Payment for Order Flow Really Does Help Investors, Research Indicates

Citadel CEO Ken Griffin claims that even though they pay Robinhood to execute their trades, investors are getting a better deal than they would in public stock markets:

Citadel CEO Ken Griffin said Thursday that the system has been “very important to the democratization of finance. It has allowed the American retail investor to have the lowest execution cost they’ve ever had.”

Sounds hard to believe, right? I’m naturally skeptical they’re giving those small investors a worse price and keeping the difference. However, one of the few recent studies to analyze payment for order flow (PFOF) finds the opposite:

Focusing solely on execution prices, we find that the cost of liquidity on exchanges utilizing the PFOF model is 80 bps higher than on exchanges utilizing maker-taker pricing. Nevertheless, when taker fees are incorporated into the analysis, the cost of liquidity on the PFOF exchanges is 74 bps lower.

More here.

In other words, the prices the PFOF model gave investors were a bit worse, but when you consider the commissions they would’ve paid otherwise, they came out ahead. This study was limited to options, not stocks, but many Robinhood users trade options as well.

On the other hand, Citadel has been fined before for offering worse prices than public markets. Until we see a comprehensive data set on Citadel-completed trades versus comparable ones on public markets, this will remain a difficult question to answer. I know of no such data currently available to the public.

If Robinhood or Citadel came out with something like that, I think it would go a long way toward allaying the concerns of investors and regulators.

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Photo: Citadel CEO Ken Griffin. “Ken Griffin with computers” by insider_monkey is licensed under CC BY-ND 2.0


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