In theory then, a market maker not executing trades at the best available price could execute a sell order for $ 1,000 at a price 2.5% below the market and cost a novice trader $ 25 out of sight. , which is much more than a standard brokerage fee. about $ 10.

While Robinhood has neither admitted nor denied the accusations, the picture of taking the poor to give themselves and the rich on Wall Street is ugly.

Additionally, the insane minute-by-minute swings in memes stocks popular with novice traders such as GameStop and AMC arguably amplify the possibility for Robinhood users to place “market” orders to receive lower prices if historical failures. repeat themselves.

In February, managing director Vlad Tenev told a hearing in the US Congress that Robinhood had negotiated the same discount with every market maker to help remove any incentive to direct orders to preferred market makers ready to buy and sell stocks.

Professional asset managers have a legal obligation to ensure that transactions routed through their own trading rooms are executed at the best available price. This is in part because historical controversies arose when it was believed that the asset manager’s brokers could give trades to preferred brokers (regardless of the cost) who bought them sports tickets, drinks or games. dinners in the form of indirect commissions.

These asset managers, as custodians of clients’ money, have a quasi-fiduciary duty to ensure best execution. Whereas a retail application such as Robinhood has a common law obligation as a principal agent of a transaction to seek best execution for a client.

Today, Robinhood says its pay-to-order model provides a net benefit to users, as market makers often get better prices than exchanges.

Any investor can also extinguish best execution risks by placing a “limit” order, with the US National Best Bids and Bids Mechanism (NBBO) designed to guarantee investors the best quoted price at the time of the trade.

Yet Robinhood’s unique model among budget brokers makes it vulnerable to any new legislation limiting payments for order flow and drastically reducing its primary source of revenue.

Australian traders

The structure of the US market of dozens of market makers and exchanges creating more liquidity has reduced transaction costs for US investors. While in Australia, best execution obligations are covered by ASIC Regulatory Guide 265, only ASX and Chi-X offering visible market depth and pricing.

Some market makers provide off-market dark pools of liquidity counterparty transactions. Initially, regulators allowed these dark pools on the basis that they helped match large block transactions, but they evolved to be dominated by tiny transactions due to algorithms programmed to split large orders into small orders or to profit from high frequency trading.

Charges that the growth of dark pools has contributed to widening bid offer spreads, with negative effects on price formation and discovery for retail investors, have not been taken seriously. account by regulators.

Dark pool traders can also line up for retail investors on enlightened exchanges often in very liquid stocks (like Telstra) where you have hundreds of retail traders sitting on a bid 1 ¢ or 2 below the bid price. .

The closed nature of the Australian markets means brokerage costs remain higher for retail investors, although budget brokers like Selfwealth, Superhero and Stake want to change that.