered how Schwab was able to cut their commissions to $0. I remember paying them $49.95 to buy or sell 100 shares in 1986 -- and it was a bargain. Put and call options were "cheap" at only $29.95 each. Now I know how.

I'm a capitalist through and through. But I oppose HFT and all it entails. To the point where I would support a fee on each trade. I won't notice a penny when I buy or sell 100 shares, but the skimmers will.

I loved how you put in quotes "add liquidity" because that's their go-to response. But are they talking about lessening the spread, or are they talking about liquidity during a crash? I would say real retail investors don't care much about the former, and the latter seems non-existent when we have the big down days.

Significant commissions and a tiny fee for each trade are, in my mind, GOOD things. They discourage short-term trading and encourage serious investment. But, hey, look, I was young once. I fell in love with options trading. Young people dream big, and options allow that. And even if you lose money, you are gaining knowledge. But I think the lessons are better when you are paying $30 a pop.

The amounts of money paid by Citadel, Virtu, and Wolverine were staggering to me. You know, a simple way to explain my big-picture complaint is with a poker analogy. If there is no rake, the players take home all the money, may the best man win. But if there is a rake, every player either loses or wins less.

Like I said, I'm a capitalist who loves investing. But I'll never understand why so many who share my views are so happy to tolerate these "free money" schemes. It's not capitalism, it's grift on a grand scale. Even if the skimmers and schemers insist it "adds liquidity." I'd rather pay a commission and keep everything in the light of day.

I'm with you 100 percent on this.

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Matt! YES! My favorite reporting you do so very well! THIS is why I subscribed. This.

so many folks, just do not know, nor want to know, what's up.

There is ONLY ONE Industry across the entire globe: Finance

ALL other global "industries" are in fact, subsidiaries (owned and controlled) by Finance (Bankers)

in reality, there is no "Big Pharma", "Big Insurance", "Big Tech", "Big Weapons (MIC)", "Big Agriculture", etc etc. Now ADD "Big Water"

All those industries are controlled at the top, by a handful of straw man corporations. Monopoly.

The majority of "shareholders" across all industries, are in fact, just insider banksters. Predictable. When you have unlimited access to source credit issuance, then turning fiat credit into tangible industry and physical property, is a no brainer.

2010: A couple of Swiss data analysts built a DB of the 46,000 largest transnational corporations, and populated the tables with those companies c-suite and board members. the DATA, not theories, proved 97% of global (yes, including fake enemies like China and Russia) mega-corporations, are owned by the same few people.

Literally, total and complete monopoly.. of Everything. Of course, it's worse today, almost 10 years later

This is the link to the actual White Paper pdf, for any skeptics:


our WORLD has already been monopolized. By who? Finance.

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Interesting article. If the service is free, then you are the product being sold.

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Hey Matt,

Great piece! I work in Chicago at an HFT firm and know many people who work at the firms you mention and am quite familiar with all of the practices you described. I think you have done an exceptional job clearly distilling the general practices in a way that many insiders aren't able to do nor fully understand. I think your piece is a brilliant contrast to this hot mess NPR broadcast the other day: https://www.npr.org/2020/12/07/943768902/former-day-trader-warns-others-of-the-risk-of-addiction

I was not aware of Robinhood specifically working their order-flow through these firms, but I did know that Citadel and Wolverine were handling customer orders in their capacity as market makers. I think the general legality of the practice is correct and allows individuals to leverage the financial weight of these large corporations against the even larger ones, like JP Morgan and Goldman. I would assume there must be some speed and order priority gains versus going through a fund or brokerage account. I could be wrong, but it's quite likely that this is a valuable tool for individual investors and basic low-key traders. That said, it's exactly akin to sitting a bunch of fish at the Poker World Championship because it simply doesn't excuse a user from developing fairly deep knowledge of trading and investing. For any of your users interested in learning more, I suggest becoming acquainted with [investopedia](https://www.investopedia.com/) which got me through my first few years as an imposter in the industry.

> 'while HFT proponents insist their practices narrow spreads, some critics maintain that high-frequency trading ends up widening spreads. In Saluzzi’s book “Broken Markets,” for instance, he estimates that while spreads are narrower in “perhaps 5% of the most actively traded names,” they’re wider in “the other 95% of the market.”'

I think the issue might be that since the complete digitization of exchanges there is far more price discovery happening across products and yield curves. For instance, many, many people trade E-mini futures (S&P) and the market is extremely tight and liquid, but all the activity is in the first month of the contract. Similarly with oil and most commodities. It is far more difficult to guess the prices of these contracts in the future and historically, while they could be traded, no one was really interested. The goal is to try and discover what the price of a contract a year or more out on the curve (up to a decade in some cases) might be, and a well capitalized firm can start to put small orders on these contracts to see who else is interested and what they think is a fair price, make a good long-term bet and hopefully dial in on a better price as the contract nears it's expiration.

I think electronic trading has made this far more possible and profitable and so the greater activity in these contracts may appear like large price spreads opening up, but may in fact represent real bets on contracts previously unavailable or un-seeable, i.e. you're not seeing a widening price spreads, just more contracts with naturally wide spread. I'd be interested to hear more from the detractors to see if their notions of price mismatches is something other than what I've seen.

As for HFT and it's goodness or badness...well....I've thought long and hard about this. My own firm is like a fly on a whale carcass and has pretty much no effect on markets that I can deduce. We don't trade equities and we no longer make markets. It was impossible to hold the line against the bigger companies who can trade on billions of dollars worth of margin. That said, I'm not sure any individual has any business trading on the stock market without a real understanding of the fundamentals of investing. Trying to scalp for a few bucks here and there can be quite profitable but also wipe out an account and as you said in the article, the key is to make sure this is just funny money and not your kids college fund. In that sense Robinhood give people the ability to try stuff without the brokerage fees, the regulatory certifications, and other impediments, while benefitting from optimized NBBO and trading algos and the leverage of larger companies. I don't like the dopamine trap the app seems to promote, I can't believe they allow trading on margin at all, but I'm not sure it's worse than any of the other digital junk food people consume.

Thanks again!!!

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Robinhood isn't a better mousetrap. It's a better baited mousetrap. Why use cheese when you can use crack?

It's all in the presentation folks

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That old adage, "There's a sucker born every minute" has never been truer than what is going on here. How do you think that around 85% of all stock is owned by 10% of investors. The stock markets have sold these type of scams to uneducated small time investors for years because it like taking candy from a baby. .

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My millennial kids sought my advice about investing. I warned them, as any parent should, that they will be - in essence - gambling. I gave the short 5 minute speech about manipulated markets, bull markets making people feel like genius investors, buy and hold, etc. Just like the sex talk as they entered adolescence, I believe it was my responsibility to give them this talk in their early adulthood.

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fuckers. Always looking for a new, bigger, and better way to screw someone. There have to be other young people like him. I hope you scream this warning from the rooftops.

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Bringing up China is always an invitation to get flamed, but I’ll do it anyway and see if anyone bites.

For anyone paying attention to Chinese financial markets, the Party has crunched down on all manner of IPO’s, wealth management companies, and other Chinese business people’s attempts to replicate the quick cash scenarios of our markets. This can be interpreted in several ways, but here’s a couple....

China was in thrall to everything about western markets until 2008. Previously, they were like the kids watching Robinhood wealth explode and wanting in on the action. Then, 2008, and it was the epiphany, that, you know, maybe Western ideas about markets aren’t so hot after all, and there began a decade + of restrictions and controls to prevent a flame out. This can also be interpreted as the Party looking to crush incentives of individuals to the government could control all things including their own blockchain based crypto currencies. OK, true enough, it could be and probably is.

There’s also the realization from many investors in China that the government was making sure that loose cannons were not desirable, and with confidence and coherency in the Chinese market at already insane unsustainable levels, maybe it was a good idea to put some clamps on all these financial innovators to prevent a 2008 type blowup in China.

Controls. Regulation. This is what Commies do and it crushes society. Or not. China seems to be doing great right now, and the future looks bright enough that one should invest in shades. I was in Wuhan for the great lockdown, saw how it works, and the storylines are always more interesting in the wan tedium representing USofA conventional media sources.

OK, all the China haters, pile on....

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While I myself have shouted myself dry about how "democratizing" markets really just means allowing individuals to lose their money at high rates, I feel like the focus of attention on high frequency trading and order flow is misleading. It is a common misconception about the trading industry, but allowing market makers to see order flow and execute usually leads to better prices for individuals to trade, and at the worst, getting the price you yourself specificy with a limit order - the spread a market maker makes is a fraction of the "cost" you'd be paying in the 1980-2000s for some banker to charge you an 1/8th or a 1/16th of a dollar to place your trade.

"Flash Boys" is also a highly misleading characterization of how markets work. Though Scott Locklin ( https://scottlocklin.wordpress.com/2014/04/04/michael-lewis-shilling-for-the-buyside/ ) castigates the book in a much better manner than I can articulate in a short comment, it is predominantly large funds and banks who benefit from "speed bumps", a concept that is pitched as "helping the little guy" when it really is meant to entrench banks back in the market-making industry, which they got ran out of by HFTs.

Individual market makers really don't make all that much money from order flow. Even in 2020, Robinhood will barely scratch 1 billion, if that, in revenue for selling order flow, and trading volume literally cannot get any higher from retail. I would estimate the total profit pool available from all market making activity across all firms (Virtu, one of the oldest and largest firms, only does 3 billion in revenue) at somewhere in the low 8-figures. Compare this to any asset management firm, (or even the Harvard Endowment fund!) where individual firms with a multiple billions will be taking in 9-11 figures in fees

I think Robinhood has the potential to erode the future wealth of a generation, but I suggest focusing more on the damage individuals are doing to their own returns and accounts absolutely destroying saving and wealth accumulation over time rather than directing your attention to the HFT industry, which, at the end of the day, is essentially just a service provider for functioning electronic markets.

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Great stuff, Matt, and important reporting. In follow up, I'd be really interested in more depth exploring how their practices compare to TD Ameritrade. I know that HFTs front run my orders that I place thorugh TDA and it bothers me, but I can only do so much to fight it. So is Robinhood exceptional or typical? Hard to tell so far but this is an important first story.

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For all the doom and gloom I actually learnt a lot about stocks because of Robinhood. Then again I am working individual that only invests "extra" money.

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Imagine. A service that lets common people make a buck out of the greatest transfer of wealth set forth by the Fed. Must be a bad thing. Only the rich should be allowed to get richer. WTF did I just read..

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