PFOF does two things and you're only focusing on half of it.
1. It segments the counterparty they trade with.
2. They get dibs on new orders arriving.
You're only talking about 1. I'm talking about 2.
1 is also bad because this segmentation also gives them inforamtion no-one else can get. But the chain of reasoning to concretely show why its bad (for someone getting their orders PFOF'd) is less obvious and longer.
> Imagine you are a market maker: you offer 2 APIs.
This is so wildly different from how market works. You'll have to clarify what you mean. If the only way to trade is through the API, then you'll offer infinite spread on both. If normal markets exist alongside, then I don't bother using either.
Then find a way to tell everyone this in the open, not just Citadel. Then anyone else is free to trade against you. There can even be a micro-auction to get you the best price among all counterparties that want to trade with you. There's already auction mechanisms at some exchanges so I'm thinking attaching a voluntary "this order came from Robinhood" tag to your order shouldn't be too hard?
I'm not talking about you getting a worse price today.
Suppose in some other industry, some monopolist consistently sells goods at a loss to drive out all the competition. In the last moments when they are doing this, yes its cheaper for you to buy from the monopolist at that moment. But after everyone is driven out of the market, you'll be paying more. Even though the monopolist is still the cheapest amongst all options.
I'm saying you're already in the "after" scenario here. You're saying that you can save a few cents with PFOF when you cross that 50 cents spread and yes that's true. But I'm saying that spread should be 25 cents and no-one is offering that because they've been driven out.
Now that I think about it, the more immediate consequence to you is that some of your order will not fill because PFOF exists, rather than you getting a worst price. Say you put a bid to buy at 100. And then I come along and want to sell at 100. Normally, you'd get to buy from me. But because my order is PFOF'd, Citadel decides that buying from me at 101 is a good deal so they do. This happens a few time with different sellers then you get fed up and/or the market moves. So you raise your bid to 150. Citadel sells to you at 149. You saved 1 off that 150 but lost out 49 from the trade you'd have gotten from me without PFOF.
Yes, PFOF is woefully misunderstood but its very much not win win win.
The reason its bad is because its anti-competive and gives them information that no-one else has access to.
By trading against you, Citadel prevents any other potential market maker from trading with you. With less competition, the spread widens and even after price improvement, you're paying more.
PFOF also tells them who they are trading against but anyone else who just sees a quote doesn't know that.
Generally, things are very zero sum so wins all around are very unlikely. But some thinking is needed to track where the value loss and gains are.
1. It segments the counterparty they trade with.
2. They get dibs on new orders arriving.
You're only talking about 1. I'm talking about 2.
1 is also bad because this segmentation also gives them inforamtion no-one else can get. But the chain of reasoning to concretely show why its bad (for someone getting their orders PFOF'd) is less obvious and longer.
> Imagine you are a market maker: you offer 2 APIs.
This is so wildly different from how market works. You'll have to clarify what you mean. If the only way to trade is through the API, then you'll offer infinite spread on both. If normal markets exist alongside, then I don't bother using either.