Doesn't make a difference on a market order, Most of the smaller MMs on CBOE are streaming to BOX - not the majors and obviously not the case in SPX and VIX which are monopoly names. Keep in mind the 70% - 80% of equity/etf option trading is done away from CBOE on the other exchanges.
It is great that Robinhood exists. They have a new web-based interface they are rolling out early 2018. It looks very nice (unlike Interactive Brokers' clunky hideous interfaces). Plus free trades mean you can take smaller positions and not get hammered on fees. My concern is that whether or not the technology is secure and robust. I've read some things where Robinhood is slow to execute orders. Don't want slow trades... don't want accounts to be hacked. I hope they put as much work into security as they do into interface design, because their designs are visually wonderful. I think Interactive Brokers has been able to get away with super-cruddy interfaces, because up until recently, they were the only ultra-low price game in town. Robinhood brings competition. Hopefully Interactive Brokers will be compelled to update their interfaces. It looks like they have not put any work into them since 2001, maybe even 1997. Competition is good for consumers. Value is determined by the consumer. And for me, the interface is very important. Go Robinhood!
You do realize that the only reason why trades are free is because they sell your order to high frequency market makers. This means that you can’t do certain types of orders for free and the ones that will be free are very likely to result in worse fills.
Nothing overrides NBBO - if your trading retail size in multiply listed name - or limit orders in a multiply listed name the markets have evolved to accommodate you. Bigger than retail the exchanges have pretty much conceded that business to the upstairs facilitation business. Handful of names still have decent liquidity, but retail electronic is pretty much untouched by human hands. market order go to PFOF venues, limit order go to maker/taker or get done as a dark preferenced order. It's built for the 10 lot and there are 15 exchanges for the liquidity that still exists. Eliminate maker/taker and the ORF fees(option exchanges charge you for their oversight) and half or more of the exchanges consolidate or go away. Again doesn't apply to VIX or SPX and maybe the monopoly model would work better today. SEC bwould never allow it, but it might work better.
A hypothetical situation. Charlie submits at bid for an option, exactly mid-market, via Interactive Brokers. Alice offers the very same option, also at mid-market at Robinhood brokers. What do you think will happen?
First broker to submit to an exchange alters the NBBO - unless they sit on the order or the order falls under the "derived" order prohibition. It's for less than 10. BTW if they sit on the order - hold it upstairs - and the other order gets to an exchange first they won't cross, but they will alter the NBBO. There are some exceptions like flashing quotes in the more liquid stuff. The devil is in details of the order type and they exchange(consolidator they sold their flow through). Robinhood is selling everything to one of possibly 3 or 4 consolidators. Were the orders to buy or sell and were they for 10 or more. If you are looking for the answer that in old days they were singly listed and would have crossed - that is the problem with 15 exchanges and 4 consolidators doing about 75% of the volume. Let's make it simple. One order is an order to buy 10@ .95 - the NBBO is .90/1.00 - second order is to sell 10 at .95 and they go to the same exchange or two different exchanges. Same exchange they are both entitled to fill - may not be a cross, but they are owed a fill. Two different exchanges and the second order to arrive would either fill on the original exchange where a MM does what is called satisfaction order. Otherwise if the NBBO is better away it can't fill and it ships under linkage. BTW this is why it's so expensive to be a MM today. Also keep in mind if there are two exchanges involved all of their servers are sitting at Equinox either here in Chicago or outside of NY. This should happen so fast the fill would be really quick. If someone delays the order that is rule violation and the customer still is due a fill. Lots more details like order modifiers would screw this up. This has very little to do with who the broker is but rather a lot more to do with who the consolidator is. Also a .90/1.00 market might have hidden liquidity at .95 and order could fill and take out the .95 in one venue and leave the other limit sitting. BTW if this went to PFOF venue the MM would lose money on an order they may have never interacted with. @sle - you ran a SNO book - how would you have handled it? /
The bigger question should be what happens when a "free" broker or flat rate broker gets and order to buy 1000 contract fly in the SPX? That's about $2000 in exchange fees and a bunch more if they used a floor broker. This is part of drove OptionHouse out of the flat rate business. Their prices had to be so aggressive that what they lost on brokerage they couldn't recoup in MM. They probably became the biggest firm in the SPX. They more they traded the more they lost. The industry began referring to it as the Amtrak model. Robinhood won't touch these customers, but on a smaller scale this still is a problem. Most e-commerce firms have some customers trading for free - but the fine print limits the share of trading in some symbols.
Out of all painful things I have done, I have never ran a single name options book as a market marker. @newwurldmn has, I am sure he will chime in, but my sense is that in real life this situation will have a variety of outcomes. PS. I have and still do trade a lot of SNO as a customer (apparently, not a very well liked customer, as I have found out today).
I am pretty sure somewhere there is a fine print (like I heard that only non-directed market orders are free, for example).
I ran a single name market maker book in the mid 2000's. I don't think Robinhood customers are going to get hurt with this service. The way internalization worked back then was that the order would come to you and you would send the customer order along with your contra order to the exchange. You would be guaranteed a percent of the order (the ISE was 40% I believe) if you were willing to trade at the best price. The exchange and the market makers were all competing for that orderflow because it was generally vol insensitive and uninformed - so you would earn to fair value consistently. You will be surprized how many orders were market orders. If I recall, we only only paid for orders we executed against. And the whole system is set up to trade against these dumb customers. Pretty much all of institutional finance is about finding whales who aren't sophisticated or profit sensitive. No one wants to trade against Citadel the hedgefund's internal PM's; they all want to trade against Citadel the market maker's internalized flow. Robinhood comes to market making community and says, "I got a bunch of dumb newbie retail minnows who think they can make money trading options. Who's hungry!?" and everyone gets excited. There will be a lot of competition for this orderflow. In terms of winners and losers: the market makers win because they trade with stupid customers, the customers win because they get free commissions and a hope they can make money in the options market (which statistically, they won't) and robin hood wins because they get revenue from PFOF.