What Exactly is Payment for Order Flow?

Ever since Robinhood was in the news back in January for their involvement in the GameStop controversy, the way brokerage firms get paid has come into question. Popular stockbrokerage companies such as Robinhood, Webull, E*Trade, and TD Ameritrade all utilize a practice that is known as “payment for order flow”. Payment for order flow is the process where the stockbrokers receive payments from the market makers (dealers) for routing trades to them. The brokerage firm is essentially acting as the middleman between you (the retail investor) and the market makers.

Who are the market makers? The bigger market makers are Citadel Securities, Susquehanna, Virtu, Two Sigma and UBS. The SEC defines a “market maker” as a firm that stands ready to buy and sell stock on a regular and continuous basis at a publicly quoted price. Market makers are essentially companies or individuals that buy up large quantities of stocks to sell hoping to make a profit on the bid–ask spread, or turn.

The market makers profit from buying shares for cheap and selling them for more expensive. The brokers on the other hand profit through making the trades actually happen by acting as the wholesaler between retail investors and market makers. The broker basically directs traffic to the market maker that can best fulfill the order. The stockbrokers will generally have prearranged agreements with market makers who will compete for the order flow.

The controversy with the payment for order flow process comes into play here. While the brokers should choose the market maker that will quickly and efficiently fill the order at the lowest market price, this isn’t always the case. An order flow agreement might make brokers direct traffic to a prearranged third-party. The third party compensates the broker for sending traffic their way, often at the expense of the retail investor.

One of the biggest worries with payment for order flow is that the brokerage firms might be routing orders to a particular market maker for their own benefit and not in the best interest of the the investors. Other concerns are that order flow arrangements empower market makers with the additional liquidity to bundle large orders, deal from inventory, and take the opposite sides of trades to buffer exposure risk.

Payment for order flow has been considered revolutionary for retail investors because it has all but eliminated the commissions and fees associated with trading stocks. But some argue that the negative consequences caused by the payment for order flow process outweigh the benefits of not paying commissions and fees. What are your thoughts about payment for order flow? Leave me a comment and let me know.

Photo by Vance Alm

How to Use Robinhood, Webull and Other Trading Apps

I’ve touched on this topic a little in a previous blog, “How to Invest Your Stimulus: Investing for Beginners“, but I want to go more in detail so you can fully utilize your trading app to get the best experience. There are numerous trading platforms and apps you can use to trade stocks, each has there own unique twist. There’s some older more traditional names like Fidelity and E*Trade and newer names like Robinhood and Webull. I have personally used Robinhood, Webull, and Stash for stock trading and out of those three I prefer Webull.

In my opinion, Webull is the best trading app because it gives you the most options to choose from among graphs, such as a simple line graph, candlestick graphs, and multiple others. It also has a “Community” section where people can ask questions and post comments. Theres also “Top News” area with the “Community” section. One of the biggest features that sets Webull apart from the others is that it lets you set the price that you want to buy or sell at. I haven’t seen this option in any other apps.

Speaking of other apps, I do like how Robinhood and Stash give you the ability to buy partial shares. This essentially makes so you can create your own mini ETFs where you can be better diversified. On the home page for both apps it will show you your portfolio total dollar amount. Robinhood is a little better than Stash here because it shows you how your portfolio performed for the day. In Robinhood, when you scroll down the homepage, it shows you the stocks that make up your portfolio, the number of shares you have in each, and how they performed. Below your portfolio is your watchlists where you can keep an eye on companies you might potentially add to your portfolio, you can add or delete whatever companies you want to your list.

The Wallet tab to the right of the homepage tab shows you your cash balance along with recent history of transactions, whether you deposited money or bought/sold stocks. The Search tab is the magnifying glass icon in the middle. You can search for information on different companies here and this is also where Robinhood shows recent news articles related to investing. The Messages tab is to the right of the Search tab and this is where Robinhood will send messages related to updates, announcements, and your purchases. The last tab on the right is your profile with areas for help, settings, and a history of statements.

Those apps are all nice and simple for when you first start investing but once you’re ready to play with some more features and see some more details, that’s when Webull or Fidelity would be a better choice. The first tab on the left for Webull shows your Watchlist and your positions along with how they performed for the day with a line graph, percentage change, and dollar change. The tab to the right of that shows a ton of information such as the performance of the entire stock market, how many stocks advanced or declined, the top gainers and losers, an IPO center displaying information about upcoming IPOs, and a calendar showing when different companies will release earnings statements, dividends, and splits. The middle icon in Webull shows your portfolio total dollar amount, the companies and number of shares within your portfolio, and how well each stock has performed since your purchase price. The icon to the right of the middle is the Community tab where you can see investing news and where people can ask questions and leave comments. Like the other trading platforms, the very right icon is your personal profile where you can find the help center and settings.

When buying or selling on Webull, you can simply click the stock from your Watchlist and that will open up the stock page. Here is the graph showing the price movement for the day, 5 days, 1 month, 3 month, 1 year, 5 year, or Max. Next to the time range is the graph options where you have a variety of different graphs to choose from. Under the chart is the Order Book section where you can see both the dollar price and quantity of shares being asked or bid on. I love this section because it can give you a sense of which direction the price will go before it actually does it, like when you see a bid for 1,000+ shares at a certain price, it will probably move the price in that direction.

When you’re ready to initiate the trade, you can select the price you want to buy or sell at along with the number of shares you want to buy/sell. This feature is HUGE for me because I get frustrated when I try buying during the intraday dip and then the purchase doesn’t go through until the price has gone back up. Let me know what trading platform you use or prefer in the comments below.

Photo by Tech Daily on Unsplash

Good Friday Wraps Up An Interesting Week on Wall Street

There’s no trading in the stock market today because of Good Friday, but there’s been a lot of little stories that have happened this week that I wanted to discuss. The biggest news this week was definitely President Biden’s announcement of his infrastructure plan. I went into detail about his proposal in my last blog “Investing in President Biden’s Infrastructure Plan“. If this plan is put into action, there will be great opportunities to invest in multiple different industries.

Other big news this week was the when the massive cargo ship Ever Given was finally freed from blocking the Suez Canal. The Ever Given had become lodged sideways, blocking the Suez Canal for nearly a week and stopping all international shipping in the area. The debacle started on March 23 and after seven days of dredging and using tugboats, it was finally dislodged on March 29. This blockage caused at least 400 boats to be rerouted and hundreds more were stuck waiting to be able to pass through the canal. Due to the amount of products and materials that were stuck at sea, this blockage cost an estimated $9 billion each day in delayed global trade. The situation is under investigation by the Suez Canal Authority.

The brokerage app Robinhood was in the news again this week but it wasn’t about GameStop or its highly anticipated upcoming IPO. Robinhood is being sued by rapper Ice Cube for trademark infringement. Ice Cube filed a federal lawsuit on Wednesday, March 31, accusing Robinhood of damaging his reputation by using his image to promote its products without his consent. Ice Cube claims the trading platform is retaliating against him for his association with Jeff Kwatinetz, his business partner and his civil rights attorney who was involved in a separate lawsuit against Robinhood over the GameStop controversy. Ice Cube is asking the court for an injunction requiring Robinhood to stop using his likeness and also for unspecified monetary damages.

There were some big IPOs that dropped this week including the online learning platform Coursera (COUR) and the newest addition to the ARK Invest ETF lineup, the ARK Space Exploration & Innovation ETF, or ARKX. Both of these IPOs have had a pretty good first week and they are trading higher than their IPO price. ARKX is managed by famed investor and CEO & CIO of ARK Invest, Cathie Wood. ARKX has received mixed reviews and some criticism over the ETF containing some names like Netflix and Amazon that don’t really have anything to do with space exploration.

It was definitely an interesting week on Wall Street. I will continue to update you with all the latest news and information from around the investment world. Make sure to follow this blog and my other social media platforms. Have a great weekend!

Photo by Lloyd Blunk on Unsplash