Smart Bird: Robinhooders are the Product

Once again the Martens are all over Wall Street’s ongoing antics as you can read about in GameStop Hearing Exposes a Sick Business Model Destined to Exacerbate Wealth Inequality in America.

The best excerpt starts with the last question from Congresswoman Cindy Axne of Iowa to Vlad Tenev, the CEO of Robinhood:

Axne: “I appreciate that but you know, folks like my nephew actually aren’t your customer. They’re your product. Your customer is sitting right next to you, Mr. Griffin with Citadel.”

What Axne was referring to was discussed at length earlier in the hearing. Ken Griffin’s Citadel Securities, a so-called internalizer or market-maker, pays Robinhood to send its retail orders to it to execute the trades. While Robinhood has payment-for-order-flow agreements with other internalizers, the bulk of its trade orders are going to Citadel. The vast majority of Robinhood’s revenue stream comes from payment-for-order flow. Thus, its priority would appear to be to please its true customer, Citadel Securities.

The reason that the young people placing trades at Robinhood are viewed as “the product” that Robinhood is selling to Citadel Securities is that Wall Street has long viewed retail orders as the “dumb money” it would like to trade against. That’s because the retail investor is willing to (or oblivious) that they are trading in the dark market offered by internalizers rather than a lit market like the New York Stock Exchange where bids and offers on stocks are publicly displayed.

This sick model is accentuated by the fact that Citadel Securities regularly pays fines for abusing these retail customers and then goes on its merry way to continue to abuse and pay more fines. At the opening of the hearing, Congressman Al Green of Texas stated that Citadel has paid more than $100 million in fines.

Citadel Securities has also been fined and censured by multiple regulators for trading ahead of customers’ orders for its own account and failing to properly report trading data to the SEC.

Which leads to the question of how this can continue to go on decade after decade. The Martens of course answer that…

One thing Ken Griffin is clearly highly competent at is spreading money around Washington. As we recently reported, Griffin personally wrote out checks totaling more than $61 million to PACs and Super PACs working exclusively to elect Republicans to Congress in just the most recent election cycle.

To Robinhooders,

When you are the product, that means someone else is willing to pay for your orders because THEY are making a killing off of front-running the masses. You can walk into a casino and win of course. But most who stay too long lose their winnings and more.

You will not hear from the losers. You will only see and hear about those who hit the jackpot. Don’t be the “dumped” when speculating in very small companies that are being pumped and dumped.

This is a public service post from TSP Smart & Vanguard Smart Investor

Categories: Perspectives, The Smart Bird