Robinhood Is Said To Get 40% Revenue From HFT Firms Like Citadel

Bloomberg said TD Ameritrade faces a class-action lawsuit alleging its payment-for-order-flow system is not fair.

Courtesy of Zero Hedge

"Stealing from millennials to give to the rich. Robinhood app sells user customer data to make a quick buck from the high-frequency trading (HFT) firms on Wall Street," that is what we wrote last month, in one of the first articles that expressed concern over the popular Robinhood investing app for millennials, which has shady ties to HFT firms and undermines its image of an anti-Wall Street ethos. 

Almost a month after our report, Bloomberg has now confirmed that more than 40% of Robinhood's revenues earlier this year were derived from selling its customers' orders to firms, like Citadel Securities and Two Sigma Securities. 

Last week, the company amended the "How Robinhood Makes Money" page on its website and published an open letter from its co-founder, Vlad Tenev, describing the practice of selling orders to HFT firms. "We send your order to market makers like Two Sigma, Citadel, and Virtu, instead of exchanges like NYSE," Tenev said in the letter posted on the company's blog last Friday. "Market makers don't front-run your orders — they're actually required by Regulation NMS to execute your order at the best price among all the exchanges, and unlike exchanges, they don't charge fees." 

While selling orders to HFT firms is not illegal, it has been widely criticized by regulators, and consumer advocacy groups, who allege the activity is not in the best interest for main street. 

> "This represents, a severe breach of confidentiality for its over four million active users, and a remarkable act of deception from the Silicon Valley firm [Robinhood] that promotes ethical trading practices to benefit the everyday American, but as we discovered via Logan Kane's reporting — the company is handsomely profiting from the average person by selling users' order flow," we said.

The scheme secretly worked for years, with Robinhood making millions of dollars from Citadel, Two Sigma, Wolverine, and Virtu Securities--that would pay them for the right to execute those trades on exchanges. 

HFT firms banked 1 cent or less per share, while HFT firms kickback $.0024 per share on average to Robinhood in 4Q17. Those numbers seem minuscule, but Robinhood clients transacted more than $150 billion in that time.

We noted that the company recently began filing financial disclosures on payment for order flow regarding dollars traded instead of shares traded. "We report our rebate structure on a per-dollar basis because this accurately reflects the arrangement we have with market makers," Robinhood said in the support section of its website. The company had made it clear that the structure helps small traders. 

On a per dollar basis, "all market makers with whom we work have the same rebate rate," Tenev wrote. 

He also said that the rebates allowed the company to charge clients less, "Robinhood's zero-commission model has unlocked the ability for every American, not just large institutions, to participate in a variety of investment strategies that were previously economically unfeasible." Of the pricing, Tenev said, "Robinhood earns ~ $.00026 in rebates per dollar traded. That means if you buy a stock for $100.00, Robinhood earns 2.6 cents from the market maker."

Larry Tabb, chief research officer of Tabb Group, told Bloomberg, "If you're an investor and you're holding things for six months, a year, or two years and lose out on half a penny, or a tenth, or two-tenths of a cent, it's immaterial." 

However, regulators have criticized HFT firms over rebates in recent years. Bloomberg said TD Ameritrade faces a class-action lawsuit alleging its payment-for-order-flow system is not fair. 

A few anonymous venture capitalists told Bloomberg that Robinhood has already begun to see the consequences of their cozy relationship with Wall Street firms, which has degraded the company's image. 

With six million clients, most of whom are millennials — seeking an anti-Wall Street investing culture, could soon find out, that, they too, have been conned by Robinhood founders into thinking the app offers free investing. The lesson at play: nothing in life is free, even if it is from Silicon Valley. 

Comments