Hello C3 Family!

Weekly Rant - A simplified version of the game you cannot win.

There is no such ting as a free lunch!!! Trading platforms like Robinhood who offer $0 fees on trades may sound to good to be true, and that is because they are. How are they able to provide such a seemingly great service while charging no money to its users? There are a few different answers to this question, and they can get pretty complex, but I am going to focus on and try to simplify the main way Robinhood and other 'free' brokers make money called Payment for Order Flow (PFOF).

Robinhood has a relationship with what you would call Market Makers (Very large financial firms). Market Makers essentially pay Robinhood for rights to the massive trade volume that comes through Robinhood's platform. The Market Makers get to buy shares at a discount. They see and use 'better' prices than what you see on your $0 trading app. The Market Makers then profit off these sales in pretty big ways.

Here is how it works in a nutshell. Again, I am simplifying a lot, but what I am communicating is true. 10,000 trades for Apple stock come into Robinhood at $220/share. Robinhood has already made a deal with Market Maker ABC. ABC pays Robinhood a fee of half a penny for each trade (This is a volume game). ABC then buys the shares at Apples Market Maker price of $218.50 and sells them to you, the retail trader at $220. Robinhood makes its profit in fees, ABC makes its profit by selling the traders the stock at an upcharge, and the retail trader is left thinking they got a deal and have moved up in life. Yet, in reality the retail trader has just dug themselves into an even bigger hole by exponentially increasing the purchasing power of the market maker while diminishing their own. 

The same thing takes place when a bunch of traders want to sell their Apple stock. Except this time the ABC, our market maker, is able to take your sale at an ask price and sell it at a bid price. The Bid price is higher than they ask of course. It is the reverse of what they do when your buying a stock. 

There are always two prices to a stock and whether the retail investor is selling or buying, they are doing so at the less advantageous price and the market maker is doing executing the order at the more advantageous price. 

The practice of PFOF is frowned upon by a lot of people and the SEC has passed many laws to regulate it and the UK wants to phase out the practice by 2026, but I would not hold your breath on that one. 

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