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Dirty Wall Street

Hedge Funds Are USING YOU!! Here’s How!!

By Guy

🏹 Robinhood Overview 🏹

A commission free broker that lets you buy fractional stocks to your heart’s content. All on a clean and efficient mobile app that is super easy to set up and use. This was the reason for Robinhood’s massive success over the past 2 years. In 2018, they had 1.8 million monthly active users. At the beginning of 2019 that number stood at 3.3 million and in 2020 they reached 4.3 million. In the lockdowns and home traders in 2020, this meant that there were many people who wanted to get in on the Robinhood action.

💴 Payment for Order Flow 💴

This is when a broker is paid by a third party to direct their orders to said third party. It’s a business practice that has been alive on Wall street for decades and is one of the predominant methods that retail brokers use to earn money. Brokers are supposed to choose those brokers that give them the best execution but you can see the conflict of interest when they are being paid for this information. There are SEC rules around PFOF disclosure. Robinhood breached these rules and hence the reason that they had to pay a $60m fine to the regulators.

💴 Why Pay For Order Flow? 💴

They can arbitrage the rates between the spreads. Basically, they will buy or sell an asset between the bid-ask spread and capture the profit depending on whether the client placed a buy or sell order. However, the bulk of the money is made through knowing how trader’s orders are positioned and trading against them. They can also front run some of those order by batching them. The bulk orders purchased will mean that they can sell to these buyers at a higher price.

🤔 Impact of Regulation? 🤔

There are increasing calls from a number of regulators which could see more stringent rules placed on order flow. Hence, if there is any sort of regulation it could either ban it entirely or there could be strict reporting requirements for these users. There is a significant risk to Robinhood’s business model. They have highlighted this in their S1 filing where they state that they have no recourse from the market makers should they choose to cease their agreements. There are also risks to Robinhood from the fact that they have had losses in the past and it is likely they could suffer these in the future.

🤔 Why I love Defi 📈

I love its transparent blockchain. Decentralised Finance or Defi is creating a world where you won’t need a Robinhood or any other middleman for that matter. There is no central entity that can control what you do on it and, because it is built on an open source blockchain, you can see exactly what is going on. There are no regulators that are determining how they function, they are governed by code only. They are open for trading 24/7/365 and tokenized assets that can be written on anything that has a price.

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📜 Disclaimer 📜

The information contained herein is for informational purposes only. Nothing herein shall be construed to be financial legal or tax advice. The content of this video is solely the opinions of the speaker who is not a licensed financial advisor or registered investment advisor. Trading Forex, cryptocurrencies and CFDs poses considerable risk of loss. The speaker does not guarantee any particular outcome.

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