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Payment for order flow - Are you affected?
Old 09-09-2021, 12:30 AM   #1
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Payment for order flow - Are you affected?

This issue became more publicized after the rise of Robinhood (HOOD) and their IPO and its indirect association with meme stock trading, i.e. reddit WallStreetBets. I am not a "trader" but do occasionally place buy and sell orders at whatever is the market price and have never been able to discern that I have been undercut/front-run. This is when making small even lot trades and when checking the bid/ask spread from multiple quote services, I estimate that on average I am given a fair price. Sometimes the price ticks up, but it ticks down just as much (or maybe even more often).

That said, many trades are at executed at 4 decimal fractional prices. e.g. Bought 100 shares at $23.1591, which makes it impossible to know if the this was bumped up a few tenths or hundreds of a cent for some intermediary, which would not enough to get upset about with $0 commission trades, but if it was cents or if trading 1000's of shares it would be more concerning.

I don't have a specific question, just wondering if I am missing anything? Or if others have a better understanding of whether this should be a concern for the average retail investor?

Interview with Sheila Bair below, which is too long for most to watch. But the one noteworthy nugget of information she gave was that Fidelity offers $0 commission trades and does not get paid for order flow.

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Old 09-09-2021, 12:58 AM   #2
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This was the follow up rebuttal. Related to the comment about Fidelity above, he made this broader statement:
Quote:
There are approximately 200 retail brokers, wealth managers in the country. About 10 of them take payment for order flow, the other 190 do not. And they still send their orders through a wholesaler. Why? They do not have an economic interest, there is no inherit conflict of interest.......they send it because of the segmentation of the order flow.
Which begs the question who are the 9-10 brokers which get paid for order flow other than Robinhood?

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Old 09-09-2021, 06:31 AM   #3
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Quote:
Originally Posted by triangle View Post
This was the follow up rebuttal. Related to the comment about Fidelity above, he made this broader statement:
Which begs the question who are the 9-10 brokers which get paid for order flow other than Robinhood?

The organization he's the CEO of is one.
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Old 09-09-2021, 07:39 AM   #4
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https://daytradingz.com/payment-for-order-flow/

Schwab, TDA, E*trade, Hood, webull, Ally, Tradestation
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Old 09-09-2021, 08:09 AM   #5
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From my reading of the above link, the national bid ask system must be poorly managed to make it so easy for all these pfof companies to make so much money.
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Old 09-09-2021, 11:56 PM   #6
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Originally Posted by Montecfo View Post
https://daytradingz.com/payment-for-order-flow/

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Thanks, that was an interesting article. I wondered how there was so much money to be made when the bid/ask spread is usually small on stocks that are most well known. It indirectly answered that question with the 2021 data collected for the first 6 months, that it was the lower volume activities that generated the larger payments. That only 4.4% of the total payment for order flow was for S&P500 companies, 34.74% for non-S&P500 companies, and 60.85% for Options. So buy/sell of GOOG, TSLA, AAPL, MRNA, etc are probably not being impacted.
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Old 09-10-2021, 12:15 AM   #7
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That explains why so many of my option orders don't get executed
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Old 09-10-2021, 06:24 AM   #8
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I was pleasantly surprised to not find Fidelity or Vanguard mentioned in the article. That's a lot of $ to walk away from, but it does appear shady without looking at the data.
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Old 09-23-2021, 12:48 AM   #9
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If you are not paying for it then you are the product not the customer.

For small folks like most of us, payment for order flow at $0 commissions may very well be a good thing. But the system would not exist if the Citadels of the world were not making big money from it. They are profiting from lack of transparency which is always a concern.
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Old 09-23-2021, 06:44 PM   #10
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Besides paying for order flow there are dark pools where the transaction never makes the stock exchange. Wells Fargo very often executed buys below my limit, probably donít pat order flow but do internally/dark pool.
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