Curriculum·R404 Execution and Trade Craft·about 42 min
True cost of a strategy
By the end of this lesson you can
- →Enumerate the six components of the true cost, and which ones are invisible by default
- →Compute an annual cost stack and express it as a fraction of gross return
- →Derive the expectancy a system needs just to break even
- →Explain why a headline price of zero is the least informative number available
Senior · enrolled learners
This lesson opens with The Robinhood best execution order, 17 December 2020.
- What happened
- The SEC charged Robinhood Financial with repeated misstatements between 2015 and late 2018 that failed to disclose its receipt of payments from trading firms for routing customer orders, and with failing to satisfy its duty to seek the best reasonably available terms when executing those orders. The order found that unusually high payments for order flow contributed to customers receiving inferior prices compared with other brokers, and that in aggregate this cost customers $34.1M, a figure the SEC computed after accounting for the money those customers saved by paying no commission. Robinhood agreed to pay a $65M penalty.
- The decision point
- The advertised price of trading was zero and the regulator computed the real price at $34.1M net of the saving. Nothing was hidden in a fee schedule because there was no fee schedule. The cost moved into the fill, which is the one component of the cost stack that does not appear on any statement and that nobody measures unless they decide to.
- Recorded loss
- $34,100,000
What you will be able to answer
- →What are the six cost components?
- →What does the worked stack cost?
- →What fraction of the gross is that?
- →What expectancy just breaks even?
Orientation and Year One are open: anyone can read them without an account. From Year Two onward the lessons are for enrolled learners, because progress through the later years only means anything if it is tracked against a record.
It is free. We do not sell the list and there is nothing to buy at the end of it.
Sources and review
- https://www.sec.gov/newsroom/press-releases/2020-321
- https://www.cnbc.com/2020/12/17/sec-charges-robinhood-with-misleading-customers-about-how-it-makes-money.html
- https://www.washingtonpost.com/business/2020/12/17/robinhood-sec-investigation/
- https://www.cnbc.com/2021/06/30/robinhood-to-pay-70-million-for-misleading-customers-and-outages-the-largest-finra-penalty-ever.html
Confidence high·Volatility medium·Reviewed 2026-08-07·Owner unassigned
Contested
The $34.1M figure is the SEC's aggregate computation across affected customers for the period examined, and payment for order flow remains a contested practice with credible arguments that it reduces total cost for many retail participants. This lesson uses the case for the structural point, being that a headline of zero relocates cost rather than removing it, and takes no position on whether the practice should be permitted.
The cost stack in part one uses stated inputs: 40 round trips a year, $50,000 of notional, a 0.045 percent taker fee, 0.05 percent of slippage per side, a 10 day average hold and funding at 10.95 percent annualised per R401-04. Every one of these varies enormously by venue, instrument and style, and the method is the transferable part rather than the total.
F108 owns tax treatment in full and this lesson includes tax only as a line in the stack at a stated illustrative rate. S211-05 owns the reporting stack that measures realized against quoted. Keep both splits.