Comment Re: For anyone wondering how Robinhood makes money (Score 1) 147
Actually, they probably do front-run trades, just indirectly. Not robinhood themselves, but the exchange they route the orders too might by virtue of timing latencies to the consolidated tape. This is not specifically illegal but it is exploited.
Basically the way it works is that trading specialists with servers sitting right next to the major exchanges can arbitrage a trade that comes up on one exchange with a better price that exists on another exchange. This is in addition to payments for routing. Arbitrage in of itself is perfectly reasonable, that's how many trades can get execution. But it can be exploited in ways that slowly drain money from frequent traders without those traders actually understanding that it is happening.
So Robinhood basically just has to route the order to the worst exchange (which would likely be BATS) and stays just on the legal side of the law. Since robinhood's investors are idiots who day-trade, the cumulative payments and losses from poor order flow execution and delays wind up being significant.
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In anycase, as a long-time investor myself it is very obvious to me that robinhood is exploiting the stupidity of its investor base. People with no experience trying to execute complex options trades (or even normal trades using 'intelligent' trading modes such as stop-loss orders) are virtually guaranteed to lose all of their money. Experience rules the roost here. Gambling addictions make it worse. Particularly when options are used... it is very easy for an inexperienced retail investor to see a few 'wins' from their day-trading and unconsciously discard the losses... not realizing that they are actually taking on inordinate risk and losing their nest-egg until they've actually lost most of it.
-Matt