The Robinhood Impact on Fairness Markets Case Report 2021

DUBLIN, September 16, 2021 / PRNewswire / – Case Study: The RobinHood Effect report has been added to’s offering.

Logo for research and markets

The seeds for a dramatic, unprecedented and lasting transformation in US publicly traded stock markets were seeds long before the volatility spike in March 2020, well before the following year of the pandemic effects, and even well before the more recent meme-stock craze of 2021. What these markets have been through – and will continue to go through – is based on a convergence of factors.

The core building block for this transformation – a practice known to the most casual market observer today as Payment for Order Flow (PFOF) – has existed since the 1990s. But while PFOF enables this market frenzy, it doesn’t do it alone. The automation of trading processes and the application of high-performance technologies to streaming market data gave early quant traders significant competitive advantages as early as the late 1990s.

Liquidity fragmentation – especially over-the-counter (or dark) trading – was born in the wake of the ATS regulation in 1998. And rules on topics such as best execution and conditions for minimum spread sizes resulted from the implementation of the NMS regulation in 2005.

In fact, the regulatory environment after the global financial crisis (GFC) also played a role in this transformation. In this environment, the bank’s own brokerage arms – the then reigning trading centers on Wall Street – struggled to justify the technology budgets, attract the talent, and muster the vision necessary to cope with the growing capabilities of the proprietary trading firms (all the high-frequency trading companies) that industrialized Deploy versions of high-performance technologies in the US publicly traded markets. They still face problems as many Wall Street banks curtail or abandon their market-making activities in stocks, especially retail options.

The story goes on

It took a group of young innovators not long after they graduated from Stanford – with a small dose of New York-style trading perspective and a large dose of Silicon Valley-style design perspective – to leverage these factors with the crucial complement of mobile technology and highly playful social media techniques. What started as Chronos Research August 2011 – with its mission to provide high frequency turnkey trading platforms – Robinhood quickly became April 2013. Not long after, from December 2013, a $ 3 million Venture capital seed round set the stage for much bigger things.

The concept was to introduce a mobile app that focuses on commission-free trading. This happened from March 2015. What the founders didn’t expect – and never were properly prepared for – was that the introduction of a new (and aggressive) brokerage business model would eventually be emulated by the largest established companies, forever changing the U.S. stock market and the marketplace would disturb participants in the entire capital market ecosystem; a very Robinhood-like maneuver.

While the historical details are colorful, the story we’re about to tell here isn’t nearly as much about Robinhood The Company or the RobinhoodApp as it is about Robinhood The Catalyst. The data show that a convergence of factors – the increasing acceptance and importance of PFOF, the gradual growth of over-the-counter trading (and the associated regulatory arbitrage by proprietary market makers), the shift in the balance of power from banks’ own market makers to the proprietary market Makers (a subset of which in this space is known as wholesalers) and the increasing effectiveness of social media-style design techniques – contributed, among other things, to an evolutionary shift in how retailers interacted with US stock markets from before conception the RobinhoodApp.

All in all, Robinhood’s aggressive take on the commission-free business model – after all, with added tweaks and twists like PFOF rates tied to spreads, no minimum accounts, stock gifts, and other unique features – fueled its dramatic growth and ultimately caught the attention of the largest established retail brokerage and induces them to adopt the central key to their success: commission-free trading. Welcome to October 2019.

Order routing income is one side of the coin that includes trading activity on the other. They are tied together. When one is up, the other should be expected to be up too. Figures 2 and 3 below illustrate this relationship and timing for TD Ameritrade and E * Trade, respectively. Both leading PFOF-receiving retail brokers see new highs in trading activity immediately after the introduction of the commission-free brokerage model, but before the pandemic lockdown and the increase in volatility of March 2020.

The first effects of the industry-wide switch to a commission-free brokerage model can also be seen on the wholesale market making side. In Appendix 4 below, the publisher presents the available net price improvement value data for Citadel securities over a period of 75 months beginning October 2014 and ends – with some gaps in the data – December 2020. Here, January and February 2020 clearly show new highs in total executed stocks, which is the other side of the order flow from retail brokers.

In contrast to Interactive Brokers (IBKR) – a trading platform (“IBKR Pro”) developed for professional traders who want a commission-free version of this platform (“IBKR Lite”) in September 2019 – The timing of new high trading activity does not follow the same pattern as the leading retail brokers (see Figure 5 below). This is evidence that commission-free trading primarily impacted a particular order flow demographics before this phenomenon was masked by the early onset of pandemic market volatility.

With this in mind, the aim of this case study is to 1) provide a detailed analysis of the factors that drive the commission-free retail brokerage model; 2) the role of wholesale market makers in these factors; 3) how wholesale market makers are the main beneficiaries of this model; and 4) the long-term impact of this model on the entire capital markets ecosystem.

Key topics covered:

1 Introduction

2. Table of contents

3. Exhibition directory

4. Storyboard

  • Transformation of Retail Brokers

  • Investor demographics

  • Broker Personas

  • Order routing sales

  • Wholesale market maker

  • Nested Alpha Strategy Architecture (NASA)

  • Liquidity Economics Framework

  • Captive order flow

  • Development of the wholesale market share

  • “Price Improvement” or Government Arbitrage?

  • Order forwarding rates

  • Market share by order type

  • The retail flow factors

  • Equity flow factor for private customers

  • Flow factor for retail options

5. Conclusion

6. Glossary and Abbreviations

7. Additional exhibitions

  • Themes for retail brokers

  • Investor demographics

  • Order Routing Practices

  • PFOF rate heat maps

  • Order type distributions

  • Order routing sales

  • Retail broker

  • Ally Invest Securities, Llc

  • Apex Clearing Corp.

  • Charles Schwab Corp.

  • E * Trade Securities, Llc

  • Interactive Brokers Group, Ltd

  • Robinhood Securities, LLC

  • Tastyworks

  • TD Ameritrade / TD Ameritrade Clearing

  • Trading post

  • Webul

  • Wholesale Market Maker Themes

  • Price improvement

  • Average order size

  • Market share details

  • Wholesale Market Maker (Cash Equities)

  • Citadel Securities

  • G1 execution services

  • Jane Street

  • Two Sigma Securities

  • UBS securities

  • Virtu America

Please visit for more information on this report

Media contact:

Research and Markets
Laura wood, Senior manager
[email protected]

For EST office hours, call + 1-917-300-0470. at
For US / CAN toll free call + 1-800-526-8630
For GMT office hours, call + 353-1-416-8900. at

US Fax: 646-607-1904
Fax (outside the US): + 353-1-481-1716



View original content:

SOURCE Research and Markets

Comments are closed.