[gruez]

>just because it's supposedly free (even though you pay for it in the fills, and get frontrunning trades)

Can you provide a source for this? Citadel (one of the companies robinhood sells order flow to) claims in regulatory filings[1] that the overwhelming majority of orders are executed at market price or better, and that they on average save traders money.

[1] https://s3.amazonaws.com/citadel-wordpress-prd101/wp-content...

[qaq]

Wha the point of paying for order flow if you "execute at market price or better"? Are you suggesting Citadel is a charity?

[kortilla]

Because they are paying for a supply of (on average) uneducated morons with no edge. Can you imagine how much a professional poker player would pay to be in a tournament with amateurs?

[qaq]

At market or better than market rate you have unlimited supply of trades without paying for order flow

[kortilla]

But the people with the edge are there who can steamroll you. Better to just pay to not have them if you’re trying to make a market.

[qaq]

You have an example of market maker being steam rolled?

[gruez]

>Wha the point of paying for order flow if you "execute at market price or better"?

https://www.bloomberg.com/opinion/articles/2021-02-05/robinh...

tl;dr: adverse selection. retail traders are less risky to deal with, so market makers can offer better prices to them.

>If the retail trades are random. If retail traders usually buy before the stock goes up, and sell before the stock goes down, the wholesaler would consistently lose money on price risk. (This is called “adverse selection.”) But they don’t. Even now, retail traders tend to be small, dispersed and uninformed. If you sell stock to a retail trader for $58.15, you have no particular reason to think it will go up (or down). The retail traders are trading randomly, which is what allows you to treat this problem as though you were matching them up with each other at a fixed price and collecting a spread. In reality you are matching them up with each other over time, not simultaneously, and the price moves while you are doing it, but the randomness of their trading means that this difference doesn’t matter too much.

>Meanwhile market makers on the public exchange are doing something similar, but with institutional traders who tend to be informed and trade large lots of stock, so their trading does carry a lot more risk of adverse selection. If a big institution buys some stock, that does mean the stock is somewhat more likely to go up, so if you sell them the stock you are somewhat more likely to lose money. This is why the spread on the public exchange—the difference between the $58 best bid to buy the stock and the $58.25 best offer to sell the stock—is so much wider than the 5 cents that the wholesaler charges. The wholesaler is just matching up small pleasant random orders and clipping a spread; the stock-exchange market maker is facing a real risk of being run over by an informed trader.

[qaq]

show me a liquid stock with .25 spread

[gruez]

The numbers are given as examples, not as real figures. If you look at the document from my prior comment the price improvement (and therefore spreads that citadel makes) is on the order of pennies or less.

[colinmhayes]

This isn’t even that complicated. Come on, like think for 15 seconds. Why oh why would a trader pay to play against a degenerate retail gambler?

[qaq]

Expand why would you give retail gambler "better than market" execution?