As others have pointed out, these "free trades" aren't actually free. In exchange, you lose good order execution. Brokerages like Robinhood seem to outsource this to other market makers which in turn give them a kickback for sending those orders their way.
It would be more accurate to frame payment for order flow as: "We get private institutions to offer you better than public prices; so you'll routinely buy each share a few cents lower, and sell a few cents higher than you would at a broker that does not offer this feature."
The institution can do so not because it's a giant scam, but because they have confidence that a seller on RH is not about to sell a billion more of the same name, depressing the price. They know that it's going to be a small and essentially random trade, which is easier to risk manage.
A friend was trying to convince me that high frequency trading was a good thing because of the liquidity it added to the market would allow me to sell my stock in milliseconds. If I've been holding a stock for twenty years, when I go to sell it, do I really care if it takes twenty minutes instead of twenty milliseconds? From the look on his face it was obvious that in his world investing in stocks long term is completely alien. Can't be too hard on him though, he did warn me of the Great Recession months in advance, with problems he was seeing in credit default swap pricing being what he considered the Archduke Ferdinand of the financial system.
> If I've been holding a stock for twenty years, when I go to sell it, do I really care if it takes twenty minutes instead of twenty milliseconds?
I think you may care actually. To give an example, I was holding a stock for several years that recently went up in price quickly, without much change in the underlying business. Simply, analysts started changing their rating on it. When this stock got high enough, I started to feel nervous, and I was watching the market open on a day when I was prepared to sell. Immediately, the stock started to tank, and I sold it right away.
I sold it at a good price, and even though I was a long term investor, I made a short term decision to sell based off the (IMO) extremely irrational price.
"do I really care if it takes twenty minutes instead of twenty milliseconds?"
No, nobody sensible cares. But the stuff people are suspicious of is supposed to be regulated so that your executions are only improved. If somehow this isn't true, it should be a bright line crossed and a big scandal with people going to jail or at least big fines.
Then again, if you panic over a "flash crash", then I guess you should be concerned about liquidity?
Where can one find better order execution? Citation needed, but I read the market makers buying these orders tend to get investors prices better than the bid-ask spread, so it's still good for retail investors. And it's not like it's any worse than when it was $10 per trade.
The kickback is because the flow is uncorrelated with the market, not because the execution is worse. Robinhood would never be able to execute better than a good market maker. Ever.
Actually you’re probably getting better prices than institutional investors. HFT firms are willing to give better deals to individuals since they’re taking on less risk that the trader will move the market.
unless you buy and sell a gazillion times a day /week, does it really matter?
Stock at $118.78 or $118.84 means what to Joe that invested $2400 ? NOTHING, the upside is that he actually invested and that money cannot be easily spent on stupid stuff. Free or barely free is the same in this case, considering that stocks can move up or down by a lot.
Because of this, it's legally forbidden for them to mess with your prices in such a way that you lose anything.
I think people see that these firms make money from selling order flow and as a result assume that they must be losing money somehow. That isn't the case. Some firms (e.g. HFT) are simply willing to pay a little extra for the counterparty to their trade to be a dumb joe instead of another HFT firm. This can lead to both you and the broker winning.
That makes some more sense. I would like to get a better picture of how trading works in terms of exchanges, fees, and agreements though. I'll have to research this.
I can't link to/find the article[1] because of Bloomberg's paywall, but Matt Levine of Money Stuff has said a few times that free trades in exchange for order flow is a good deal for retail investors.
