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No shortage of wrong takes on RH order flow/payment on this website. It’s really not that hard. RH gets paid about $1.50-$2.00 for every 1000 shares they execute. If the avg px is $25 thats $25K notional for that 1000. /1
The wholesalers (ie Citadel) on avg make about 3 bps (0.02%) on that $25K so $7.50. They paid about 0.8 bps (0.008% or $2) for it so keep $5.50 for a net capture of 2.2 bps /2
The payment figures are in the public 606 reports. MM profits are a little more difficult but KCG (formerly Knight) was a publicly traded, pure play MM before their were acquired by Virtu /3
The net capture figures were in the quarterly reports. The market hasn’t changed that much since nor has the pricing. But the capture would range from about 1-3 bps depending on market volatility. /4
It’s fair to say the capture could be elevated to 3-4 or higher right now but is nowhere near the crazy numbers being thrown around. And yes Citadel is very good at what they do but KCG and now Virtu was/are very competitive with them /5
There’s just a ton of order flow right now—so it’s a little bit on a lot of volume. That’s the game. There’s no “front running” of this flow-people use that term and have no idea what they are saying. You can’t front run 23 shares /6
Front running is when you know a BIG order is coming and you position ahead knowing it will move the price. Taking the other side of a RH order is just a bet that on avg it will be “wrong” and will make a few bps. /7
I say “wrong” in quotes because it’s only zero sum over identical timeframes. If I buy 100 shs at $10 and sell at $20 a wk from now, yay for me. Am I “wrong” of Citadel bought back the 100 he shorted to me a nickel lower? No. /8
The wholesalers lose on more trades than you think-there are smart customers, exchange and clearing costs eating up profits, bad luck, etc. But they win on avg (and yes everyday) because the trades are mostly just noise. /9
I’m probably tweeting into a black hole but if that helped even one person tamp down their outrage for a least a couple of hours, I’m good.
