How Much Does Payment for Order Flow Cost You? We Did an Experiment. - YouTube

in an earlier episode i made my first trades  on robinhood but let's step back and try to  

figure out why the online brokerage firm  is so popular online trading is not new  

roughly 25 years ago a slew of online brokerages  like e-trade emerged letting people trade on  

their home computers for a fraction of what  traditional brokerages charge i like to trade  

online you know you give a kid a computer and  thinks he can beat the market the sites even  

had flashy ad campaigns to appeal to a young  generation of home-based tech-enabled creators

this christmas everything is getting blowed up

but over the last decade those traders felt they  were losing out to moneyed hedge funds that were  

better equipped to seize upon and perhaps  even create their own trading opportunities  

in fact just three years ago the wall street  journal reported that 80 of daily trading  

volume in the us was computer generated and  based on algorithmic models then in 2015 came  

the robinhood app offering what it called free  trading and empowering a new generation of traders  

as we saw in previous episodes registration was  easy as was making my first stock purchase also  

in the time since i've opened my account i've been  flooded with alerts on how my portfolio is doing  

and although i was skeptical about the hype i  have to admit it's made me eager to log in of  

course nothing especially in the world of finance  is ever truly free while traders may not see  

fees on their trades robin hood is actually  being compensated by payment for order flow  

when you place the trade on robinhood in the  background market makers like citadel securities  

and virtue are paying brokerages like robinhood  to execute the trades these market makers make  

their money by buying the shares for less than  they sell them for moments later roughly eighty  

percent of robin hood's revenue comes from payment  for order flow to the blind eye there's not much  

to see but regulators and others worry that these  compensation arrangements aren't clearly spelled  

out and that retail traders may not be getting a  fair shake in august sec chair gary gensler said  

the agency is reviewing payment for order flow  and eliminating it is quote on the table and  

then at the milken institute investor conference  in october market participants speculated what  

would happen if payment for order float went away  according to joe mckean of citadel securities the  

market makers would actually make more money  because they'd no longer be paying for flow  

and brokerages would likely have to resort to  charging fees again in the end the debate may  

just come around to transparency either way i  want to test it out no i am not doing dueling  

laptops or dueling pianos here i am going to  do a little experiment where i am going to buy  

the same amount of shares of the same stock at the  same time on two platforms my robinhood account  

over here my fidelity account over here i'm going  to go with smile direct club now smile direct club  

has been the weakest performer in my portfolio  it's down around 40 but as they sometimes say  

buy the dip so let's see if maybe i can lower my  cost basis maybe catch some upside on this stock  

robinhood is showing that smile direct shares  go for four dollars and three cents right now  

uh fidelity is showing four dollars and two cents  fidelity has a disclosure that its quotes can be  

delayed by at least 15 minutes i don't see that  disclosure on robinhood doesn't mean that there  

isn't a delay there so i am going to do my best  to try to execute these trades at exactly the same  

time maybe this pointer is a little bit stronger  than this one we'll try my best let's line this up

okay the trades have been placed so on my  robinhood side it is showing a market buy  

of twenty dollars and fourteen cents  now on the fidelity side i am seeing  

twenty dollars and fifteen cents so we're looking  at the difference of a penny not a big difference  

penny doesn't really add up too much but if you're  trading thousands of shares millions of dollars  

those pennies or even fractions of a penny  eventually do add up risen questions about who's  

getting the best execution for trading as for me  we'll see where my shares of smile direct end up

next time we'll take a look at what regulators  think about the meme trading phenomenon