Agree: They are called block trades in equities. Also, another benefit of a dark pool is that you can pay to control who you trade with. On the primary exchange, it is dog-eat-dog. This is why long-only asset managers prefer block trades for supersize trades, and dark pools for smaller trades.
To me, the practice of paying for (non-toxic retail) flow is way more suspicious than dark pools. This is how Robin Hood can offer free equity trading. They sell your flow to another firm that can front run it. Unless you have incredibly overreaching regulation and constant monitoring, it is literally a fox in the chicken coop.
> This is how Robin Hood can offer free equity trading. They sell your flow to another firm that can front run it.
This is not true, and front-running trades is both easy to catch and illegal. This is a bad combo for any white-collar crime.
You are correct that they make money by selling non-toxic order flows, but non-toxic here just means that retail investors tend to be "dumb money."
Market-makers need to estimate how much an asset is worth to be able to quickly fulfill orders - they can't instantly find people to take the other side of their users' trades. For example, user A buys Gamestop at $10/share, the brokerage accepts the trade and internally writes an IOU for that share, but later on realizes that the true price of Gamestop is $10.05/share. This means that the brokerage will lose $0.05/share because the price they estimated for the asset was too low. If too many orders from a source are like this, the source is considered toxic because the market-maker will generally lose money on them.
Some types of traders have highly toxic order flows. For example, HFT firms exploit <1ms latency in market makers' price estimates to systematically make money off the differences. Large funds can also place massive orders in a way that moves the entire market to make these estimates wrong.
Retail traders, in contrast, don't reliably know when a stock is mispriced. If Jimmy Bob Joe blows his college fund buying TSLA for $250/share, the exchange can probably give him TSLA at that price and not lose money.
If a market-maker gets too many toxic orders, it has to offer their clients worse prices to compensate for mispricing risk. Worse prices drive customers away, so they will often choose to pay for nontoxic orders to keep that risk down. We, the retail investors, get to trade for free at better prices and the market-makers get to turn a profit.
> it is literally a fox in the chicken coop.
The foxes here are HFT firms, and the chicken coop is any market where you end up trading with them. These "dark pools" benefit the little guys because they exclude the more predatory traders.
Or, to frame what you said in slightly different terms:
Why do people say "the HFTs" are the enemy? I mean, it's kind of true (the mental image I have of HFT firms and hedge funds is of a swarm of locusts descending on anywhere they smell money), but it's missing a super critical piece: there's more than one HFT locust swarm, and they all hate each other. They'd much rather screw each other (more money there!) than screw you (not as much money!) and they're willing to pay you if you can help them do it.
That's what payment for order flow really is: small bribes to send them something useful (non-toxic order flow) which they can then use against each other. Retail traders aren't the ones losing out here (or, if they are missing out, they're paying less than they'd pay under the old commission structure, so who cares).
to be legal, the broker selling your order flow must give the price you're supposed to have gotten to be at or lower than the best price from the market. I dont get how front running could work under this legal rule.
OP just provided an explanation for Robin Hood's business model, it was never stated that Robin Hood operates in accordance with the law.
In fact it is well known, that Robin Hood operated illegally for a long time and got fined by the SEC for its violations: https://www.sec.gov/newsroom/press-releases/2025-5
None of those violations are related to trade order flow.
The majority are related to customer protections, lack of data retention etc. With perhaps the violations related to the blue sheet data (transaction data), which is used by various financial regulators to sniff out illicit transactions.
Robinhood's been accused of selling out their retail customer by allowing HFT firms to frontrun retail trade. And yet, no evidence of such actions have been found so far.
The fact that violations happened is clear proof that violations can happen. You asked how RH could do front running when it's illegal - the same way they could and did violate customer protections when it is illegal.
Whether or not Robinhood could do it isn't the right question. The better question is whether or not it would make sense for Robinhood or any other actor to front run microscopic retail trades.
Do you understand how front running helps the front runner and hurts the large volume trader? I think if you did, you would realize that Robinhood has no reason to do it.
Each time I hear this I am reminded of the signs that appear the inside of hotel room doors in some places, advertising insanely high prices for the room. I believe these stem from laws that require the hotel to offer the room at or lower than the price advertised on the sign, so the hotels jack that price up to something unrelated to the actual price you'd get from competitive shopping. I assume this can't happen with open market prices, right?
To me, the practice of paying for (non-toxic retail) flow is way more suspicious than dark pools. This is how Robin Hood can offer free equity trading. They sell your flow to another firm that can front run it. Unless you have incredibly overreaching regulation and constant monitoring, it is literally a fox in the chicken coop.