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Startup found a way to give $0 Commission to trade equities

  #2 (permalink)

New York, NY
Trading Experience: Beginner
Platform: Vanguard 401k
Broker/Data: Yahoo Finance
Favorite Futures: Mutual funds
Posts: 1,046 since Jul 2012
Thanks: 718 given, 2,146 received

There's no such thing as free trading.

It's true that the marginal costs for brokers/clearers to take care of every additional share trade is close to $0. But you still have to pay software developers and IT guys to maintain databases; you have to pay lawyers to maintain compliance; and these guys are extremely expensive and have to be paid somehow.

Robinhood makes that money to pay their employees by selling their order flow to sophisticated firms such as Citadel, who thereafter skim those trades for their own book. (It's not surprising that Madoff was the guy who pioneered this idea.) Moreover, Robinhood's order flow is going to be very attractive to firms like Citadel because the people who are attracted to $0 trading are also - to be crude - the most foolish and disadvantaged. The expected (hidden) cost of being skimmed by Citadel could conceivably be much higher than a fixed commission.

A broker's duty has always been to ensure best execution and to act with no conflict of interest, and you could say that such a practice is an unethical violation of both duties.

What I cannot stand is that firms like IEX and Robinhood seem to make their business by targeting unsophisticated investors and removing value from services that they should be required to provide in a traditional broker/trading venue model (e.g. by slowing down their clients' trades, giving broker priority, or by selling their clients' trades off to an order flow internalizer like Citadel), and yet somehow marketing to their customers that this is good for them.

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