Are you having Free Lunch or you are someone's Breakfast?

Original Story: SeekingAlpha

Logan Kane

Robinhood Is Making Millions Selling Out Their Millennial Customers To High-Frequency Traders

Summary

Robinhood is marketed as a commission-free stock trading product but makes a surprising percentage of their revenue directly from high-frequency trading firms.

It appears from recent SEC filings that high-frequency trading firms are paying Robinhood over 10 times as much as they pay to other discount brokerages for the same volume.

Robinhood needs to be more transparent about their business model.

In English folklore, Robin Hood is an outlaw who takes from the rich and gives to the poor. Robinhood was founded to disrupt the brokerage industry by offering commission-free trading. They may not be all that they represent in their marketing, however. The question you should be asking whenever someone in the financial industry offers you something for free is "What's the catch?" And yes, there is typically a catch.

After digging through their SEC filings, it seems that today's Robinhood takes from the millennial and gives to the high-frequency trader.

Not only does Robinhood accept payment for order flow, but on a back-of-the-envelope calculation, they appear to be selling their customers' orders for over ten times as much as other brokers who engage in the practice. It's a conflict of interest and is bad for you as a customer.

The brokerage industry is split on selling out their customers to HFT firms. Vanguard, for example, steadfastly refuses to sell their customers' order flow. Interactive Brokers (IBKR), which is the preferred broker for sophisticated retail traders, doesn't sell order flow and allows customers to route orders to any exchange they choose.

Robinhood not only engages in selling customer orders but seems to be making far more than their competitors from it. Among brokers that receive payment for order flow, it's typically a small percentage of their revenue but a big chunk of change nonetheless. Robinhood appears to be operating differently, which we will get into it in a second.

All brokerage firms that sell order flow are required by the SEC to disclose who they sell order flow to and how much they pay. The people Robinhood sells your orders to are certainly not saints. Citadel was fined 22 million dollars by the SEC for violations of securities laws in 2017. Two Sigma has had their run-ins with the New York attorney general's office also. Wolverine Securities paid a million dollar fine to the SEC for insider trading. It's easy to miss, but there is a material difference in the disclosures between what Robinhood and other discount brokers are showing that suggests that something is going on behind the scenes that we don't understand at Robinhood.

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Well if this is happening in a strictly compliant developed market like USA, Wonder how you might be getting ZEROed in India?