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What exactly is high-frequency trading? And is it bad?

What exactly is high-frequency trading? And is it bad?

We’ve listened carefully to our customers over the last few days. It’s been clear to me that the mechanics — plumbing if you’d prefer — of investing are not well understood. We are starting an occasional series of posts that I hope will inform, educate, and maybe entertain, on occasion.

Let’s begin with High Frequency Trading and PFOF. Both are much misunderstood.

As our frame we have to agree that technology changes the world. Brings us closer together, gives us access to information, impacts the fabric of society.

People for thousands of years have been trading and speeding up information flow to improve price efficiencies. In the 1800s, it took months to ship goods between Europe and America, leading to huge price differences. The first high-frequency traders in the middle of that century used the telegraph to better integrate the two markets and bring prices together.

Fast forward 150 years and you have massive microwave towers transmitting price information at the speed of light between New York and Chicago, the two largest trading centers in the U.S. As the speeds have increased, and the differences separating the high-frequency trading firms have narrowed, the market has experienced significant consolidation.

What does that mean for today’s investor?

A handful of large firms now execute the majority of trades in financial markets. Those so-called market makers can more efficiently process trades at a narrower band of prices. Among those who benefit? The everyday investor. Not only do people now avoid trade commissions, the competition to fill their trade orders often yield them a better price. That is what enables Robinhood to offer quality execution on trades — you can always check that on our website.

These benefits have been lost in the swell of misinformation about high-frequency trading, market makers and what’s known as payment for order flow (PFOF), a rebate that brokers receive from market maker firms for sending them trade orders for execution. Check out this video which breaks this down even more.

Our goal is to open access by reducing costs and building an intuitive mobile-first platform. We aim to be transparent about the industry we operate in, I hope you find this useful. In short, high frequency trading is just what you get when you apply technology to trading — getting data moving faster between trading centers will enhance the trading experience for us all.

Vlad Tenev is the CEO and Co-Founder of Robinhood Markets.

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