That's the sound of the face. That's uh, some people are gon na, be making those silly chickens out there using payment for order flow and they realize that the apes understand what's actually happening here. Oh my gosh guys, i was, i couldn't sleep last night. I i think i laid down at like seven or so, and i got up at like nine.

I was like ab screw it whatever, so i just stayed up and i pieced through uh some research and some stuff that i kind of want to put together here for payment for overflow fast forward. Now it's 6 30 in the morning and i'm finally kind of done with this soul presentation on in terms of information the background the history synopsis, i'm paying for order flow, so you guys can walk away a little bit better often, hopefully understand the process better. If you did not know it before, but before we get into that, what is up everybody welcome to choice, trades. We freaking talk fast and don't skip class like your president, if i said that i'm not a financial advisor expert, so take what i say.

The grain of salt - let's get into this bad boy, so, as you can see here by the title of the video we're gon na, be talking about payment for order flow. The origin of how this came to be is actually a little bit sad. It's disgusting and the the reasoning that i say that is because the man who came up with payment for order flow is bernard madoff now, if you're not familiar with him, we'll give you a brief synopsis, but i do encourage you. Look him up for more details.

In terms of what actually happened here, but bernie madoff got busted for really gnarly billions of dollars worth of ponzi scheme and he also created a hedge fund, so we're gon na start here in chronological order and kind of walk you through this whole process, so 1960 Bernard l madoff created investment securities llc, the actual origin of what he was trying to do. I don't think in and of itself was malicious right. He had an intention essentially that he wanted to make money. He didn't start with a lot of cash.

He started with about five thousand dollars to get things rolling, innocent intentions. I like to think but money talks and people can lose themselves at money right. It can. That's.

That's where i think true character is tested is where you really see people uh show up to the plate right when there's money on the line, so essentially what he did. He was a penny stock broker dealer. He was essentially in charge of you, know, bids and asked and getting things filled. So that brings me to 1971..

His job initially was to make markets, which is essentially just a quote, bid and ask prices and to make this. You know pretty simple for you, these guys these uh, these market makers essentially make profit on the difference between the bid and the ask what you can essentially think of. As you know, where people are willing to sell it at where people are willing to buy that, they make the difference in profit, so that was his job, maybe something similar to like a lit market, the new york stock exchange or the nasdaq which we're actually going To get into here in a little bit, this is actually fascinating and it just makes you wonder about the whole system and the way that things were built, but nonetheless, mark gets literally an economically demanded a better product. He couldn't compete with the new york stock exchange firms right and to put this in a pretty simple sort of context.

Think about bernie, madoff llc. His whole sort of you know: securities llc that he created was just too small right, the product that they were offering. Even if it was good can't compete with the top line stuff, which at the time was the new york stock exchange, new york stock exchange still obviously being one of the best out there. So what do you do in this situation? Think of it like an apple versus a firefly.

I don't know if you guys remember what the freaking the firefly looked like, but this phone this was actually the first phone that i ever had and you're gon na. Actually, it's gon na blow your mind, i'm looking at this sucker. Let me just pull this up so it'd, be like the firefly phone trying to compete with an apple it'd, be very, very difficult. You have to create a product, that's literally just different from what currently exists because of the market supremacy and the brand name, that's carried by apple.

In the same way, bernie madoff had to create something better than what presently existed at the time, which was in-person trading right paper trading there as actual certificates of stocks that are being exchanged on a given day. It would take you a long time to get orders filled. So what did he do? He couldn't compete with the market, so he created tech that was better than the market. But what was the better tech - and that became essentially two main things - electronic trading, which is what we use nowadays right as well as otc exchanges, over-the-counter exchanges.

Now this is really important to think about, because this is going to lead us to payment for overflow. This is not payment for order flow, but it's going to lead us to payment for order flow and how this is actually important. The purpose and appeal of otc exchanges and trading is that there's no exchange regulator, there's less transparency, you can execute block trades and there's lower bid and ask spreads right. So, what's the appeal to both parties here to the market maker, as well as the people who are getting their orders filled well lower bid and ask spreads means that you have a better chance of walking away profitable on any sort of trade right.

Think if you were to buy a stock at 10, but you you want to sell it at 10.50 and there's a huge spread between the bit and the ass and you got to give it to a buyer right, the bid. You got to slap that thing in order to sell it. That means the stock has to go 50 cents for you just to break, even if there's a 50 cent spread. So, there's an appeal to that, but there's also a money appeal: it's very profitable for market makers to be able to utilize this sort of tool.

So, having known this now, that's the purpose and appeal is money: less transparency, big block, trades, no exchange regulator, supervision, just right off the bat. What does that tell you? It tells you that there's some people that wanted to do things with their money that they didn't want to show to the general public and bernie madoff, helped create that so bernie madoff's firm, evolved into market making or profiting off of the bid in ask spreads on Otc trading now in and of itself, that's not malicious right, that's just something that market makers do that's how they make their money. They want to find the most opportunity to make cash whatever. Let it be what it is.

Let's put this into perspective, though, because this is going to come into importance as we get further into the video madoff securities was the largest market maker at the nasdaq and madoff securities was also the sixth largest market maker in the s p 500 stocks. Now this is important because these guys, that means that a lot of the volume that was being traded across the entire stock market right, the new york stock exchange - you include, made off securities in here. They took a large chunk of that overall liquidity in the market space, which means they can move markets in any given direction if they wanted to do so. Bernie found the best way to consistently return money in the market, which was to profit off of people's trades.

In this scenario, which sounds goofy, but this is the most simple way i can put it you're the product right, you they they make money off of your trading and that's how we found ways to consistently be profitable, and this is going to bring us a payment For order flow, i just want to give you this whole backed background, so you can understand truly how freaking crazy this whole situation is right. So now, let's talk about payment for order flow, because now, when we put into perspective how these guys usually make money, the way that things normally work in a stock market you've got essentially otc trading lit exchanges which are the new york stock exchange, the nasdaq at The time made off securities, whatever it may be, they make money on the bids and ask the spreads payment for order flow is a little bit different. You've got monetary kickback to brokers, to fill orders at a third party now think about this logically right. If there's a third party out there, a firm such as made off securities, who invented payment for order flow, why would they be willing to pay a broker to have orders executed at their specific firm? It's because they make money on it as simple as it gets? If you're willing to pay somebody five dollars to go and freaking mow your lawn right, maybe it's because you run a lawnmower business.

Maybe it's because they're the products, maybe it's because that's how you're making your freaking cash? That's exactly what happened here right now, the purpose and appeal of payment for order flow. Let's walk through this before i kind of get into why this is really not a good thing in the situation, so the purpose of appeal payment for order flow is investors execute a buying a sell order. The brokerage will then route that order to a third party which in this instance, was made off securities broker, collects kickback for writing that order, and then third party finds the best execution which has some asterisks aside. Best execution can be interpreted in a couple different ways.

Maybe it means you get the best fill. Maybe it means you've got the most timely execution. Maybe it means you're providing liquidity for the market space. There are all these are also doing massive conflict of interest right.

This is an actually really important topic to be able to dive into is that conflict of interest, and this is going to be important for this piece as well as what i'm going to talk about in the current market situation. Now why do i think, there's massive conflict of interest here and why do i think payment for order flow in and of itself, on top of the ponzi scheme that this dude literally created is problematic right, so we're going to walk you through that, but first i Want to talk about his ponzi scheme, because you have to understand this to be able to truly understand why this doesn't make sense hold up. You have to understand what this ponzi scheme is. So what happened with with madoff right, bernie madoff what he did was essentially build a pyramid setup where he would tell investors hey you, give me money and i'll guarantee you x amount of returns annually and we're just going to keep that rocking and people were making Cash, we were making freaking fat filthy stacks, but the reason for that was because he was paying people through other investors.

Money essentially had an infinite feedback loop of investors that are feeding other investors returns. So an investor right here would put in money right bam. Looking good another investor putting money, what he would do is he would take this investor's money and it would actually feed it into the previous investors pockets and that endless feedback loop would continue forever and ever and ever and ever, but wait a second right. He also is in charge of otc trading he's also in charge of payment for order flow, which both provide monetary kickback to them to the original firm right.

This is not good. This is not good, because this is vested interest conflict of interest. He built this system with the intention of fraudulence. He built this ponzi scheme with the intention of fraudulence.

Now i can't speak on the fact of whether he this the payment for order flow was correlated with his ponzi scheme and otc trading right. All this sort of stuff, but what i can say is that it's very similar to a situation that you're watching unravel in real time right now, so what he did is he promised investors extraordinarily high returns. He took that money for investors and deposited into his bank. He paid the returns to investors with other investors, money risk repeated until literally literally failure now this conflict of interest.

This is the last piece i want to talk about before we can actually get into where this is problematic. In today's you know, time and age bernie pioneered payment for order flow in order to route orders to a third party, which was at the time his firm. Why, though, think about this this? This is the really goofy part, bernie pioneered payment for order flow in order to route orders to a third party, which was at the time his firm. He was a market maker.

He was a market maker as well as a firm, very similar to another company that we're going to talk about in a little bit here. The bid and the ask spread profits. That's not malicious in the least bit right. That's just business they're, making money whatever it may be, but misconduct of orders - if the third party has vested interest - that's problematic - and this is gon na - bring us back to this piece right here - check this out.

Bernie madoff's firm, evolved into market making or profiting off of bid and ask spreads on otc trading. Ask yourself a question: what firm out there is this reminding you of right now, like you can't make this up? You really can't you can't make this up. This just gets better. This gets better hold on a sec.

Bernie also created the largest ponzi scheme in us history, which could have been aided by payment for order flow payment for overflow. Profits could have very easily been feeding into the malicious and fraudulent activity that he was committing to and don't think for a second that that could not happen now that it couldn't god dang it, but it didn't happen in the past. It won't happen again right. This is absolutely 100 possible payment for order flow offered, bernie additional trade execution money, while also committing to financial treason in the realm of billions of dollars and bernie's scheme was shut down.

But what about payment for overflow right? Let's just think about this. Logically, if you knew that the guy who pioneered payment for order flow, who pioneered the electronic system, that's actually utilized literally now by the nasdaq, you probably want to look into exactly the system that he built. Wouldn't you well. This is the argument.

This is the argument for the benefit of payment for order flow. It allows commission free trading for retail investors. Sure that's not wrong. It's a true statement.

It saves the retail investor money on paper right. It also allows for better liquidity and efficiency within the market, but at what cost right. This is the important piece think about this in real life scenarios, anytime, that you are offered a free service, it is because you are the product. Facebook youtube google payment for order flow, all these things they're free to you, because they make money off of you, and it gets worse than this.

My friends and i god it just feels like a freaking, morbid story that i even have to tell. But the problem with payment for order flow is that it's literally embedded in the entire stock market and it's unavoidable - you can't avoid it. I'm going to show you exactly why that's the case so check this out? What does this actually mean? What does this do? What is payment for order flow and the whole process actually look like you've got brokers and third parties. So initially it starts out like this.

You've got a retail investor who has a buy and a sell order that they want to get executed. They send that to their broker. This said broker goes to a third party who they have some sort of agreement with and say: hey look. We have this payment for order flow agreement.

I'm gon na sell you this buy and or sell order and you're gon na give me a monetary kickback. The broker really isn't doing anything wrong here. Right they're just trying to make money initially in and of itself they're, not market makers right they don't they don't get to choose where you know, orders get filled, how they get sold, how they get bought. They don't get to choose what what the firm does with those orders.

It's essentially just best execution. That's the guidelines that these guys have to follow by legally. So the third party ie, a market maker and or a firm, goes and fills that buy and or sell order. Now, where can they do this? They can do it in a million spots because that's the problem with literally now's day and age in the stock market.

As you can go to the lit exchange right, the new york stock exchange, the nasdaq et cetera. You can go otc over-the-counter market. You can go to dark pools, you can go to their own actual personal securities portfolio, literally their own, like i'm, not making this up their own personal securities portfolio. These big market makers and firms have their own portfolios of different securities in the market to help liquidity and help things keep moving.

I don't know about you that doesn't sound like supply and demand that doesn't sound right at all and when this is filled, the order execution goes back to the retail investor and then all is said and done. So if the brokers are getting paid for every single transaction that takes place because they're getting paid by these third parties, we're gon na get into this more, but you already know where i'm going with this: how much money do you think these guys are making right? Why pay for trade execution? It's not only if the reits of investors not only are the retail investors the product, but brokers are too. This leads us to somehow legal monopoly citadel securities. Now, i'm not here to freaking start some claim of fraudulence or a scam, but i am going to tell you this.

The picture that you see lined up in front of you is eerily similar to what you've seen in the past, with with made off securities. I'm just telling you guys, connect the dots yourself, but i literally could not go to sleep reading through this stuff for the last eight hours so check this out. Let's talk money, because this is important right. This is a concept.

That's talked about a lot by retail investors as of late all the apes out there, you know basically debating how payment for order flow works and how this actually affects the broad scheme of the way the market operates, brokers in 2020 and in the first half of 2021 received this much kickback from payment for order flow, meaning that the people who are paying these guys out the big firms and market makers that want to use payment for order flow paid out a total of 2.604 billion dollars in 2020 and in 2021, the first Half alone 1.819 billion dollars and the market is considered a small. You know to follow the smart money. It's smart to do that right so where big amounts of money move. Let's do that, let's see where the money's going where's this coming from well truth be told, and how would you know it citadel paid out the majority of that capital, 1.08 billion dollars of that 2.6 citadel 760 million of the 1.81 billion dollars citadel.

That's 41 of all payment for order flow kickback. So now you have an idea right now you have an idea of who really truly benefits off of payment for overflow. If citadel can afford to pay out 1 billion dollars in 2020. How much do you think they're making from that right? It's a huge massive amount of money, so here's where the two big problems lay - and this is where things get really man, i'm telling you.

This is wild citadel accounts for 13.4 of the u.s stock trading market. As of december 2020., they control the markets. This is very similar. We're going to take you back a second here right.

This is very similar to made of securities. These guys accounted for a lot of the freaking volume and liquidity that took place in the market at any given time right. It's a monopoly, these guys literally control so much liquidity that they can move entire securities by themselves by themselves. Right citadel has an undoubtable and an undisputable conflict of interest, and this is the second and probably most scary problem is how much of a conflict of interest these guys actually have.

I don't think people truly understand this. It's really freaking scary check this out citadel securities. State-Of-The-Art market maker and citadel connect are the three sort of entities that are embodied within citadel itself. Citadel connect.

You might be asking yourself what is this? It's the literal own dark pool. Now, if you don't know what a dark pool is, i recommend you go watch a video. I've got a few out there. I know there's a million of them out there in terms of what it is, but it's essentially used for two main things: executing large block trades without moving the market and less transparency.

But this is just goofy. I mean look at this: they have their own securities, which means their own investments in their own portfolio. They manage on any given day. They've also got citadel the market maker, which literally does exactly what this is meant to do the payment for order flow.

They trade otc, they make money off the bid in the ask spreads: that's where they profit they've got their own dark pool guys they have their own shady place where they can execute large block trades for themselves for other firms, and it gets worse than that. But wait right, it's surely regulated. It has to be but check this out. There's a direct quotation.

Numerous reliable reports suggest citadel connect is indeed a dark pool. Interestingly enough, however, citadel connect is not registered at an ats, which is an alternative trading system. Nor does it report its trading volume to finra, which is overseen by the sec. So this is a dark pool, but also has no legally binding sort of enforceable action within the actual system itself, and on top of that, these guys handle 13.4 of us stock trading market.

As of december 2020, they control the freaking markets. Guys i mean that's, it's so mind-blowingly huge how much these guys really do in the market. To put this in perspective right, oh i choked on my spit. I got too excited to put this in perspective.

If you had, let's just eyeball this and say out of all of the united states 400 and now 350 million people right, let's just say that 20 of those people are invested in the stock market at least a little bit 20. That's it 35 million people ish. Whatever that means, i think, it's 70 million, i'm not good at math, 70 million people - you had 13 of that getting routed straight through citadel every single day if they just bought one stock out of any security. Think about how much money that is to take away what they do.

Every single american in the united states would have to quit using payment for order flow. It is embedded in every single security entire in the entire stock market everywhere everywhere you look. This is literally tied back to these guys and, what's the most scary, my friends is this: is that these guys are not only a monopoly they're, not only central securities, the market maker and their own dark pool, but nobody is regulating these guys. Nobody is regulating these guys where's the regulation.

This is so sticky. I feel like i'm watching. History happen twice literally because what happened back here and we're gon na go over this here, a little bit with bernie madoff and that whole sort of scandal is he started a system. Essentially, that was supposed to be the best thing since freaking jam and jelly man and it ended up biting him in the ass and everybody else in the future in the ass.

Now, let's just revisit this right: let's revisit the payment for order flow purpose and appeal with bernie madoff and evaluate the current situation. So you can see exactly what i'm talking about bernie's firm property to have bid in ask, spreads and control the majority of market volume and order routing right. That's where he made his money. They had a lot of volume and liquidity, that's getting pumped into their firm.

They made money off that ponzi scheme set aside, bernie's firm, exploited weakness and investors, albeit not using payment for order flow, but conflict of interest certainly still applies, especially considering what happened back in the day, with his ponzi scheme, with literally him tricking investors out of billions Of dollars and still building payment for order flow, i mean the guy was literally a fraudster. The guy was a fraudster and the system is still used today. So how is that similar to now right? Let's just let's just connect some dots right. You guys make your own opinions, you do what you got to do.

Stereo security is the largest firm to execute orders and profit off of payment for overflow. We know this because of how much they pay out, and we know this also based on the fact that not only is 41 of their overall payment for overflow payments coming from citadel, but they controlled 13 of the overall stock market volume, just based on 2020 alone. Citadel securities has an obvious conflict of interest. An unregulated conflict of interest, they've got cereal securities, they've got the market maker and they've also got citadel connect.

How are all three of these connected? Are they all governed by different entities? Who knows, i mean they're, not very public, about the way things run. Stereo securities also makes an ungodly amount of money off retail investors, and this is not even based on their investments. That's the thing about payment for order flow and that's what bernie madoff came to realize about the stock market, there's any synopsis, i've taken away and, honestly, the more i dig into the way that this whole system is built. The more sort of disappointed i get with with the way the stock market's built to keep the top on the top people realized really quick.

The best way to make money in the stock market is to make money off of other people trading. Literally, it's the most stable source of income that any big firm can make, is literally profiting on everybody's transactions and that's the way the system's built right now. So, let's evaluate the real issues here: right, retail investors are the product and it's unavoidable literally. You have to take every single person on planet earth off of payment for order flow to take out one sector of what's happening in the stock market.

Actually, obviously you do what you guys want to do, but look at the gravity of this look at the gravity of this. This is nuts. It's absolutely mind-blowing. The people getting paid the brokers aren't even the problem play the same market.

We do with extra information, extra liquidity and no accountability now. Why is why is this important right? Think about this? You go you've got sally over here that wants to go, buy a hundred shares of whatever freaking stock and she says yup good to go. It gets payment for order float up, but you've also got freaking, maybe citadel or melvin capital or virtue or whoever is using payment for overflow to fill their orders at that third party and they say huh. You want to buy 100 shares long on that, but we're short on this position, so maybe we're going to kind of eat you out that way and just poop conflict of interest.

You can see where there's problems here right, be the same as going in front of a judge, and you know the jury's against you right that doesn't make sense. The sec is observing this but who's to say they won't look the other way, and i say that not to be a pessimist, but because there's actual proof of this sort of thing happening. This is coming all the way back to bernie madoff the literal biggest fraudster. Probably in the u.s history i mean it's just absurd.

The oig investigation did fine. However, the sec received more than ample information in the form of detailed and substantive complaints over the years to warrant a thorough and comprehensive examination and or investigation of bernie madoff and bi bmis for operating a ponzi scheme. Despite three examinations and two investigations being conducted. A thorough and competent investigation or examination was never performed.

Oh, oh literally, right laid right out in front of us. I mean there were people that were reporting. This thing, this sort of problem for literally decades before it got cracked down on and that's, i literally feel like we're watching that real time right now, like i, don't think people fully grasp the gravity of the entire system and how problematic some things in the stock Market are literally freaking built. I want to leave you with one thing right.

I want to leave you with this, because i think this is going to really wrap up truly what the situation is right now, where we're kind of sitting. So let me just see if this uh works really quick, uh pull this up there we go double prize and behavioral economics nope that ain't it give me one sec to pause this. I can probably oh, how do i do that uh i'll find it on twitter? I retweeted it so check this out. This is what i got.

This is what i want to leave you guys with this video right here dynamics give me one sec how humans behave can be in a sense taken advantage of by technology. If we know how humans behave and we can predict that we can use that to better position, our portfolios and a number of quantitative strategies rely upon human biases and behavior to be successful. So, as we understand this look at the recent nobel prize in behavioral economics, as we understand this, we will use computers in new and innovative ways to better drive the pricing of assets and financial markets. Many, i don't think, there's any better way.

I can put that man, it tells you their intentions, that's what i've got for this video, my friends, i fell down the rabbit hole. Hopefully you were able to pull some uh some value away from that i know it was kind of an atypical video. I know it's gon na be freaking way too long, but i didn't, i couldn't think of any better way. To sum up what i was talking about, so blah blah blah blah blah blah blah blah catch on the next one.

If you enjoyed this, you have any comments, concerns questions, queries drop in the comments section i'll, try and get back to as much as i can, but without further ado, much love for me and titan titan's going freaking nuts this morning he's a crazy chicken catch y'all. The next one much love and peace.