A crucial problem is that many investors don’t understand the “plumbing” of how financial markets work — including what high-frequency traders do, Tenev said in a blog post.
“A handful of large firms now execute the majority of trades in financial markets,” Tenev wrote Tuesday, adding that this will be part of an occasional series of posts. “Those so-called market makers can more efficiently process trades at a narrower band of prices. Among those who benefit? The everyday investor.”
Menlo Park, California-based Robinhood is under the spotlight over its handling of the meme-stock episode, which included a massive rally in shares of GameStop Corp. in late January. As customers sought answers, they instead encountered conspiracy theories online about the brokerage’s ties to high-frequency traders.
Such firms including Ken Griffin’s Citadel Securities and Virtu Financial Inc. are an important part of Robinhood’s business. Not only do they carry out trades by the brokerage’s customers, they pay Robinhood for the opportunity to complete those orders. Doing so usually carries less risk than trading on open exchanges operated by Intercontinental Exchange Inc.’s New York Stock Exchange or Nasdaq Inc.
While the system is widespread in the industry — and monitored by securities regulators — it has also become controversial, with some Robinhood customers alarmed to learn that the firm has financial ties to mainstream Wall Street.
In December, Robinhood agreed to pay $65 million to settle allegations that it did not properly inform customers that it sold their stock orders to high-frequency traders. Robinhood neither admitted nor denied the claims.
Tenev and Robinhood co-founder Baiju Bhatt are no strangers to the world of high-speed trading. Before creating Robinhood, they ran Celeris, a hedge fund that used high-frequency trading strategies, and Chronos Research, a software firm that catered to algorithmic traders.
