An interesting detail surfaced in this week’s Congressional hearing on GameStop shares and Robinhood, the platform where they’re often frenetically traded:
In his statement, Themis Trading Partner Sal Arnuk went right for that last issue, calling attention to the fact that payment for order flow (PFOF) causes a disconnect between a broker and his customer — especially in the case of Robinhood.
“They recently changed their PFOF method from one giving them a set payment per share to one giving them a percentage of the spread instead,” he said. “Think about this: A Robinhood trader wants the spread in the stocks he/she is trading to be as narrow as possible. The HFT [high frequency trading] market maker buying those orders benefit most when that spread is as wide as possible. And now Robinhood benefits most when the spread is as wide as possible as well! This is an amazing misalignment of interests.”
Arnuk took a dim view of Robinhood’s motivations:
“This tells you Robinhood knows full well the value of its herded and gamified product base; they knew to educate their users just enough to incentivize trading and maximize their own revenue as a result of it.”
Let’s back up a bit. A spread is the difference between the price you can buy a share at and the price you can sell it at. Let’s say you can buy GameStop at $190 a share and sell it at $189 a share. The company that executes the trade gets that dollar for their trouble.
You want that spread as low as possible so you can make more money. If Robinhood is paid a percentage of the spread, their incentive is to get that spread as high as possible. Nice for them, not so nice for you.
I don’t think Robinhood has publicized this change, and it seems sneaky and not in the best interest of investors. I’d like to see them come out and explain why this is good for investors. But I’m not sure they can do that.
For more on GameStop, check out these posts:
- The 2nd GameStop Hearing Just Happened. Here’s What You Need to Know.
- GameStop Short Squeezes Are Over
- Pattern in GameStop Bonds Spells Trouble For Reddit’s Favorite Stock
If you found this post interesting, please share it on Twitter/LinkedIn/email using the buttons below. This helps more people find the blog! And please leave a comment at the bottom of the page letting me know what you think and what other information you’re interested in!
Check out the Stuff I Use page for some great deals on products and services I use to improve my health and productivity. They just might help you too!