PFOF: Citadel Securities – Robinhood model slammed by Public

Rick Steves

The short squeeze lawsuit may be going in favor of Citadel Securities and Robinhood, but that doesn’t the PFOF model is not at the end of the road. Most countries have already banned it outright. It might be a question of time for the US to do the same. 

Following the infamous short squeeze of January 2021, Public.com decided to end its participation in payment for order flow (“PFOF”), the model that raised scandal among retail investors and even several lawsuits, including the Short Squeeze Trading Litigation.

Public.com is a stock trading platform that rivals Robinhood and is now throwing stones at the PFOF model as well as claiming it has achieved “better execution quality on average to customers” than competitors that rely on PFOF from market makers, such as the relationship between Robinhood and Citadel Securities.

PFOF with worst prices for retail investors

As to effective spread over quoted spread (EFQ), Robinhood stood at 44.79% while Public.com achieved 32.88%, demonstrating better execution quality. The impacts of other metrics, like AOB and Price Improvement, are naturally reflected in EFQ.

As to net price improvement – measured by taking the gross price improvement per share and subtracting any executions that slip outside of NBBO, then averaging that across all shares traded – Public.com also outmatches Robinhood: $1.18 against $1.72.

Public.com arrived at the conclusion that rejecting the PFOF model resulted in better price execution. “Looking at the data across EFQ, AOB, and price improvement per share, it’s clear that quality price execution is possible without routing to market makers in exchange for PFOF. Public’s price execution on the most comprehensive and important metric, EFQ, is better than our peers and is comparable, if not better, across the other metrics”, said Stephen Sikes, Chief Operating Officer at Public.

A Bloomberg Intelligence reported the spread between the midpoint and the best bid or offer on retail investing orders in the second quarter of 2021. The spread was divided as follows:
49% went to market makers in the form of trading revenue
13% went to brokers in the form of PFOF
38% went to retail investors in the form of price improvement

The more value or share of the spread that goes to brokers and market makers, the less room there is for price improvement for customers, Sikes continued, adding that Public’s model delivers more value to customers than PFOF.

Stephen Sikes explained both the PFOF model and Public’s, pointing the reasons why the latter is better.

“Most retail brokers route their customer orders to a small number of market makers, who pay the broker PFOF in exchange for order flow.

“So, when a customer submits an order to the broker, the broker assigns that order to a predetermined market maker, without checking the broader market for a better price”.

To sum it up, “every dollar they deliver in extra price improvement is a dollar less they earn on that trade, so their incentives are to deliver a price that is just good enough to retain the contract with the broker, but may not be as good as other pricing that is available in the market.”

Public accounts for gap of National Best Bid and Offer (NBBO)

Public’s model accounts for NBBO’s limitations, which only captures 50% to 60% of the pricing available in the market, and particularly for orders of less than 100 shares, there are better prices available in the market than what is captured by NBBO.

The trading platform works with Apex Clearing, Instinet and the execution venues, and locates the best price for each order available across 28 different lit exchanges and alternative trading systems (“ATSs”). Smart order routing does the rest, including scanning venues that are often not included in NBBO, including retail-specific lit venues and ATS.

“We currently execute across 28 different venues and execute 70–75% of our shares on lit exchanges. We execute the remainder on ATS, almost entirely in cases when we are able to find a midpoint execution that is better than we’d find on the lit exchanges”, Sikes explained.

The short squeeze lawsuit may be going in favor of Citadel Securities and Robinhood, but that doesn’t the PFOF model is not at the end of the road. Most countries have already banned it outright. It might be a question of time for the US to do the same.

 

Read this next

Digital Assets

LMAX Digital onboards Bryan Christian and Cassandra Cox to lead sales

Institutional cryptocurrency exchange LMAX Digital continues to undergo a series of changes in its top ranks as it continues to build its presence globally. Two industry veterans, Bryan Christian and Cassandra Cox, have joined the group as its newest sales directors in Europe and USA.

Digital Assets

Cake DeFi introduces Ethereum Staking with 5% returns

Cake DeFi, a Singapore-based DeFi platform, is launching its Ethereum (ETH) staking service for retail and institutional customers.

Retail FX

FX trading rebounds 405pct at Saxo Bank in September

In a volatile market driven by Russia-Ukraine headlines, FX trading volumes through Saxo Bank have rebounded strongly in September to the highest level in three months.

Retail FX

CMC Markets’ stock climbs as H1 revenue to climb +20%

CMC Markets PLC (LSE:CMCX) shares spiked 5.6 percent to 235p in Thursday’s trading after the firm’s trading update for the first half of its fiscal year 2023 revealed results at the high end of company projections.

Retail FX

Interactive Brokers doubles client accounts to 2 million in 24 months

Electronic brokerage firm Interactive Brokers LLC (NASDAQ:IBKR) said its trading volumes took a slight step back in September, an indication that investor confidence is still fairly mixed over the past few months.

Digital Assets

DeFiChain tokenizes Walmart, Unilever, US Oil and Gas Funds

Bitcoin-based DeFi platform DeFiChain is opening up the opportunity for its users to trade crypto versions of Walmart, Unilever, US Oil Fund, and US Gas Fund.

Industry News

The B2Broker B2Core REST API Is Now Live

B2Broker has announced the release of its new REST API, which lets customers use B2Broker’s solutions and services for business purposes.

Executive Moves

CME Group taps Paul Woolman to lead Equity Index, Giovanni Vicioso to lead Crypto

“Our equity and cryptocurrency businesses have experienced tremendous growth in recent years, underpinned by strong customer adoption and continued innovation.”

Technology

Sumsub launches document-free KYC for users in India, Brazil, Nigeria and Indonesia

Sumsub has launched one click-KYC for users in India, Brazil, Nigeria and Indonesia in a move that allows businesses to instantly onboard over 2 billion users without requesting their ID documents.

<