A vital downside is that many traders don’t perceive the “plumbing” of how monetary markets work — together with what high-frequency merchants do, Tenev mentioned in a weblog publish.
“A handful of enormous corporations now execute nearly all of trades in monetary markets,” Tenev wrote Tuesday, including that this will probably be a part of an occasional sequence of posts. “These so-called market makers can extra effectively course of trades at a narrower band of costs. Amongst those that profit? The on a regular basis investor.”
Menlo Park, California-based Robinhood is beneath the highlight over its dealing with of the meme-stock episode, which included an enormous rally in shares of GameStop Corp. in late January. As clients sought solutions, they as an alternative encountered conspiracy theories on-line in regards to the brokerage’s ties to high-frequency merchants.
Such corporations together with Ken Griffin’s Citadel Securities and Virtu Monetary Inc. are an essential a part of Robinhood’s enterprise. Not solely do they perform trades by the brokerage’s clients, they pay Robinhood for the chance to finish these orders. Doing so often carries much less danger than buying and selling on open exchanges operated by Intercontinental Alternate Inc.’s New York Inventory Alternate or Nasdaq Inc.
Whereas the system is widespread within the trade — and monitored by securities regulators — it has additionally change into controversial, with some Robinhood clients alarmed to be taught that the agency has monetary ties to mainstream Wall Road.
In December, Robinhood agreed to pay $65 million to settle allegations that it didn’t correctly inform clients that it offered their inventory orders to high-frequency merchants. Robinhood neither admitted nor denied the claims.
Tenev and Robinhood co-founder Baiju Bhatt are not any strangers to the world of high-speed buying and selling. Earlier than creating Robinhood, they ran Celeris, a hedge fund that used high-frequency buying and selling methods, and Chronos Analysis, a software program agency that catered to algorithmic merchants.