Why Did Reddit Trigger a GameStop Stock Surge?

[kyphysics]

$HOOD up 22% today. Cathie Wood also added another $65 million worth.

 

[kyphysics]

^^^Then again, after the $GME debacle, maybe a lot of them have boycotted Robinhood. Although, lots of people on the Reddit site still post pics from their RH accounts.

 

[phinds]

It wasn't about race, but rather responsible professionals that I was thinking of.

Ah. Well that makes more sense.

 

[Astronuc]

Robinhood, and the rest of the online brokerage industry, rely on what’s known as payment for order flow as their profit engine in lieu of commissions. The pioneer of “free trading,” Robinhood’s business model hinges on the back end payments, since the other brokers have established other revenue streams and only recently slashed commissions. Thanks to a recent change in SEC rules, these brokers are now required to give more disclosures on how trades are executed, and how much money they bring in for firms.

Payment for order flow is a common practice but it’s often criticized for its lack of transparency. It has become especially vital to companies’ bottom line after commissions went to zero.

https://www.cnbc.com/2020/08/13/how...n-customer-trades-despite-making-it-free.html

I read a headline of a story, which I didn't read into Robinhood's business model. The gist seemed to be that it's taking advantage of investors somehow. Maybe what appears to be free is not?

I also wonder about Reddit/Robinhood and churning/pumping stocks.

 

[kyphysics]

They sell order flows.

So, if a retail trader buys a stock using "market order," then someone can front-run them and bid up the stock ...buy it first...then sell it to them. The app is "free," but some argue it's not really free, b/c they're losing money on trades that get front-ran (is that a word)?

 

[kyphysics]

Maybe one solution is to use limit orders? That way you have a fixed price (range) that you know you'll be getting?

p.s. $HOOD up 80% today...crazy

 

[phinds]

p.s. $HOOD up 80% today...crazy

But only momentarily. Still, it IS up 33% at mid-day

 

[Stephen Tashi]

They sell order flows.

So, if a retail trader buys a stock using "market order," then someone can front-run them and bid up the stock ...buy it first...then sell it to them. The app is "free," but some argue it's not really free, b/c they're losing money on trades that get front-ran (is that a word)?

Yes, as I understand it, Robinhood gets paid by entities that execute the trades. So Roginhood does not directly profit by front-running orders from customers. They profit from directing the orders to other entities that may do that.

Given the dominance of computer trading, is it likely that a small time investor won't feel the effects of front-running? Is it better to pay comission to made a trade and also have someone make money by front-running the order? It might be worth paying commission to execute an order on an exchange that delays reporting trades in order to thwart front-running. However, I think none of the traditional brokerages offer this service to ordinary investors - and they may also be paid by various exchanges for directing orders to them.

 

[kyphysics]

Yes, as I understand it, Robinhood gets paid by entities that execute the trades. So Roginhood does not directly profit by front-running orders from customers. They profit from directing the orders to other entities that may do that.

Given the dominance of computer trading, is it likely that a small time investor won't feel the effects of front-running? Is it better to pay comission to made a trade and also have someone make money by front-running the order? It might be worth paying commission to execute an order on an exchange that delays reporting trades in order to thwart front-running. However, I think none of the traditional brokerages offer this service to ordinary investors - and they may also be paid by various exchanges for directing orders to them.

Good clarification. That wording is more accurate!

I don't know if the major brokers - Fidelity, Schwab, Vanguard, etc. - let you trade commission free w/o the possibility of getting front-run or not.

I've heard the argument that for long-term investors those few cents you may "lose" per trade on Robin Hood or to high frequency traders aren't a big deal. It's mostly traders (high speed, automated, retail, etc.) that getting front-run on that may make a significant difference for their shorter-term outlook/profits. But, if you're looking to buy and hold for 3, 5, or 10 years, then losing a few cents or a few dollars may not be a big deal.

 

[kyphysics]

I mentioned limit orders as one possible solution, but that has drawbacks. You may never hit the price and a difference of just 1 cent could make your trade non-executable. The existence of automated, high-frequency algorithmic trading nowadays makes it hard to get in "on time." Dips are bought quickly (esp., on high quality stocks). I've heard a hedge fund manager say that 5, 7, or 8 years ago, you could sit back and "think" more and then buy bargains in the market. Nowadays, you have much less time. A great bargain could be gone within hours.

 

[Office_Shredder]

Just to point out, front running is a serious financial crime. Nobody has a large at scale business model that involves front running retail traders, that's an obvious idea that is heavily scrutinized for.

In fact, when you send a market order to a retail broker, the price you get is typically better than the price anyone can get by buying the stock on the exchange (and they publish reports about exactly how much better it is).

 

[kyphysics]

Just to point out, front running is a serious financial crime. Nobody has a large at scale business model that involves front running retail traders, that's an obvious idea that is heavily scrutinized for.

In fact, when you send a market order to a retail broker, the price you get is typically better than the price anyone can get by buying the stock on the exchange (and they publish reports about exactly how much better it is).

Thanks.

I'll bow out from re:'ing, since I clearly am not sure anymore how things work.

I did see this Motley Fool article about RH and the order flow controversy:
https://www.fool.com/investing/2021/08/03/robinhood-understand-payment-for-order-flow/

How it works

Most people with an understanding of the stock market know that when someone purchases shares, there needs to be a willing seller. The two parties use a broker to meet digitally at a stock exchange (like the New York Stock Exchange or the Nasdaq Stock Market), where their transaction is facilitated.

But times have changed. The chairman of America's market regulator, the Securities and Exchange Commission (SEC), recently noted that only 53% of all customer orders actually go through an exchange. About 38% are handled by wholesalers instead, more formally known as market makers.

That's where payment for order flow takes center stage.

Market makers stand ready to buy and sell shares each trading day. They make money by setting the bid-ask spread. Let's say a market maker is willing to buy a share of Apple for $145.50, and it's willing to sell a share for $145.60. The difference of $0.10 (the spread) is its profit.

When a Robinhood customer places a market order to buy or sell shares of Apple, rather being matched with a seller in the market, they are instead routed to a market maker, because it can be relied on to absorb the transaction in the blink of an eye.

Market makers can compete with each other for this order flow by lowering spreads -- for example, one might charge a spread of $0.07 instead of $0.10, so the broker would route the order to that firm to get its customer a better price.

Alternatively, and controversially, market makers can simply pay Robinhood to route its customers' orders to them, partly removing the need to compete. It has drummed up concerns among regulators that retail investors are getting a raw deal when it comes to the pricing and execution of their orders.

In December 2020, Robinhood paid a $65 million settlement to the SEC after the regulator discovered the practice had deprived customers of $34.1 million, caused by inferior order pricing -- and that's after accounting for customers paying zero commissions.

If someone wants to jump in and comment, that'd be great. Is the problem the market makers "screwing" with pricing?

 

[Office_Shredder]

Thanks.

I'll bow out from re:'ing, since I clearly am not sure anymore how things work.

I did see this Motley Fool article about RH and the order flow controversy:
https://www.fool.com/investing/2021/08/03/robinhood-understand-payment-for-order-flow/

​

If someone wants to jump in and comment, that'd be great. Is the problem the market makers "screwing" with pricing?

No, the problem is there is basically no problem, but people are obsessed about it anyway. I'll leave matt Levine to describe it best

https://www.bloomberg.com/opinion/a...ressures-payment-for-order-flow?sref=htOHjx5Y

 

[kyphysics]

No, the problem is there is basically no problem, but people are obsessed about it anyway. I'll leave matt Levine to describe it best

https://www.bloomberg.com/opinion/a...ressures-payment-for-order-flow?sref=htOHjx5Y

Here's a counter-opinion: https://www.businessinsider.com/robinhood-retail-brokers-still-quietly-screwing-over-users-2021-4

Citadel, Virtu, and Robinhood claim to benefit the retail investor by offering better prices than they might get on exchanges. It is true that Citadel sometimes gives retail investors a better price than the National Best Bid and Offer (NBBO), basically what regulators have determined to be the best selling and buying price for each security, displayed by the Securities Information Processor (SIP). But the NBBO SIP is a slow data feed that provides incomplete information on buy and sell orders displayed on exchanges.

The NBBO benchmark Citadel and Virtu use is widely understood to be outdated and incomplete. But brokers selling their order flow and the market makers who buy that flow and execute their trades have a strong incentive to ignore non-displayed orders because poor execution quality for retail investors translates directly into profits for them. . .

In a nutshell, Citadel is in direct competition with the retail investor for the best prices and has paid retail brokers like Robinhood billions of dollars to help them cover up this conflict. In fact, on March 11, Virtu CEO Douglas Cifu admitted in a TV interview that retail customers of brokers like Fidelity, who don't pay for order flow get better execution quality than customers on venues like Robinhood.

 

[kyphysics]

If I understand correctly, Macey is saying a market maker like Citadel has more information (from seeing order flows they pay RH for) than what is listed on the SIP. Thus, IF they wanted to, they COULD fail to give a retail trader the best price, by using the SIP prices to find a price point for trades, and ignoring non-displayed prices.

IF they did that, which it seems Macey is implying that they probably do (?), then that seems like a form of "information front-running" to me.

 

[BWV]

providers of liquidity like Citadel need to be paid, just like the old floor brokers on exchanges, so the topic is complex. Traditionally front running consists of a broker trading head of a large institutional order that could move the price - individual trades on Robinhood are too small for that. The average Robinhood account is $5K and the median only $240. I

 

[Stephen Tashi]

But times have changed. The chairman of America's market regulator, the Securities and Exchange Commission (SEC), recently noted that only 53% of all customer orders actually go through an exchange. About 38% are handled by wholesalers instead, more formally known as market makers.

The article goes on to explain how market makers make money, but we should ask how a (pure) exchange would make money? Wouldn't exchanges also have an interest in having stock trades directed their way?

Suppose we think of an exchange as a business that does not itself buy or sell stock. Suppose an exchange only publishes information on transactions made by others and keeps records of transactions made by others. Would it not have to charge a fee for these services? If so, it's plausible that the fee charged by an exchange would be based on the "volume" of a transaction ( either in price or in number of shares).

I don't know whether such an idealized stock exchange exists - i.e. an exchange whose income doesn't involve being paid by market makers to direct trades to market makers.

An interesting problem for an exchange is: How does an exchange know that a transaction it handles is real? How does it know the person selling the stock really owns the stock and how does it know that amount paid for the stock is actually paid? One method would be an "honor system". Only certain organizations would be allowed to be "members" of the exchange and they would agree to be honest about reporting transactions with other members. Another method would be to require that participants in the exchange have accounts kept by the exchange. The accounts would contain both cash and stocks. Only stock and cash in the accounts could be used in transactions handled by the exchange.

 

[Vanadium 50]

how a (pure) exchange would make money

Bid-ask spread.

If the stock has a listing of 100, it might cost 101 to buy it and the seller might only get 99. The exchange pockets the difference.

 

[Office_Shredder]

If I understand correctly, Macey is saying a market maker like Citadel has more information (from seeing order flows they pay RH for) than what is listed on the SIP. Thus, IF they wanted to, they COULD fail to give a retail trader the best price, by using the SIP prices to find a price point for trades, and ignoring non-displayed prices.

There are two separate things being asserted here.
1.) That the sip is slow and outdated. Yes, the sip is a bit slower than direct marketdata from an exchange. But that really doesn't matter much for routing your average retail order.

2.) There is some mythical pool of hidden liquidity available that would give retail traders better prices. I'm sorry to say, for the retail traders, virtu *is* the mythical pool of hidden liquidity.

Also this last part

In fact, on March 11, Virtu CEO Douglas Cifu admitted in a TV interview that retail customers of brokers like Fidelity, who don't pay for order flow get better execution quality than customers on venues like Robinhood.

There's nothing special going on here. Basically virtu and citadel compete for retail flow by offering to give more price improvement than any of their competitors. Citadel gives more price improvement on average, so gets more flow than virtu. The amount of price improvement they can give is a function of how much they pay for the flow. For example, suppose they are paying Robinhood 10 cents per hundred shares for flow,, and they give price improvement of 20 cents per hundred shares, and they make a profit of 5 cents per hundred shares (hypothetical numbers, I have no idea what the real ones are). Then Robinhood says hey, actually, we don't want payment for order flow, we will give it to you for free.

Which would be better in your opinion
1.) Virtu gives 30 cents per hundred shares of price improvement, and makes 5 cents per hundred shares itself still.
2.) Virtu keeps the extra money for itself, and gives 20 cents per hundred shares of price improvement, and makes 15 cents per hundred shares in profit.

Basically the thing I quoted is just pointing out the world works like situation (1), but the author is upset about it and would prefer it was like situation (2) instead?

Wholesalers don't get more flow by paying more for it. Robinhood fixes a price, and then the wholesalers compete to give more price improvement to get more flow. If Robinhood didn't charge pfof, their customers would get a better price, but Robinhood would have to figure out some other way to charge them money.

Nothing here mystical or magical. It's just regular business doing regular business activity.

 

[Stephen Tashi]

Bid-ask spread.

If the stock has a listing of 100, it might cost 101 to buy it and the seller might only get 99. The exchange pockets the difference.

That's how "market makers" make money. But is there a distinction between a "stock exchange" and the "market makers" who participate in that exchange?

 

[Vanadium 50]

This appears to be your distinction. I don't think it can be answered. It is certainly possible to divide up a company into mental pictures that make no sense. I can divide McDonald's into a part that takes customers' money (the cash register) and the the part that only spends it (the part that makes the hamburgers). I'm not sure there is insight to be gained by doing this.

 

[Office_Shredder]

This appears to be your distinction. I don't think it can be answered. It is certainly possible to divide up a company into mental pictures that make no sense. I can divide McDonald's into a part that takes customers' money (the cash register) and the the part that only spends it (the part that makes the hamburgers). I'm not sure there is insight to be gained by doing this.

No, this is wrong. The market maker and the exchange are totally different. It's like the difference between eBay and the people selling stuff on ebay.

 

[BWV]

That's how "market makers" make money. But is there a distinction between a "stock exchange" and the "market makers" who participate in that exchange?

The ebay analogy is good. ICE (the owner of the NYSE and several futures markets) gets ~75% of its exchange revenue from transaction fees - they are small, starting out at $0.0012 per share. The remainder comes from selling data and fees for new listings

https://www.nyse.com/publicdocs/nyse/markets/nyse/NYSE_Price_List.pdf

 

[Vanadium 50]

It's like the difference between eBay and the people selling stuff on ebay.

Yes, but you don't have one without the other. It's not at all clear to me how one answers the question "how would someone who sells stuff on Ebay make money without Ebay".

 

[BWV]

Yes, but you don't have one without the other. It's not at all clear to me how one answers the question "how would someone who sells stuff on Ebay make money without Ebay".

Is there a dark pool of off-eBay merchandise transactions? Large institutional investors will trade off-exchange

 

[Vanadium 50]

Is there a dark pool of off-eBay merchandise transactions? Large institutional investors will trade off-exchange

That is an interesting question. I know the reverse is true for Ebay: large institutions buying off Ebay. I know one lab that bought a bunch of Vax computers for spare parts - while they still could. But we're drifting.

 

[BWV]

That is an interesting question. I know the reverse is true for Ebay: large institutions buying off Ebay. I know one lab that bought a bunch of Vax computers for spare parts - while they still could. But we're drifting.

Well then I won’t mention the dark Etsy pools

 

[Astronuc]

MassMutual fined $4 million for failing to monitor GameStop booster Kevin Gill
https://www.marketwatch.com/story/m...nitor-gamestop-booster-kevin-gill-01631828263
Gill, aka Reddit’s ‘Roaring Kitty,’ helped drive meme-stock frenzy while employed at MassMutual subsidiary

NEW YORK — Massachusetts regulators are fining MassMutual $4 million and ordering it to overhaul its social-media policies after accusing the company of failing to supervise an employee whose online cheerleading of GameStop’s stock helped launch the frenzy that shook Wall Street earlier this year.

The settlement announced Thursday by Secretary of the Commonwealth William Galvin centers on the actions of Keith Gill, who was an employee at a MassMutual subsidiary from April 2019 until January 2021. His tenure ended as GameStop’s stock price suddenly soared nearly 800% in a week, as hordes of smaller-pocketed and novice investors piled in, to the shock and awe of professionals.

Gill’s job at MassMutual was to create educational materials for current and potential customers, but regulators say he was also posting more than 250 hours of videos on YouTube and sending at least 590 Tweets about investing and GameStop through accounts that were unaffiliated with the company.

 

[Vanadium 50]

Predictable. And predicted.

 

[Stephen Tashi]

I'm not familiar with the Wallstreet Bets forum. I've looked at examples from it presented by YouTuber "Wall Street Millennial". But how do people know that the investments and trades presented on the forum are real?