[marketmakerx]

What they ignore is that the NBBO spread is made larger by this practice. By siphoning off all the uninformed flow, leaving only the toxic flow, this then causes people to quote wide spreads on regular exchanges, making the NBBO spread larger than it otherwise would be.

[evrydayhustling]

Yes, this article boils down to three pages of "it's complicated" followed by "the market makers publish stats that say they are great for retail". And as you point out, the stats cited ignore that the market makers play a big role determining the reference point against which "improvement" is measured.

[ypzhang2]

Yes but if you tighten nbbo by mixing retail and institutional orders, it by definition will still be worse than the retail market maker price, so end result is worse for the consumer anyways?

[marketmakerx]

Not by definition.

If that uninformed flow is going to market, there is a good market design to encourage price competition among MMs who fight each other for time and price priority. That mechanism is obstructed under payment for flow. Under this, the MM only needs to give at or better than NBBO. The primary competition among MMs here is to pass on as much rents to brokers as possible, instead of minimizing rents in the first place. The market is also more prone to consolidation due to scale economies and informational advantages that private flow access provides.

I also dispute the clean distinction between retail and institutional. Much institutional flow is just funds (e.g pension funds) that hold retail money. If they're getting maximally screwed by this, then so are their investors.

[alpineidyll3]

Yeah, hiding behind second order thinking is a great defense :/ It seems a regrettably tiny fraction of people can take a step back and think about the basic amount of profit citadel makes per trade without actually serving as a counterparty for a period of time most humans can even measure. Pfof actually exists because exchanges and broker dealers are legally prohibited from doing the same thing. Citadel is just a external way of receiving this income as a kickback for the likes of RH.