[throwacomment]

Yes, PFOF is woefully misunderstood but its very much not win win win.

The reason its bad is because its anti-competive and gives them information that no-one else has access to.

By trading against you, Citadel prevents any other potential market maker from trading with you. With less competition, the spread widens and even after price improvement, you're paying more.

PFOF also tells them who they are trading against but anyone else who just sees a quote doesn't know that.

Generally, things are very zero sum so wins all around are very unlikely. But some thinking is needed to track where the value loss and gains are.

[wrsh07]

Please see my other comment that provides links to a study that shows: yes you get the best price from a broker using pfof

Your argument seems reasonable but isn't borne out empirically

https://news.ycombinator.com/item?id=42378516

[throwacomment]

I'm not talking about you getting a worse price today.

Suppose in some other industry, some monopolist consistently sells goods at a loss to drive out all the competition. In the last moments when they are doing this, yes its cheaper for you to buy from the monopolist at that moment. But after everyone is driven out of the market, you'll be paying more. Even though the monopolist is still the cheapest amongst all options.

I'm saying you're already in the "after" scenario here. You're saying that you can save a few cents with PFOF when you cross that 50 cents spread and yes that's true. But I'm saying that spread should be 25 cents and no-one is offering that because they've been driven out.

Now that I think about it, the more immediate consequence to you is that some of your order will not fill because PFOF exists, rather than you getting a worst price. Say you put a bid to buy at 100. And then I come along and want to sell at 100. Normally, you'd get to buy from me. But because my order is PFOF'd, Citadel decides that buying from me at 101 is a good deal so they do. This happens a few time with different sellers then you get fed up and/or the market moves. So you raise your bid to 150. Citadel sells to you at 149. You saved 1 off that 150 but lost out 49 from the trade you'd have gotten from me without PFOF.

[wrsh07]

This example is apples to oranges

Imagine you are a market maker: you offer 2 APIs. The first, you allow anyone to trade on. The second, you only allow traders who are doing less than 100k in volume per day (and don't allow users to have multiple accounts)

Which API are you able to offer tighter bid/ask spreads on? Why?

That's the point. Pfof is saying: the second API is so valuable to me that I'm willing to pay to obtain customers. In the worst case, there will always be the open-to-all API.

Your second example continues to show the lack of understanding. You're saying: without the market segmentation, somehow I have a wider bid ask. That's not right at all. The entity that gets bad spreads is going to be the entity that would take advantage of good spreads. That's the whole point. Maybe there's a point that vanguard ends up getting worse execution because it gets lumped in with the rest of the market, but the counterargument to that is essentially just volume: is the retail market big enough that if you didn't segment them onto a better spread that the overall market would end up with better pricing. The answer: maybe! In some things! Is that really what the people who hate pfof want though?

My understanding is that people who hate pfof are actually the ones benefiting the most from it. (ie because unsophisticated investors get better execution)

[throwacomment]

PFOF does two things and you're only focusing on half of it.

1. It segments the counterparty they trade with.

2. They get dibs on new orders arriving.

You're only talking about 1. I'm talking about 2.

1 is also bad because this segmentation also gives them inforamtion no-one else can get. But the chain of reasoning to concretely show why its bad (for someone getting their orders PFOF'd) is less obvious and longer.

> Imagine you are a market maker: you offer 2 APIs.

This is so wildly different from how market works. You'll have to clarify what you mean. If the only way to trade is through the API, then you'll offer infinite spread on both. If normal markets exist alongside, then I don't bother using either.

[wrsh07]

I'm not sure what to say. Your arguments are extremely hypothetical and there's no evidence of the claimed badness today.

I don't find them convincing - why is it bad that someone paying for exclusive access to data gets exclusive access to that data? There are so many exclusive data vendors in financial markets, this one seems relatively low value

[wbl]

Dude, I want the market to see I'm a moron! I'm not buying BH because I've observed private jets between Omaha and Washington but because I'm saving after having been paid.

[throwacomment]

Then find a way to tell everyone this in the open, not just Citadel. Then anyone else is free to trade against you. There can even be a micro-auction to get you the best price among all counterparties that want to trade with you. There's already auction mechanisms at some exchanges so I'm thinking attaching a voluntary "this order came from Robinhood" tag to your order shouldn't be too hard?