Commission Free Trades

More users are downloading Robinhood and beginning their journey to riches. I'm sure that at least some of them are wondering how Robinhood is able to offer commission free trades. Especially in a world where we often find that Nothing is Free. One obvious reason is the lack of features typically found on a pay-to-play brokerage trading platform such as Level II quotes and complex charting capabilities. But nothing is truly free, and the trades are “free” because orders (typically market, or marketable limit, for most user) are routed in such a way so that Robinhood receives a rebate for the order. Thanks to an article from Themis Trading LLC there is some substantiated evidence of this fact.

Rule 606

Here is a breakdown of their most recent Rule 606 filing. I can’t say I am that surprised, but as a Robinhood user myself, I’ve sat at the computer and placed trades via the app and watched my order on Level II. Rarely did I notice any major price improvement “shenanigans” but then again, a marketable limit order probably isn’t as tasty as a straight up market order. Now that Citadel and KCG are more or less the same, I figure they ought to just buy Robinhood but that would never happen and here is why: Robinhood, the character, would rob from the rich to feed the poor.

The Irony

Imagine all the users finding out that, in fact, Robinhood of the modern markets robs from the poor retail to feed the rich market makers. In the end, it is still a nice trading platform as one can buy a single share of stock without having to have a triple digit return just to clear commissions to break even.

Execution Quality

I just finished conducting some qualitative tests of the execution quality while using the Robinhood app. The results illustrate the important issue of complacency and/or naivety that is seemingly commonplace with retail “traders”.

NBBO

I buy 1 share of some stock on Robinhood at $13.10/share and it costs me $0.01 to buy the share. The penny I consider a cost since the NBBO according to the level 2 quotes on both the desktop and laptop I am using to actually monitor the activity of said stock indicate that the best offer is $13.09. Furthermore, it is $13.09 for 1.3s prior to swiping up to submit my market order for 1 share (don’t hate on the 1@MKT, this is for science!) and is still 13.09 for almost a second after I hear the notification that the order has been filled.

One Penny

So why was my order filled at $13.10? Was there a lag in the data feeds I was using to source the orders on the book? Maybe my order was filled on a non-lit exchange. Hopefully, HOPEFULLY, it didn’t get filled at $13.10 because order was flagged as “retail” (“super-sucker” I think is the Robinhood variation of the flag) and it was assumed I wouldn’t notice or if I did I wouldn’t care.

Could be Worse

Yes, ultimately it was $9.98 cheaper than buying that 1 share through TD Ameritrade but I decided to inform the support staff, in the name of science of course, that an error had been made and I was owed a penny. The way I see it, if you are not even going to provide a means by which I can do just about anything other than buy shares of stocks for “zero commissions” you don’t get to keep even $0.01 as that would be a, well, COMMISSION.