Market structure The Robinhood saga has exposed some significant changes in the way stocks are traded in the U.S.
The commission-free stock trading that Robinhood introduced four years ago, which was followed by Schwab, and Ameritrade in 2019, have changed the revenue model for brokerage and exchanges. Rather than relying on retail customers to pay commissions, the commission-free brokerages earn money from market makers through payment for order flow (PFOF), interest earned from savings accounts, margin accounts, options trading and various advisory services. Fidelity offers free trades but a spokesman said: “Fidelity does not accept payment for order flow from market makers. The scale of our broad businesses allows us to offer free trading without any trade-offs to the customer. In fact, our retail brokerage customers saved more than $1.6 billion in price improvements on their stock & ETF trades in 2020.”
In a research note on market structure, Paul Rowady, CEO of the capital markets think tank Alphacution, wrote that Rosenblatt Securities noted that off-exchange trading in dark venues “achieved majority or near-majority share of total U.S. stock trading around year-end 2020… At year-end 2020, and for the first time ever, more shares traded on “dark” trading venues than on traditionally ‘lit’ trading venues, like the New York Stock Exchange (NYSE) on a single day.
Alphacution believes that “this is largely – if not, totally – beyond the knowledge and understanding of the public. (These mechanics are also likely outside the knowledge and understanding of many institutional investors.)”
In January off-exchange trading accounted for 47.19% of total equities trading volume, a record.
Rosenblatt Securities noted two shifts to off-exchange venues, said Justin Schack, partner at the firm. One came at the end of 2019, when zero-commission trading was adopted by leading retail brokers. A second, bigger move came as volumes increased — people who were trapped at home started trading more, in part because it was free. They also were getting stimulus checks and some sports bettors turned to the equity markets.
