Almost all of the discussion around payment for order flow is inaccurate. To highlight the worst,
1. Retail order flow is toxic like all other flow and trading against it blindly leads to material losses. Retail is particularly well informed with respect to news and major market events. "Retail investors destroy value when trading" is a fun quote and repeated assertion of the article, but is not true of any retail order flow I've seen (and I have seen all of it).
2. Wholesalers make surprisingly little money from the flow being uninformed. Most of the P&L is a result of (a) fee arbitrage (some strategies that aren't possible on public markets become possible with an internalizer because there are less market access fees), (b) queue priority (internalizing a market order allows the market maker to effectively rest at the inside without quoting there), and (c) strategies for executing special order types that cannot be traded against on exchanges (stops, for example).
3. Robinhood earns more for order flow because their order flow is less toxic (less informed) than other brokerages. It has nothing to do with options.
4. Retail order flow data is incredibly valuable since it's needed to build pricing and trading models. Citadel Securities, in fact, does run models (and machine learning models) against retail trade data and would not be profitable without it.
Finally, if wholesalers are good for retail investors is an open question that won't be answered by this blog piece. A simple thought exercise: if I'm a retail investor with the most aggressive limit order in the market and a market maker internalizes a retail market order on the opposing side -- is the result net good, or net bad for the two retail participants?
1. Retail order flow is toxic like all other flow and trading against it blindly leads to material losses. Retail is particularly well informed with respect to news and major market events. "Retail investors destroy value when trading" is a fun quote and repeated assertion of the article, but is not true of any retail order flow I've seen (and I have seen all of it).
2. Wholesalers make surprisingly little money from the flow being uninformed. Most of the P&L is a result of (a) fee arbitrage (some strategies that aren't possible on public markets become possible with an internalizer because there are less market access fees), (b) queue priority (internalizing a market order allows the market maker to effectively rest at the inside without quoting there), and (c) strategies for executing special order types that cannot be traded against on exchanges (stops, for example).
3. Robinhood earns more for order flow because their order flow is less toxic (less informed) than other brokerages. It has nothing to do with options.
4. Retail order flow data is incredibly valuable since it's needed to build pricing and trading models. Citadel Securities, in fact, does run models (and machine learning models) against retail trade data and would not be profitable without it.
Finally, if wholesalers are good for retail investors is an open question that won't be answered by this blog piece. A simple thought exercise: if I'm a retail investor with the most aggressive limit order in the market and a market maker internalizes a retail market order on the opposing side -- is the result net good, or net bad for the two retail participants?