Robinhood and How to Lose Money
I work in the industry and these kind of articles are always full of bad information about order routing.<p>* Robinhood order flow is informed and toxic like all other brokerages. Taking the opposing side of all Robinhood trades would cause a broker-dealer to lose all of their capital very quickly.<p>* The &quot;bad prices&quot; the &quot;novices&quot; are trading at, are in fact, the same market price that all participants trade at (at or inside the bid&#x2F;offer). If the prices were obviously bad, there is free money available to the author here by simply quoting inside the spread.<p>* Recall that the majority of trades on lit exchanges are from professional or institutional investors. For this reason, spreads are wide because providing liquidity means you will likely get run over. Robinhood orders do not exhibit as much short term momentum, and so trading against them is safer for broker-dealers because there is less risk. This risk profile is valuable, and you might wonder what&#x27;s a fair way to allocate that value. One option is to not capture it, and send all Robinhood orders directly to the market. The author implies this makes sense (a gravy-free approach), but it does not, the retail customer actually ends up worse off. Another option, the one that occurs in practice now is for the value to get split between the counterparty taking on risk (Citadel, in the form of less toxicity on orders), the customer (the Robinhood client, in the form of price improvement over the national bid&#x2F;offer), and Robinhood themselves for sourcing the flow (a commission or payment).