[shahmeern]

Please stop spreading misinformation.

There are two prices, the bid price (how much someone is willing to pay) and an ask price (how much someone is willing to sell). When you submit a market order, you usually get a price close to the bid (if you’re selling) or the ask (if you’re buying).

The 20$ difference you describe is the spread - not a fee taken by the brokerage, market maker, exchange. Whoever is executing your trade isn’t pocketing the 20$.

[londons_explore]

The counterparty for the bid price, and the counterparty for the ask price are commonly the same person.

So when you execute both trades, you are putting a literal $20 into their pocket.

[dchftcs]

Then just don't execute both trades... and everyone can quote on the current bid or the ask price, you should do it too if you're afraid of crossing the spread.

[shahmeern]

That's fair but calling it a fee is disingenuous, especially considering your contrived scenario of buying and then immediately selling

[smaryjerry]

Is that misinformation or not? Don’t market makers make their profits by collecting some difference between bid and ask? I recall a video from Warren Buffett explaining that it was criminal that firms like Robinhood get away with calling it zero fee trading.

[shahmeern]

Disclaimer: I used to work at robinhood

The consolidated bid and the ask across all exchanges make up what's called the NBBO and every one (market makers, exchanges, etc) are required to give you a price equal to or better than the NBBO. So if the bid for SHOP is say $50.00, the ask is $50.10, and you are selling SHOP, its illegal for anyone to give you a price < $50.

Market makers make money by buying low and selling high (and vice versa). They typically look for small movements not large ones. So if a market maker bought SHOP at $50, they would try to sell it at $50.10. This is what everyone means when they say a market maker makes money off the spread.

This strategy works really well when you have large random order flow, which is why market makers want to pay brokerages for order flow. They incentivize brokerages, even ones that charge commission) by giving pfof (payment for order flow) and price improvement on top of the NBBO. This price improvement is passed on directly to the customer.

IIRC, brokerages have a best execution obligation. So they are required to try and execute orders in a way that gets customers the best prices. I don't know about other brokerages but at Robinhood, pfof wouldn't go into our order routing decision at all. We would send orders to the market maker using a model which only considered the historical price improvement they gave our customers.

Because Robinhood order flow is so lucrative for marker makers in aggregate, they were willing to give us really good price improvement. So the execution for options and equity orders at Robinhood be better than other brokerages (even ones you pay commission for)