drew

9/ As it turns out trading against counterparties who drive the market is not a good business strategy. Which is why Robinhood is paid more for their flow than Interactive Brokers who is paid more than Credit Suisse

10/ Again, all of which is the opposite of what one would expect if proprietary flow info pumped into prop trading alpha was any significant component of the PFOF business model.

11/ The one exception I can think of is a game called “follow-on” trading. Certain gamer shops will target large institutional managers like Vanguard, who they know have large persistent blocks to execute.

12/ The shop tries to send a really enticing price improvement for a really small size to profile Vanguard’s flow. They then turn that flow into an alpha, then stop quoting.

13/ The most important part to understand about this game is to that you internalize the *smallest* amount of volume you can get away with. Think of it like pinging a dark pool.

14/ The idea is that you bleed on a small amount of highly toxic, highly persistent flow, because you think you can turn around and execute in lit markets at larger size.

15/ (FWIW don’t feel too bad for Vanguard. They absolutely know the rules of this game. Just as often the gamers get counter-screwed when the block execution desks tease them into taking as large a clip as possible at the end of a run)

16/ Again this is entirely inconsistent with the behavior of retail PFOF. Citadel and Virtu would be fighting to get the *smallest* market share possible. Not competing to handle more flow. Remember the point of follow on is “just a small taste”— not to eat the whole buffet.