yes. I know .. I wonder if they are still around? Their site is still up and they had a both at the Marriot in NYC like 2 years ago..
"I understand the cost reduction plus a better control of the process. But is there more likely hood of optionssellers.com scenario than when there is independent clearing?" Until they start offering futures their securities accounts are SIPC protected. When you start to exceed SIPC then start asking questions. Again the largest independent clearing firm went out of business and was acquired by APEX - nobody lost any money except the owners of Penson.
Robinhood and Payments for Order Flow Paul Rowady, Alphacution Research Conservatory 29 November 2018 Recent revelations that a big portion of Robinhood’s revenues are derived from payments for order flow got Alphacution’s Paul Rowady thinking about how valuable retail order flow is likely to be to the brokers that make these payments. Here, he breaks down the numbers. It was a recent father-son (and dog) road trip. Several hours in the car, on our way to support daughter/sister Emma at her final regatta of the season. Head of the Hooch in Chattanooga, Tennessee. And an opportunity for some undistracted conversation. Among the many topics covered was our ongoing debate about how to trade Tesla (TSLA). Eddie has proven himself to be a fairly decent scalper of this volatile name, so I usually ask how he is positioned and the levels he thinks are meaningful. Anyway, it turns out he is trading on the Robinhood platform – no more than a few shares at a time – and paying zero commissions, which, of course, improves his net profitability. This is the main attraction, on top of the fact that he can toggle between trading stocks, playing video games, watching YouTube, Instagramming with his friends and listening to music all on the same device. (No wonder he is always wiped out!) So this got me thinking about some of the recent disclosures about how a big portion of Robinhood’s revenues are derived from payments for order flow (PFOF), how valuable the order flow of all the novice “Eddie’s” of the world is likely to be to brokers that make these payments, and also how it was reported back in June that the popularity of the mobile app group had passed E*TRADE in total accounts (4 million) over the past year. Here’s some numbers and pictures representing what we have assembled so far. Based our modeling of available data, Alphacution estimates aggregate PFOF – sometimes known as order flow revenue or order routing revenue – for the 5 years ending 2017 as follows (needless to say, $605 million for 2017 is a sizable pie considering we haven’t worked an estimate for Fidelity into the mix yet): Note first that with Fidelity’s disclosure of 284,000 DARTs (daily average revenue trades) as of June 2018, its order flow revenue is likely to come in somewhere between E*TRADE and Schwab. Let’s swag it for now at $120 million for 2017, which would put our total aggregate estimate for 2017 at $725 million. We will update this chart once we dig around on that a bit more. And, as for our Robinhood order flow revenue estimate, it is based on disclosed receivables from executing brokers (aka: order routing payments) in SEC Form X-17A-5, which includes balance sheet data. Leveraging and annualizing those few data points we could get our mitts on yielded the following, which is small in relation to the whole pie above – and likely to remain relatively small because Robinhood’s demographic of coveted (because they are the least price sensitive, but highest cost sensitive) millennials and other “Eddie’s” are not likely to ever trade all that much in this format: Beyond this, it occurred to us to turn the tables and look at where all this dough is coming from. Problem is, the sources of the slices of this pie are quite opaque. For now, all we can easily observe has been disclosed by KCG, which, for the past year, has been absorbed by Virtu. In the charts below, Alphacution presents order flow payments for the 5 years ending 2017, plus an annualized estimate of what has already been disclosed by Virtu for the first 9 months of 2018. A quarterly chart that follows this demonstrates 1) when KCG ramped up its PFOF activities (but likely corresponds with the timing of the original GETCO-Knight Capital merger), and 2) that PFOF levels are not cyclical but – like most everything else in this zone of our map – dependent on volatility. Lastly, here is where we can demonstrate that KCG/Virtu payments represent 9.4% of total estimated PFOF revenue for 2017 of $605 million – and less if we count Fidelity. This means that there are several other players making 90-plus percent of the aggregate payments for order flow. When we sort all that out, we’ll check in on it …. This article originally was published on the Alphacution Blog.