I stopped reading at the first image: <a href="https://themeasureofaplan.com/wp-content/uploads/2021/01/Robinhood-NOK-order-flow-v3.png" rel="nofollow">https://themeasureofaplan.com/wp-content/uploads/2021/01/Rob...</a>, which implied that the market makers were offering robinhood a worse price than the exchanges, and pocketing the difference. This is not what happens. Matt Levine explains:<p><a href="https://www.bloomberg.com/opinion/articles/2021-01-29/reddit-traders-on-robinhood-are-on-both-sides-of-gamestop" rel="nofollow">https://www.bloomberg.com/opinion/articles/2021-01-29/reddit...</a><p>>Market makers stand ready to buy or sell stock from or to customers; they try to buy for a bit less than they sell at, and pocket the spread. If you go out into the market and say “hey I’ll buy anyone’s stock for $10,” and a really smart hedge fund comes to you and sells you stock for $10, that’s probably bad. You’ve probably made a mistake. The hedge fund is selling you the stock for $10 because it knows it’s worth $8. This is called “adverse selection.”<p>>More subtly, if a really big mutual fund comes to you and sells you stock for $10, that also may be bad. The mutual fund is probably selling lots of stock, because it’s so big; it sells you a little, then sells a little more, then a little more, until it pushes the price down to $8. The mutual fund isn’t necessarily smart, but by virtue of being big and doing big trades, it moves the price; if you are on the other side of its trades, you get run over. This is also a kind of adverse selection: You buy at $10 and are stuck selling at $8. Part of the spread that market makers earn in public markets—the difference between their buying and selling prices—compensates them for adverse selection, the risk of being run over by a counterparty who knows something they don’t.<p>>Market makers, the textbook theory goes, would much rather trade with retail orders. Retail investors generally don’t know much, so if you buy stock from them you’re probably not making a mistake. And retail orders are generally small and uncorrelated: One investor buys a little, another comes along a moment later and sells a little, it’s all pretty random, and you’re not facing an avalanche of steady sell orders that push the price down. Trading with retail is so nice that market makers—wholesalers—will both give retail orders a tighter spread (pay more to buy their stock, charge less to sell stock to them) and pay their broker for the privilege of doing it.<p>In fact, they're specifically prohibited from offering a worse price than the public exchanges due to regulation NBBO (national best bid order). The SEC penalty last year was only for failing to ensure best execution, which is slightly different than offering worse prices than the NBBO, since the former also requires them to take into account other market making firms that might offer a better price.