Odd Lots - How They’re Really Making Money On Your Free Robinhood Trades

Episode Date: July 30, 2020

With so many people working at home, bored, and with no sports to bet on, there’s been an incredible explosion of retail stock market trading. One service, Robinhood, in particular has gotten a lot of attention due to its free trading, and videogame-like appeal to young users. But how are they really making money on those free trades, and how does the economics of the business work these days? On this episode, we speak with Larry Tabb, the Head of Market Structure Research at Bloomberg Intelligence, who explains how it all works.See omnystudio.com/listener for privacy information.

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Saturdays and Sundays starting at 7 a.m. Eastern. Make us part of your weekend routine on Bloomberg television, radio, and wherever you get your podcasts. Hello and welcome to another episode of the Oblods podcast. I'm Joe Wisenthall. And I'm Tracy Alloy. Tracy, I have a question about things in Hong Kong, which is, are people going crazy for stock trading there the way they are here? That's a good question.

I'm not sure if this is reflected in Hong Kong, but definitely in mainland China, we've had this massive rally in Chinese shares. So, yeah, over there. we're having like a similar retail boom to what we have seen in the U.S. Yeah, I mean, it's pretty crazy. I mean, there's a lot of like subplots to this crisis. In fact, that's sort of the theme of our podcast over the last several months is just exploring all of the subplots.

But the incredible boom that we've seen in retail trading activity has to be one of the more surprising ones. And of course, the whole, you know, it's the whole Robin Hood phenomenon. All these people are home. They're not their jobs. There's no sports betting going on. And so it's like, all right, well, I got a few bucks laying around. Maybe I'll bet on some Tesla shares for free on Robin. Yeah, I think that's it, isn't it? It's not necessarily that retail investors are jumping into the stock market. It's the way in which they're doing that. Because we have commission-free trading.

Now, you can kind of take a punt on a bunch of stuff without necessarily losing that much money, at least up front, I guess. And like the punts that we are seeing, Tesla, um, Hertz, which declared bankruptcy. Everyone's been talking about those. And I think that really, that really stands out right now. Yeah, absolutely. I remember like last year, I think it was, yeah, it was last year and Charles Schwab announced that it was going to cut, uh, commissions to zero and a bunch of other online brokerages, uh, followed suit. And my first thought, was like, oh boy, like people are going to lose a ton of money because they're going to overtrade. And some people probably are. But the weird thing is that a bunch of people who jumped into

the market over the last several months have actually participated in one of the most extraordinary rallies we've seen of all times. So for now, some people are clearly winning. Yeah. But the other part of the story is, I guess, the downsides of retail participation, or not the downsides, but the criticism that comes along with it. So obviously, a lot of people have been making fun of people who are buying Tesla stock or bankrupt company stock. We've also had some criticism of some of the trading platforms, but particularly Robin Hood, which seems to be at the forefront of commission-free trading. Right. Robin Hood has sort of become, it's kind of like become like Band-Aid or Kleenex. It's like this brand, but it also is synonymous with a phenomenon or an

industry where lots of people are getting into trading and this whole commission free retail craze. It also raises some questions in addition to just sort of the retail side about how the industry is making money and who is really the big winner here. Because sure, there are some people that have probably turned a little bit of money into millions, thanks to investing in buying call options on Tesla, but also a lot of people are just, are making a lot of money just handling this incredible order flow, this incredible activity. And obviously with commissions having gone to zero, the business model has changed a little bit, say, from the late 90s when the online brokers, say, like, charge just $14 a trade or whatever it was. Right. So there's no free lunch in economics. There's

supposed to be no free lunch when it comes to trading. But clearly, retail investors are getting, you know, commission free trades, and yet someone must be making money off of those. So how are they doing it exactly? And again, that kind of feeds into some of the criticism that we've seen around the Robin Hood platform. Yeah, exactly right. So that's what we're going to dive into today. Like, who's really making money off of all this activity? How sustainable it is, what the new business models of online brokerage really look like. And so we're going to be talking to a great guest. He's actually with us at Bloomberg. He's the head of market structure research at Bloomberg Intelligence. Larry Teb is joining us to explain the sort of the new retail online broken landscape

who's making money out. Larry, thank you very much for joining us. Joe and Tracy, I'm really happy to be here. It's great to be here. Thanks. How surprising or weird is this moment? You've been examining the world of market structure for a long time. How crazy are things right now from your perspective? It's pretty insane. If you look at equity volumes, while we didn't hit a record during February March, in terms of share volume, we pretty much almost doubled the amount of notional traded, and that has a lot to do with the lack of stock splits. But the amount of value turning over is just phenomenal, given traditional history. And even this is through the global financial crisis, through the dot-com meltdown,

volume has just been astronomical. And actually, the other thing you've got to go provide kudos to is the market infrastructure. You really haven't seen, now, Robin Hood was down for a day or so. But other than that, you know, you've seen very few outages. And given all the volume and especially over a prolonged period, the brokers, the exchanges, the infrastructure providers have really done a great job keeping up with it. Right. I mean, Robin Hood was down at a pretty critical.

time in retrospect. But before we get into all of that, what do you think is driving the retail interest in stock trading at the moment? Is it as simple as everyone being stuck at home and having nothing to do? Or is it people who saw the Federal Reserve response and assume that it would lead to a big rally in risk assets? Or is it something else? I think you've got a couple of different factors going on. First, I think the initial issue was a freak out that everybody realized that, the economy may come to an end and, you know, we might have this pandemic of global proportions that may kind of wreck the economy. And so I think a lot of people got on sold a lot. That would, you know, that would explain a lot of the big dips and reallocate their portfolios.

Then I think, you know, the economy started shutting down in mid-March. People were stuck at home. There was no sports. There was no, there was no nothing. And you still had a lot of volatility. And then I think you start getting into this whole, you know, I'm stuck. at home, what do I do? And then you've got also a lot of professionals that are also stuck at home with nothing going on and a lot of volatility. And then you start seeing things like Amazon, oh, you know, I'm going to go, I'm going to go buy everything from Amazon and it's going to come the next day. So you've got logistics pops. You've got, you know, online pop. You've got the hotels, you know, entertainment, you know, sector shutting down. So you have a lot of interesting plays and

thoughts around, hey, look, this sector may actually do really well, but this sector might actually do very poorly. So you've got some real directional bets, whereas over the last decade, it's really, you know, the secret to life has mostly been throw everything in the S&P 500 and just let it grow. So now you actually have directional bets that you can play. And so I think you've got a, you've got a whole bunch of factors. Plus, of course, you know, commission free brokers. We started to see the, you know, in December when we started to see Schwab and the other guys kind of throw in the towel on commissions, you start to actually see the retail participation tick up actually then. It didn't just happen in February and March. It really started December when folks brought their

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episode up in your podcast feed within minutes. So you're always getting the latest stories and developments. Get the reporting and the context from Bloomberg's 3,000 journalists and analysts we're all over the world. Listen to the latest from Bloomberg News Now on Apple, Spotify, or anywhere you listen. Okay, I want to back up for a second. So we introduced you as the head of market structure research at Bloomberg Intelligence. But talk to us a little bit about your background, but also market structure, what does that mean? I don't know if that term is a particular one that people have a grasp on when they hear it. And why is it something that itself should needs to be understood? Why should people know more about the sort of vague, big picture concept of

market structure and why is it worth researching? Well, certainly my wife doesn't understand it. But market structure research is basically not necessarily what people are buying and selling and whether IBM is expensive or cheap. It's how all of the infrastructure fits together. So it used to be, you know, we used to have a New York stock exchange floor and people wandered around and negotiated and were specialists and poor brokers. And then NASDAQ was over the counter, mostly traded on traders' desks. But over the last 20 years, basically, All of this has been electronified. And so we now have 13, 14 exchanges, soon to be 16 exchanges in U.S. equities.

We have 16 options exchanges. And the pricing structure and how all this fits together and how do they connect and who do you route to first and what types of orders do you put where and how do you measure whether you're getting a good fill or not. that's all it has to do with all the rules and mechanisms that markets engage to actually match buyers and sellers together. And this occurs not just in U.S. equities, but fixed income. You're starting to see electronification of the fixed income market. And that's much more complicated and fragmented than equities and foreign exchange. And so you're seeing the movement and the electronification of all of these markets. and it has tremendous ramifications in terms of higher orders are executed.

And so that's basically what market structure research is. So it starts with the rules and regulations and then translates into how all of these rules from regulations are adopted through exchanges and the market infrastructure. I got to say, I used to call Larry up quite a bit when I was writing market structure stories over at the FT. And he was always very generous with his time and insightful. So thank you, Larry. Let's connect the market structure argument to what's going on with the commission-free brokerages or trading offers.

I mentioned in the intro, there's this weird thing. You're offering someone the ability to trade for free, but obviously that trade is generating a cost somewhere in the system. So how exactly are those trades being funded? Yeah, so this is really an interesting topic. And so at the very highest level, it sounds really fishy. You mean that market makers and wholesalers are actually paying to execute against my trade as a retail broker or as a retail investor. How can that be good? They must know something that I don't know.

They must be ripping me off. They must be giving, you know, getting me a horrible execution. This can't be right. Actually, though, it's not necessarily as nefarious as it all. all sound. And first of all, there are two different payments for order flow streams. First, there's equities, which works one way. And then there's options, which actually is a whole different way. That's a little more challenging. We can talk a little bit about that if we have time. The equity side, so think about equities and think about an electronic platform. So at the heart

of an electronic matching platform that works in microseconds, and all of these exchanges now execute in microseconds, if not quicker than microseconds. basically hundreds of nanoseconds, which is an unfathomably fast amount of time. So me as a market maker, what am I doing? I'm putting out a bid to buy or sell Apple. And so all of these really smart, really high frequency trading firms are looking at my quote to buy or sell Apple and trying to determine if that's the appropriate price for this nanosecond, basically, for this micro second. And if it's wrong, it's either not going to trade if I'm too high or too low, but if I'm too

aggressive, I'm going to get taken out in a heartbeat in the microsector. So me as a market maker, I have to, you know, if I'm trading on lit exchanges, I have to ensure that I'm really confident in my quote. And confident in my quote, not just in terms of Tracy or Joe or Larry trading against that quote, but confident in that quote for big, huge mutual funds, high frequency traders, and the smartest hedge funds in the world to trade against that quote. Because the second that I'm, you know, or the microseconds that I'm wrong, I'm going to get taken out. So the quote that I provide really has to be an institutional quote, a quote that, you know, hedge funds and mutual

funds need to think, okay, you know, that's a fair quote. It's not too aggressive, not to lose. That said, the reason why they're thinking that is because they're trying to buy thousands, if not hundreds of thousands, if not millions of shares. You and I are trying to buy 100 shares or increasingly less than 100 shares. But that's a whole other topic about odd lot to promote the title of this podcast. In effect, because you're in my order is for a fraction of the shares of fidelity or capital group or. Ridgewater or whoever's trying to buy, I can price, you're in my order tighter because, you know, because I don't have, you know, because Larry doesn't have a million shares after that first 100 share order behind it.

So if you think about supply and demand, what does the market do? It gauge the supply and demand. And if there's not a whole lot of supply or demand, then the price should not change that much. Whereas if there's a lot of supply and demand, the price will change a fair amount. But theoretically, actually, retail trades should actually price more aggressively than the larger orders. And that's kind of the theory behind payment for order flow that a market maker could actually price my or your shares better than they can price a large mutual fund or hedge fund. And the savings that gets split three ways. it gets split up into price improvement, which basically means that they're going to,

they're going to give me the customer a better price. They're going to pay a few cents to the broker, the retail broker who routed that order flow to them, and that's the payment for order flow part. And then the third part, of course, is the wholesaler's profit. And so that is, if you think about it, that that's the philosophy behind internalization and equity payment for order for. All right. There's a lot there.

So let's try to unpack it a little bit further. So you've made this distinction between, say, if I, if me or Tracy, you want to buy 10 shares of Apple, then the market maker at the other end can price, you said, I think, more aggressively or give a, so a narrower spread because they feel more confident. Yeah, because you're not going to come on the. back of that with another 100, another hundred, another hundred is going to add up to 50,000 shares. So when Schwab last year announced that they were going to go commission free, everyone's like, yeah, well, they can do it because they have this huge float of other assets and they make money in a bunch of ways. But that's obviously not the case with Robin Hood, which doesn't have, you know, which doesn't have nearly the asset base. It has a very different business model. It doesn't have the bank

attached to it like Schwab does. It doesn't have all the RIAs, et cetera. So just let's walk through specifically the innovation on, say, the Robin Hood side a little bit further and how payment for order flow works there. I open up my Robin Hood app. I make an order to buy 10 shares of Apple. Explain to me specifically how Robin Hood makes money after that transaction without commission. Well, they make their money pretty much the same way that Schwab or Ameritrade or each trade, you know, do it. That trade is going to get routed to most likely Citadel Virtu or Susquehanna through the city here. Etx-1. And just to stop you real quickly, when you, those are the market makers when you were talking about, okay, so these entities like

Virtue, Citadel and so forth, their market. Susquehanna, their market maker. They're market maker. Mm-hmm. Yep. And so they're going to route that order flow to generally one of those three players, which are the three largest, and there are a couple of other auxiliary players there, too, like Six, like two Sigma. So they're going to route that order flow to those guys. The wholesalers are going to execute that equity order at or better than the best price in the market, because that's how the SEC demands that those orders get executed. And they're going to pay. they're going to probably give a little bit of price improvement to the order. So you'll get a price that's actually better than what you see in the marketplace. And then they're going to pay Robin Hood a few cents for that order.

And it could be anywhere from the average payment for order flow is about 14 cents per 100 shares. But actually in Robin Hood, it's more. Yeah. I wanted to ask you about exactly this. And I think maybe it will help us understand the process more. But one of the criticisms of Robin Hood especially is that it tends to get more for every dollar in, you know, customer order flow versus someone like Schwab. Why is that? What's the difference there?

Because presumably everyone is sort of executing at similar prices or at least executing with the same intent of achieving best price. Yeah, that gets a little squirmy. So if you think about the three sections of profit, you know, the price improvement, the payment for water flow and the market maker profit. So if you think about it, the spread's going to be the same, whether, you know, whether, you know, it's you or me or coming from Schwab or Robin Hood or each trade. So the bigger question is, how much am I going to make on that trade and how is that what I make and be split between what I keep, what I send to the client and what I send to the

broker. And what I, what I keep will probably be somewhat consistent because it's very competitive. And so the real difference is between what I, what I give to the client and what I give to, to the broker. And while I don't have the execution quality stats, that's where there could be different, you know, that Robin Hood may keep a larger percentage or a smaller percentage or give, you know, a larger percentage back to the client or not. And that's where there can be some variability. How do you measure execution quality? Execution quality is usually measured by the spread and the percentage of the spread that goes to the market maker versus the percentage of the spread that goes to the client. And we've seen those numbers actually tip very significantly over the last

20 years from basically the broker or the market maker keeping the full spread to only keeping roughly about 30% of half the spread, actually keeping half the spread because everything's measured on half the spread between the midpoint and the execution price. So it's gone over the last 20 years from the market maker keeping basically the whole half spread versus they're only keeping about 30% of half the speed. And so it's all measured between the execution price versus the displayed price. And it's a measurement called EQ, effective over quoted ratio. And that's part of the SEC's reporting requirements for retail execution.

So we're seeing, you know, we're seeing much better execution quality. Now that execution quality differs, you know, can differ really depending upon. what the broker's priority is. Do they want to get paid or do they want to give that money to the client? So you can look at, let's just say, fidelity. Fidelity doesn't take payment for order flow from retail clients. So all of that money that comes back in effect from the wholesaler goes directly to the client, whereas folks like Robin Hood probably take a little bit more, Schwab takes a little less,

but, you know, it really is a dialogue most depending upon what the retail broker want. So I want to press you a little bit on best execution and best price as well, because one of the criticisms of commission-free trading or payment for order flow is that even though you're trading for free, you might not necessarily be getting the best price. And that's, you know, even though you're dealing in smaller retail orders that market makers can execute at tighter spread. So can you sort of walk us through that argument? And what is the opportunity that retail investors are missing out on when their trade goes to a payment for order flow provider versus a different system? You're starting to get into a little complicated areas here. So let's make it a little simpler and then we'll add some complexity to it. Generally what happens is since the wholesaler receives the order and executes it off exchange,

they then can manage the risk and execute it and executed at a tighter price than, you know, what can happen on the exchange. So without the wholesaler, in effect, what would happen is that a little, would go to an exchange and that would trade on the bid or on the offer. Or, you know, if it traded in the dark, it might be executed at a mid price. But by and large, if it goes to an exchange, it's going to be traded at the bid or the offer. The wholesaler is going to give you an inside price, a price that's better than the bid of the offer.

So the whole idea that the wholesaler is kind of ripping you off, that doesn't really fly, especially when you start seeing prices that are tighter than the best bid offer, because you wouldn't necessarily get that if you routed to an exchange. You would generally get the bidder offer. Now, adding a little bit of complexity to this is that in most cases, odd lot orders are not displayed. And that's part of the new SEC market data infrastructure proposal, that they want to start seeing more odd lots be part of the bid or the offer.

So there may be odd lots sitting more aggressively in the market than you actually see when you get on your Robin Hood screen or your Schwab screen. And so there actually may be more aggressively priced orders out there that you can't see. But hopefully under the new proposal, if that ever goes through, you'll see a tighter price and a little different. So I wish I could say that you were always, when you got price improvement, you were always getting the most aggressive price that you could get in an exchange. But that may not necessarily be true depending upon the number of shares you're executing and what you actually can't see that's more aggressively priced because of the way the consolidated pay for. So I'm curious. So obviously payment for order flow is available and why that's. used in the United States. But over in the UK, the Financial Services Authority cracked down on it

many, many years ago. I think it was too. They banned it in Europe. Yeah, I think it was 2012. So what is it that they're seeing? What's their concern with it that, you know, the U.S. isn't necessarily seeing? Well, first of all, retail trading in Europe tends to, or trading in Europe tends to be not as retail focus. A lot of the equity trading and shares trading in Europe was really done by more institutions. So that's that's one thing. Share trading in Europe in the UK by retail tends to be more around spread betting, which is illegal here. So so there are different types of retail transactions that occur. The priority in the U.S. has really been to get the retail investor the best price. And the SEC has structured those rules to really focus more on price than

price transparency within the exchanges. Europe has been a little bit more focused on the whole idea that we're community and the exchanges are really the central point of price formation and that that we want a larger proportion of orders and trades to go through the exchange infrastructure. Now, and that was a part of what the MIFID II, the Mark Financial Instruments Directive, their second cut at that tried to do with reducing the amount of flow that could be traded in dark pools and things like that. They were not successful there, so there probably be a MIFID 3, but they try to push order flow into the exchanges. The U.S. really cares more about the price that investors get than basically ensuring that order to trade on exchange. I'm Francine Lacquois, an award-winning journalist, and I've got a new podcast, Leaders with Francine Lacqua from Bloomberg Podcasts.

I've interviewed everyone from Heads of State to fashion icons about the news of the moment. But I've always been curious, who are these people as leaders? I don't think there's one right way to be a leader. Make decisions. A poor decision is always better than no decision. Listen to new episodes every other Monday. Follow leaders with Francine Lacois wherever you get your podcast. Can you explain a little bit further? You mentioned that Fidelity, I think you said, didn't do payment for order flow. Which brokers? For equities. Which ones do and don't? And what is the alternative model? Why not engage in it?

Well, first of all, Fidelity has a large mutual fund complex. I don't know for sure, but you can assume that Fidelity, view on payment for order flow, if you think about it, if the retail orders did not go with the wholesalers, they would come into the market, and overall they would be accessible to the institutions to trade against. So if you look at fidelity over, you know, its entirety, they want access to that order flow into their mutual funds, which they're really not getting. The contra argument to that is that, you know, fidelity, and I'm not just picking on fidelity, but, you know, every mutual fund or every institutional trader, they hire traders, professional traders who use algorithms, who study, you know, execution quality, who really focused on how they execute their order

flow. And that's what they get paid for. That's what you can pay your fees to cover. But who represents your order at Schwab? Who represents your order at E-Trade? You can argue that that is the wholesaler. The wholesaler, you know, gives you that best price in effect because they are the the guy that's guaranteeing that best execution. And Schwab and those guys, they don't have those teams of traders studying every fill, every order, and every nuance of transaction.

So it's a difference of philosophy. It'd be great to say that payment for order flow is good or bad or this to that. It's very nuanced. And it's general I fall on that it's a good thing. Well, put it this way. the wholesaling process, whether the firm like Fidelity gives all that money back to the client, I think that's a great thing. I would much rather see price improvement go 100% to the client rather than the brokerage take a portion of it.

But on the other hand, that payment for water flow along with securities lending, which is the other way that these guys make money. Right. You know, that's what funds the ability to have free commissions. So it's not like they're going to town on your order flow. It's a very competitive market. And generally, execution quality has just been getting better and better. So it's really, this whole process has actually been good for individual investors.

So in addition to the big boom in retail trading, one of the recent trends that we've seen is all the banks reporting their results and a lot of them posting better than expected trading results. You mentioned internalization towards the beginning of our conversation. Could you maybe give us an overview of what internalization actually means at banks and how it might be, I guess, how the business might be doing at the moment, given that retail trading boom? There's been actually major shifts in terms of who trades and why. If you look at, or who trades and who profit, if you look at market share of, you know, the over-the-counter business, it has shifted really dramatically to, you know, to the wholesaler. Citadel is trading like, you know, 30% alone of all the over-the-counter trades. And they have gained share over the last couple of months. Virtue is, is, you know, is. less than them, I think they're in the, you know, 20% or something range. And so you're seeing a

tremendous shift of order flow to these wholesalers. The folks who are actually losing ground are, you know, the traditional brokers, the Goldman Saches, the Morgan Stanley's, the Citigroups, the Bank of America, Marylandians. They are losing, they have been losing ground in terms of equities. And that's because to certain extent, it's very difficult for them to keep up with the technological race, the technology race, you know, compared to the citadels, the virtues, the two sigmas, the Susquehontas. Because to a certain extent, you think about it, it's all about agility. If I can find a faster way, a faster server, a better way to calculate this stuff,

if there were fewer levels of bureaucracy and technology layers between me and the ability to get, you know, change, I can adapt quicker and I can be more competitive. And if you look at the big banks, they've gotten so big and so large and so massive. So if I'm in the equity trading side of Big Bank A, I'm competing for resources, not just with the fixed income side, not just with the institutional side, but I'm competing for resources with retail banking, credit cards, mortgages, you know, wealth management, all sorts of different players. And so whereas if I am Citadel or Virtue or Susquehanna, I just need to go

across the floor and say, hey, buddy, I need, I need the new server, you know, write me a check. And you're seeing that play out as well as the regulatory infrastructure has not been particularly favorable over the last decade that the big banks in terms of taking risk. Now, on the other hand, you know, you look at the fixed income side and you look at the earnings that the big banks have turned out on the fixed income side, you're probably looking at this quarter alone, them making something like $20 to $30 billion on their trading business. Now, that $20 to $30 billion is coming out of investors' pockets. They are not making that kind of money on the equity side.

And that has a lot to do with the market structure and the efficiency and the way that these orders are internalized and how they trade. And so over time, I think you're going to see the fixed income side become more efficient. Probably will never be as efficient as the equity side, mostly because there's, depending upon if you include mortgages, over a million, you know, Cusips, a million individual securities that need to be priced. But it's going to become more efficient and cheaper. Do you see these entities like Susquehanna and Citadel continuing to expand their lines of businesses and just continue, you know, I don't know if cannibalization isn't the right word, but find more areas where they can win market share against these legacy players? No question. No question. And so, you know, if you look at the, you know, the markets that look closest to equities tend to be much more easily, you know, able to be, you know, aligned to electronic trading type type strategies. So certainly options have gone that way. If you look at porn exchange, it's, you know,

it's starting to move in that direction. Some of the fixed income is starting to move in that direction. It may not necessarily be the same players. Some folks have different, you know, there are other players that focus in other market. But the electronic guys are just, they have lower overhead and less regulatory burdens. So it's a combination of agility, focus,

and regulatory headwinds. And the banks over the last decade have certainly, had tremendous amounts of regulatory headwinds in this size of the business. Before we go, I want to just go back to the Robin Hood phenomenon. So, you know, people hear this stuff like Citadel is paying for order flow. And they don't really understand what that means. And they're like, oh, you're being a front run and that's really what's happening. And as you described, that's really not. And in fact, actually pricing is pretty good and it just keeps getting better and better and so forth. Should the SEC or regulators be more concerned about the gamification aspect

or the gamification aspect, the idea that these entities are sort of turning, trading into a video game and not so much whether people are getting bad prices or being front run, but whether this is just sort of like a risky, reckless way to introduce investors to the stock market. Now you're ordering on politics, you know. Without opining on politics, but is this more the, is this more the issue when people are like, something feels a little bit wrong about this, or I'm a little uncomfortable with this whole Robin Hood thing, is it more that side than the sort of more conspiratorial citadel stuff, such like that? There are, there are significant issues there because if now you can compare this also to the dot-com crisis when you start to see investors

you know pile in the pets.com and things like that. This is different. Back then it was really more about IPOs and buying and holding and you wound up, you know, with kind of flaky companies being valued at way too much and people holding all these overvalued assets and then all of a sudden the rug being pulled out. This seems to be a bit different in that this is more about. This is more trading and I think one of the big things about Robin Hood is the transparency of their platform enables you to kind of see what other people are trading and join the momentum train and the problem with that is that you know because you're dealing with a handheld device you have enough information to really understand if you're in the

beginning stages of this momentum train or if you're in the middle or if you're really you know buying at the peak. The benefit is that are they really investing a lot in each of these trades and are they, how long are they sticking in with it? But there are certainly valuation questions. But on the other hand, the SEC doesn't look at itself as trying to say, yes, we should allow, you know, Larry or Joe or Tracy to buy Tesla at whatever. They want to make sure that, you know, when you buy Tesla at whatever, is.

whatever the right price. And is there transparency around that. And so I don't see the SEC sticking their nose and the valuation issues. That said, people should be worried about the value of what they're buying because, in effect, if they're not really worried about it, then you're into the strategy of who's the next sucker

who's going to buy this for me at a higher price. And I'm not sure that's a great investing strategy. Right. Well, Larry, this was a great conversation. This cleared up a lot of questions that I've had for a while. And sort of, I think for me and Tracy gives us a lot of new avenues to explore. So really appreciate you coming on and explaining it. Well, hopefully I didn't confuse everybody too much, but it's not. See, that's why you need market structure research. Because it is complicated. Thanks so much, Larry. It feels like we just scratched the service, but this is, it was really great. Thank you very much. You're all awesome. Thank you.

Yeah, I have to admit, Tracy, this area, it does sort of hurt my head a lot. And I do have like a million more things I want to explore now. But that was a really helpful sort of overview of what is a kind of extraordinary moments in financial market. Yeah. I mean, I've read the criticism and I've read some of Larry's research, which kind of argues that payment for order flow isn't as nefarious as it seems. and it's very hard for me as a non-expert to come out on either side of that. But what I did find very interesting and something that I think we can all agree with was Larry's point about this idea of commission free trading sort of turning the market

into a very momentum driven one. You know, people aren't necessarily holding for the long term because it doesn't cost them anything to make these trades. And so everything does really become about momentum or flows, you know, just guessing where the money is going to go in next. And one of our Bloomberg colleagues, Luke Cowah, did a really good story on Robin Hood and this dynamic recently. And it was sort of around people kind of agreeing what stocks to buy and then pushing for them in online forums. And then the stock would go up and they would make a lot of money on Robin Hood through options trading and things like that. Anyway, that's, that's, that's, that's, That's the dynamic that I think is very new and important for markets overall. Yeah, totally right. I also like, we should have Chris White on again soon. I mean, I know we've had them on like nine times,

but thinking about, again, revisiting this topic in light of just this massive quarter that the Wall Street banks had trading fixed income, we should definitely have them back on talking about market structure on that side too, because obviously there's a huge pot of gold there for anyone who is in a good position to, you know, continue to disrupt that space like they've done with equity. Hey, I am always up for a market structure episode. Great. Well, let's do more.

So do we leave it there? Yeah. You know what I forgot to ask, Larry? Mm-hmm. I wonder, like, will we ever break the zero lower bound with brokerages? Like, can I get paid? Like, someone will pay us? Yeah.

Yeah. Maybe that's the next frontier. That'd be fun. could, you know, maybe make more money than you could on, on interest rates by doing that. Fun. Yeah. No, I meant to ask that, but next time. Okay, next time.

All right. Well, this has been another episode of the Oddlots podcast. I'm Tracy Alloway. You can follow me on Twitter at Tracy Allaway. And I'm Joe Wisenthall. You can follow me on Twitter at the stalwart. And you should follow our guest on Twitter, Larry Tab. He's at LTAB with two bees.

Follow our producer on Twitter, Laura Carlson, at Laura M. Carlson. Follow the Bloomberg head of podcast, Francesca Levy, at Francesca Today. And check out all of our podcasts under the handle at podcast. Thanks for listening. This is Tom Keane, inviting you to join us for the Bloomberg Surveillance Podcast. It's about making you smarter every business day. I'm Paul Sweeney. We bring you complete coverage of the U.S. market open.

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