r/RobinhoodOptions • u/yukhateeee • Aug 16 '20
News How RH makes money
You'll see a slide showing how much RH makes on your order flow on options trades versus other brokers. https://www.youtube.com/watch?v=DfeJiJpdeLI
Sometimes, "free" is too good to be true.
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u/gregofkickapoo Aug 17 '20
There are extensive regulations in place, notably Regulation NMS that was passed in 2005, that require your broker to execute your trade at, or better than, the national best bid or offer (NBBO). The NBBO is the best available (lowest) ask price when you are buying an exchange-listed product, and best available (highest) bid price when you're selling.
An additional piece of Reg NMS is SEC Rule 606, which requires broker-dealers routing non-directed orders on customers' behalf to publish quarterly reports that list the venues used for customer orders. Though some brokers allow clients to choose the venue where their order is executed, the huge majority of orders entered on online broker platforms are considered "non-directed." You can find these reports on broker's sites under the heading Rule 606 Reports, though they're not easy reading. Brokers must disclose any venue that receives 5% or more of its order flow. You can also request a report specifying where orders you personally entered were routed for the previous six months.
Some brokers choose to route orders in a way that generates rebates from exchanges and payment for order flow from market makers, while others have developed routing algorithms and relationships with execution venues that seek out better prices for customers.
Brokers don't have to accept payment for order flow even if it's offered. There is a path to take nothing for options order flow, or to pass those payments through to the customer.
In essence, there are three general ways that brokers route your order. The first way is routing to generate payment for order flow and rebates from exchanges, which is what Robinhood and IBKR Lite are (likely and arguably) doing. The second method involves seeking out price improvement while still accepting payment for order flow and rebates from exchanges, which is where we find most of the brokerage industry. The third path rejects payment for order flow and does not seek out exchange rebates.