Hey this is tom, and let me ask you a quick question: how long ago, did you take your last vacation because i vividly remember mine for all the wrong reasons we went up to greece and the tour guide kept taking us to souvenir stores. It was god awful instead of watching the sunrise or the sunset or even the acropolis, we kept going to souvenir stores. Until eventually you know we punched him in the face. I'm just kidding not really, but we basically told him to screw off in russian and then we actually enjoyed us.

But on a serious note, that kind of behavior is really annoying to me as a tourist, and why does it have anything to do with the stock market? Well, let me explain in the stock market, you have that happen every single day to you, you don't even know it you're in the souvenir store every single day. Tour guide is getting paid and you don't know nothing about it, which is actually unacceptable to me. So what i'm talking about in case you haven't figured out yet is payment for order flow because payment for order flow in case you don't know - is exactly what i just described. The tour guide getting paid to take you to this god-awful souvenir stores.

Now i'm going to explain everything in this video, but before we do first of all a warning, this is going to be very nerdy. So if you don't like that sort of thing and you like more the hype stuff, the new stuff, you can leave, don't worry. I won't be mad if you like the nerdy technical stuff, stay with me. Why not? But just one thing, don't click, nothing, don't smash.

Nothing don't buy. Nothing. Just focus. Give me your attention.

That's the only thing i need. I don't have any courses, no sponsorships. I just want your attention because i want you to be focused. This isn't very simple.

It's quite complicated, so payment for order flow for those of you are not familiar a few words, but then we're going to jump right into the technical stuff, so payment for order flow is exactly what it sounds very complicated but in fact very simple, just a commission. Let me explain when you buy shares through your broker, you basically put in an order and the broker actually has to go out and get these shares for you. So there's a few ways he can do it. He can do it through going through the stock exchange and actually getting a seller matching and giving you the stock or they can buy it from a wholesaler and when you buy it from a wholesaler, it's much easier for the brokerage.

Obviously, because there's a lot of stock there's a lot of inventory and it's quite easy - it's simple blah blah blah blah blah. Now, here's the thing what if the wholesaler was paying to the brokerage to come and buy from them instead of going out to the open market. Now this poses a little bit of a problem beyond the annoying factor that we had with the tour guide. Example with stocks it actually might be illegal, and let me explain why, because the brokerage has a fiduciary duty, much like the lawyer has a fiduciary duty to make his best efforts or her best efforts to defend you at all costs within the bounds of the law.

Obviously, the brokerage has the same fiduciary duty to make every single effort reasonably possible to get you the best price. For that order, and in case that tour guide, slash brokerage is getting paid by the wholesaler instead of going directly to the stock market, diverting it to the right and going to the wholesaler to the market maker to the citadels of the world right. How can we be sure that the brokerage is making every effort to get the best price for their clients, which is their fiduciary duty, and for those of you who think this is purely theoretical? Let me give you an example. From nine months ago, nine hours ago, the sec actually settled with robinhood for doing exactly that.

The sec basically charged robin hood with not getting the best execution, not getting the best prices for increased payment for order flow from the market makers from the wholesalers. Now robin hood didn't admit they did anything wrong, but they did pay 65 million dollars voluntarily to make it go away so that pretty much you know, tells you everything you need to know. So that's definitely not a theoretical risk actually happened before and it might happen again. In my opinion, i think the risk is very real and has a lot of implications to the day-to-day trading of every single retail trader or investor.

Now the one thing that bothers me, the most about payment for overflow, is what some of you may not actually know about it: who's, the guy who came up with payment for the flow. Obviously, robin hood didn't invent it. It happened way before robin hood. The guy who came up with it was none other than barely made of yes, yes, the same bernie madoff that you all know about.

So that tells me everything i need to know about it now, the big problem with payment for order flow, the way robinhood actually using it is it actually creates a lot of dependencies between the brokerages and the wholesalers right now the wholesalers stands control about 40 of The trades 40 of the trades don't even happen on the exchanges. They happen off. Exchanges with the wholesalers and half at idea of that is happening through citadel, which gives them a lot of power, a lot of cloud, a lot of influence and a lot of eyes into what's going on in the market. When citadel, the market maker sees the activity from a macro level and they look at 50 of 40, which is a lot of numbers.

It makes it easier to be the god mode in this video game. That's all i'm saying not saying that they're doing it, i'm just saying it creates a lot of unfair advantages which i don't think any market maker should have but hey what do. I know i'm just a guy on youtube, but on a more serious note, here's the main issue so robinhood has 80 of their business coming from this specific business model, and that's not healthy in fact about a third of our revenue is coming from citadel themselves. Little is actually responsible for 33 cents on a dollar on the revenue of robinhood.

Now beyond the fact that i think it's unhealthy to be that dependent on one single client as far as client consideration, risk and everything, but that's a problem for the robin hood management. Not my problem, i think it creates a lot of influence that you don't want to have in a highly regulated business like the stock market. Now the problem is, i'm not saying that there's anything sinister going on i'm just saying that a lot of dependencies there that don't really make a lot of sense. I'm not sure i want such a relationship between the brokerage and the market maker.

Don't think it's healthy, but hey again my opinion just my opinion. Now here's the thing payment for order flow existed before robinhood and it existed, but never was relied on. So robin hood's kind of novelty was that they came up and they said well we're going to build a business around pfof. Now everybody dipped in it a little bit.

Everybody took some money from payment for overflow for sure robin who came up and said. Well, we're going to do this full tilt, we're not going to charge you any fees up front which is to their credit right and we're going to build a business around payment for order flow, which has never been done before, because now 80 of their business is Coming for payment for the flow, the reason that it works for them is because the unique structure of their clientele, their clientele, is retail investors. So when you're buying payment for the flow as a citadel or as a market maker for any other company, you love those retail trades, because retail trades are the equivalent of two guys walking into a used car slot, basically saying well, i want to buy this car. I want to sell this car and, as you use car salesman, all you do is just pick up the check cut out the middleman and make a lot of money sitting on your ass, which is exactly what market makers are doing when the order flow is retail, Because it's all 50 50.

buy sell, buy, sell, buy, sell, there's no big chunks, there's no bill. Wangs! There's no citadel, actually going crazy, scrambling trying to figure out how to solve this. It's very easy money, so payment for the flow premium order flow is the retail on the floor because it's so clean, it's completely neutral. You don't have to waste any time.

It's kind of just like printing money. Again, don't think they want the retail order flow to manipulate anything, but it's very easy for them to operate this way and again shout out to patrick boyle from patrickball and finance. Who actually explained this to me? He's actually one of the most undervalued youtubers in the scene, patrick actually used to manage a hedge fund and is a very known high frequency trader. And he explained me why it's such a lucrative business for citadel to buy these orders and that's why robin hood managed to make a whole business out of it.

Problem comes for. Robinhood is in the sense that they're completely dependent on the decision of one regulator. In this case, gary genser to decide whether he likes or the flow or not, because if he doesn't their whole business goes to shambles. And that's why i specifically made a video saying: i'm not coming anywhere near a company which has 80 of the revenues tied up to a questionable regulatory practice that might get banned.

Now this isn't the video about robin hood or about the robin hood stock. This is a video about payment for order flow. So that's not really that important. So what i want to talk about here is what happened in the rest of the world.

Now us isn't in some vacuum, because the uk have already banned it. In fact, there's a research from 2012 pointing out to the argument that basically, what robinhood is saying well, it increases liquidity if we go through the whole sales because we get it faster. So a uk study from 2020 did actually sorry 2012. That led the ban of payment for the flow out of the uk actually proved that this is completely bogus when you remove payment for other flow.

It actually is more efficient, more efficient as far as pricing and liquidity. So it's just urban legends. So we have the data from the uk. Australia also banned it, canada, i think banned it.

A lot of other countries are thinking about banning it. I don't think it's a sustainable business model for robin hood. However, i do know politics and i know it's going to be a very difficult decision for gary gensler to pull the rug under payment for the flow, because what it essentially will cause is people paying upfront fees for every trade which people hate. But what will be hard to understand here for most traders or investors is that in fact, i think they're paying more money through using for payment for overflow because of the inefficiencies of getting the best execution, which might be the case or might not be the case.

In my opinion, i'd rather pay a fixed fee and get best execution, but hey it's going to be a very unpopular decision for gary genser to actually ban pfof, which is the main thing working in favor of robinhood right now. The political pressure against that kind of move, we'll see what happens, and you know what let me know below what you guys think either, and you know what i'm really curious to hear what you think is payment for order flow evil. Is it good? Is it completely neutral? What do you think? Let me know i'll try to get as much comments as i can. I can't promise you that i'll do my best.

We do have a zoom meeting coming up on monday with the patrons. So if you join patreon by then five bucks a month, you'll be supporting the channel and you might want to hop on the zoom call, because we just had one today and it was blast. Thank you everybody for supporting me. Thank you for the channel members.

Thank you for the paintings. You guys are amazing. You allow me to do this sponsor free without pushing any products down anybody's throat. Thank you.

So much i'll see you tomorrow.