| > That's like Robinhood users telling me they pay zero trading fees. Then how does RobbingHood make money? I was reading a book about that recently, it boils down to: "You're not [just] the customer, you're [also] the product." Key term: Payment For Order Flow (PFOF) [0], with the book-paragraphs I was thinking of down below: ____________ > Retail investors have one hugely attractive property when considered by a professional – they’re dumb money. Not only are they unlikely to have private information, a lot of the time they haven’t taken care to consider all the public information. When the party on the other side of the trade is a small investor (or a lot of orders from small investors all over the country, ‘bundled’ by a retail stockbroker), you can be reasonably sure that you’re not taking too big a risk that the person selling stock to you knows something about it that you don’t. > This makes retail orders very valuable to the market. One of the reasons why stock brokerage commissions are so cheap these days is that retail brokers have actually realised how valuable they are. They charge a quite substantial fee to players like the high-frequency traders for the privilege of dealing against their order flow, and they rebate some of this fee to their customers. But the retail orders would eventually dry up if the customers lost too much or felt that they weren’t being given a fair chance. And without a steady flow of ‘dumb money’ lubricating the wheels, the professionals would find it a lot harder to trade, as they’d always suspect each other’s motives for buying or selling. -- Lying For Money by Dan Davies [0] https://www.investopedia.com/terms/p/paymentoforderflow.asp |