You're not. Market makers really like filling orders for small-time investors because it's really unlikely that a small-time investor knows more then the market maker. They don't like filling orders for big institutional investors because those guys might know more than the market makers, and the market makers might accidentally give them too good of a deal.
If you're doing anything other than passively buying index funds, you're probably screwing yourself, but your choice of broker is irrelevant.
As a small-time, retail investor, you are statistically guaranteed to make random, uninformed trades, and it is profitable for market makers to process them, in much the same way that it's profitable for a grocery store to sell you groceries. And much like the grocery store selling you potato chips, they make their money on volume, not on gouging you on the cost of staples.
Whether you should be buying those chips (or day trading AAPL) is a question for you and your dietician and/or investment advisor, but you don't need to worry about the price.
How are you guaranteed to make random uniformed trades? Moreover, you said above that you are only “probably” screwing yourself. And you’re right, unless you love investing and deeply care about making alpha, it’s probably not for you.
But the markets aren’t a random walk and even if you are just buying indices, you still have to actively manage them. Namely you have to decide asset allocation, leverage, industry, country exposure, etc. Also you have things like style exposure to consider as well. As such, there’s really no such thing as passive management.
Also, actively trading beta isn’t exactly the hardest thing in the world. Even though some players move extremely quickly over market news like Trump tweets, trade war announcements, etc, it still takes a couple days for all investors to react to the news. In fact, retail investors are often better positioned to quickly react as the slippage on their trades is non-existent for all but the most illiquid names.
In short, I wouldn’t recommend actively trading for most people. But those people are still going to need to choose some allocations and rebalance once in awhile. For those that are interested, retail alpha isn’t that hard to find, especially with leverage.
Think about it this way, as a small-time investor, you won't always get the best price. Your strategy should not be dependent on that. You should be building positions or trading appropriately to your scale. (Read: Buy and hold or trading at stop-loss prices, not market orders)
Said another way: The big guns will likely beat you, and you over time with LOTS of trading may lose a few % but for most small fries it shouldn't even matter.
That said, it looks like Robinhood is making more than most on their orderflow:
> In September 2018, Logan Kane, a contributor to Seeking Alpha, stated that Robinhood's payment for order flow generated ten times the revenue as other brokers receive from market makers for the same volume. Bloomberg has analyzed Robinhood's reports to the Securities and Exchange Commission (SEC), and calculates that Robinhood generates almost half of its income from payment for order flow.
> Think about it this way, as a small-time investor, you won't always get the best price.
As a small-time investor, you can trivially get a better price than larger investors. And you must, by law, get the National Best Bid and Offer (NBBO) which is, at least for some purposes, the "best price".
The deck is heavily stacked against retail investors trying to actively invest, but the issue isn't being unable to get good execution!
Robinhood is making more than most on their orderflow
Robinhood's apples weigh more than Schwab's oranges, because Robinhood encourages users to do options trading (and be more active on it) and Schwab does not. Spreads are wider in options, because they're less liquid, because they're (mechanically) larger trades [+], and because the degree of volatility in options prices is higher than therefore market makers have to charge higher spreads to justify the risk. High spreads mean happy market makers, so the amount you can charge a market maker for "Here's a retail order; would you like to collect the spread on it?" is higher.
[+] Options contracts represent, typically, 100 shares. The notional exposure of 1 options contract on e.g. Google at a strike price of their current price is high. If you measure the other way, by transacted trade size, the spread on a $500 order of Google should be denominated in pennies and the spread of a $500 order of Google options will could be hundreds of dollars for a sufficiently illiquid strike/date combination. (e.g. Consider a put on Google at a strike price of $100 in late October. Google currently costs ~$1,200 a share. If you believe it is likely that Google declines by over 90% in October, and want to express that belief in an instrument, the financial industry can assist you in doing that, but the spread on that particular product will probably be wide. Without checking the quotes at all, I'd predict no buyers at any price and ample sellers at 5 cents a share. If you put in a $500 order expressing that view, you are paying ~$0.01 for the instrument and $499.99 for liquidity.)
If your day trading millions of dollars of shares, it could matter. Retail rarely make trades that can’t be filled with one order. Even if your moving large amount of shares, you can always do limit orders .
People will give you all sorts of misinformed explanations. Matt Levine, the Bloomberg columnist, is a respected guy who understands the industry. Here's his take, a trustworthy take, on it: https://www.bloomberg.com/opinion/articles/2018-10-16/carl-i...
(skip forward to the part where it says "Robin Hood", it's just part of his column that day)
tl;dr You're not getting screwed by Robin Hood (as a matter of fact, they're good for you), but Robin Hood is enabling you to make trades you shouldn't be making in the first place because you're probably unsophisticated.
I agree that I’m unsophisticated but not that I shouldn’t be trading. Most of my investments are 401k and passive index funds. But I keep a small amount of active trading capital to learn by doing. Sometimes I win, sometimes I lose. But it’s a hobby that I enjoy. And I’m becoming more sophisticated over time.
Ok, so after reading the Bloomberg article, your 401k is being negatively impacted by order payment flow. You as an individual retail investor is probably ok but your 401k is losing in aggregate.
