Robinhood : payment for order flow

(source: WSJ, Feb 4, 2021) The Reddit-fueled frenzy in stocks such as GameStop Corp. and AMC Entertainment Holdings Inc. is prompting calls for regulators to reconsider a decades-old practice in the U.S. stock market: payment for order flow.

The practice, in which high-speed trading firms pay brokerages for the right to execute orders submitted by mom-and-pop investors, has long been controversial. Some say it warps the incentives of brokers and encourages them to maximize their revenue at the expense of customers. Supporters, including many brokers and trading firms, say it is misunderstood and helps ensure that investors get seamless executions and good prices on their trades.

Either way, it is big money. Last year, brokerages such as Charles Schwab Corp. , TD Ameritrade, Robinhood Markets Inc. and E*Trade collected nearly $2.6 billion in payments for stock and option orders, according to an analysis of company filings by JMP Securities. The biggest sources of the payments were electronic trading firms such as Citadel Securities, Susquehanna International Group LLP and Virtu Financial Inc.

 

Payment for order flow helped set the stage for the manic trading in GameStop, whose shares began the year around $18, surged to a record close of $347.51 on Jan. 27 and ended Wednesday’s session at $92.41.

That is because payment for order flow made it possible for the U.S. brokerage industry to shift to zero-commission trades in late 2019. No longer needing to pay a fee on stock transactions and empowered by easy-to-use trading apps like Robinhood, individual investors poured into stocks and options at record levels last year. More recently, they snapped up stocks like GameStop that were being touted on Reddit and other social-media platforms.

 

 

Ken Griffin

Citadel Securities, the electronic-trading firm owned by hedge-fund billionaire Ken Griffin, has played a quiet but critical role in the frenzy of the last two weeks.

The firm—an affiliate of Mr. Griffin’s hedge fund, Citadel—executes orders placed by customers of Robinhood Markets Inc., TD Ameritrade and other online brokerages that have enjoyed surging volumes during the coronavirus pandemic.

Citadel Securities makes money by selling stocks or options for slightly more than it’s willing to buy them. The difference is often just a fraction of a penny per share. But repeated millions of times a day, it adds up to serious money.

Last year, net trading revenue at Citadel Securities was $6.7 billion, almost double the previous high in 2018, a person familiar with the matter said.