The only thing Robinhood did good was pushing other brokerages to get rid of commissions.
I would hope that most people left their platform after they had those major outages during volatile trading days a few months ago. Any place that has outages lasting that long without properly explaining what happened shouldn't be licensed to deal in securities.
Now they're just preying on people that aren't knowledgeable in the financial markets by showing them how "easy" it is to trade. I have studied and worked in finance, and I'll be the first person to tell you, trading isn't the least bit "easy" and shouldn't be portrayed as such.
Well they sell your trade data to HFT firms before a trade is executed to let them arbitrage on you so you are probably net losing money vs fees from other brokerages.
No. The opposite thing is true: HFTs want your retail trades because the cost basis of trading with you is lower than with trading with the broader market, and they can split the difference in savings with the brokerage. If anything, you're likely getting price improvement from the HFT.
(None of this makes Robinhood good; it's just that PFOF doesn't explain why they're bad).
Yes, this is exactly right. The truth about HFT is that it has materially reduced the effective trading fees for retail investors across the board.
> the cost basis of trading with you is lower than with trading with the broader market
But this is exactly why Robinhood is bad. Trading with you (a retail investor) has a lower cost basis because retail investors are reliably less sophisticated than institutional investors. Therefore: an institution will pay to take the other side of a series of trades with you because it knows you aren't sophisticated, so it's likely to win in the long run.
From there, follow the incentives: Robinhood is incentivized to sell more order flow; which it does by increasing its trading volume; which it does by making trades easier. Robinhood is also incentivized to increase its net revenue per trade; which it does by increasing the price at which it can sell a given volume of order flow to institutions; which it does by making its average trade less sophisticated.
In summary: The most obvious way for Robinhood to optimize its revenue is to get its investors to make lots of bad trades.
That's not the sense in which market makers "win" on these trades. The information market makers are capitalizing on is "your tiny retail trade isn't followed by a giant block of additional trades unloading a huge position held by a pension fund", not "you are too dumb to know what this stock costs".
The money they're making is just the spread. They can safely quote better spreads to retail investors than they can to execution firms trading for giant funds.
The market makers win on both factors. Their concern is that my sell order will be followed by many other orders to sell, because that would leave them with a large inventory of stock that they can't unload except at a loss (because the market impact of that selling probably drove the price down).
That concern might exist because I'm selling a big position and my order is the tip of that iceberg, as you say; but it could also exist because I'm trading on news that hasn't yet been incorporated into the share price, and my order will be followed by many other people selling once they learn that news themselves.
> Trading with you (a retail investor) has a lower cost basis because retail investors are reliably less sophisticated than institutional investors
It's not about winning or losing, it's about getting "run over" by massive momentum. Retail investors move less volume and randomly take both sides of trades, so it's much less risky to trade with them. Conversely, large players can dump so much volume that they move the price against a market maker and decimate their revenue from whatever very small spread they usually collect.
> The most obvious way for Robinhood to optimize its revenue is to get its investors to make lots of bad trades.
Robinhood doesn't care whether trades are good or bad. A discount brokerage is a moving business, not a storage business (unless you count interest on cash balances, which Robinhood doesn't make much from). They make money from retail investors doing a lot of trades. Arguably that's against the interest of the investors because retail investors tend to make bad trades, but there's no malice on the part of Robinhood there. If all their clients made a lot of money presumably they'd use it to make more trades and make Robinhood more money.
That is not true. The market makers buying the order flow are bound by the National Best Bid and Offer (NBBO) according to Reg NMS. Which means they cannot fill you at a worse price than the NBBO. However, there is a lot of liquidity on venues that are not part of the National Market System. A good, real broker will find you that price improvement, and pass it through. The MM buying your order flow will not, and will pocket the difference.
So, let's say you are trading 1000 shares. Normally, you might pay around $10 for that with a real broker. Now you execute that same trade at RH (or some other zero-commission broker), and let's say your average price is just 2c worse than what the other broker would get you. Well, now you just paid $20 for your "free" trade. And this gets worse for odd-lot orders (those that are not multiples of 100 shares). Because with those the MM is not bound to the NBBO, and can give you an even worse fill. Given that a lot of these RH accounts are presumably rather small, that likely applies to a decent amount of orders executed.
> the cost basis of trading with you is lower than with trading with the broader market
These are market makers; they don't take directional bets, hence this is irrelevant, as they only trade in a reactive way while trying to maintain a neutral book. What you are presumably talking about is toxic (i.e. informed) vs non-toxic order flow. Having a big player, who knows more than the MM, is what they are afraid off, because they can lose a lot of money by being on the wrong side of the market. They know that retail traders are unlikely to be informed traders, hence their order flow is less risky. However, the volume retail traders are moving is a drop in the bucket compared to what instis do.
yeah - if you place two market orders with two different brokers, you will get two different results. so what? use a limit order. with all the electronic routing that markets have nowadays, I would be surprised if retail brokerages differed that much in their ability to execute a limit order in the same set of market conditions.
Why did this get downvoted? Price improvement is strictly better than no price improvement, but there's no reason to expect that every brokerage will divide the economic benefit of their uninformed order flow between themselves (as payment for order flow) and their customers (as price improvement) in the same ratio.
I'd love to know how that split gets decided. I guess it's "as much as possible to the brokerage without looking so lopsided that someone writes an article about it", except at brokerages like IB that publish data on execution quality and try to market based on that? Do the contracts between the brokerages and the market makers specify the quality of execution in any detail, or is that just a long-term reputational thing?
"Well they sell your trade data to HFT firms before a trade is executed "
Is this actually true? If so it blows me away this this is not illegal, or that the press hasn't destroyed them for it.
RobinHood is has one of the most ridiculous branding efforts ever: 'borne of the Occupy Wall Street' movement, the idea was to empower Millennials to 'break the system' ... by 'buying into the system'??? It's like the perfect script written by a NY agency for a bank to re-position the exact same financial products under the banner of a ridiculous 'empowerment branding', like Exxon creating a hipster brand to sell 'clean oil'.
"Robinhood Raises $323M to Democratize Finance For All" [1].
"Trading app tries to fix a 'rigged' financial system" [2] from CNN.
How does a startup get major news agencies to consistently promote their narratives unchallenged, especially when they're so ridiculous? We saw this a lot with WeWork as well.
I can't figure out is how the press, particularly CNN bought into hook-line and sinker especially early on. They've been consistently promoting Robin Hood and their 'empowering message' with fluff stories, not remotely critical of the materiality of the business. Have a look [3]
Recently, they've started to question some things, and perhaps the press will fall out of love with them and it'll be narrative in the other direction.
There is absolutely something amiss here, if anyone with deep relationships in the PR and story placement care to comment, it would be enlightening as I think that's a big part of the underlying story.
Edit: another great example of the press point-blank driving RH's branding, in this case 'intergenerational' [4]. What kind of agency can get this kind of coverage?
"Schwab earned 1.4% of revenue from payment for order flow, TD Ameritrade about 8.4%, and E*TRADE about 6.1%. Interactive Brokers has historically been quite reticent about participating in internalization, because it doesn’t play well with their sophisticated clients; they earn about 1.1% from it."
"Why Robinhood earns more than the discount brokerages for order flow is readily apparent: their product encourages options trading. This is bad for customers, principally because the supermajority of Robinhood customers do not understand options trading and the risk/reward calculus for them is even more borked than it is for the vast majority of people who engage in it. The options trades they engage in are also less liquid, and so have higher spreads, and so are more lucrative for marketmakers, "
PFOF doesn't exempt a brokerage from NBBO rules [1], that's the thing that actually matters. Now, Robinhood isn't always very good about that [2] but that's a different issue.
Man this comes up every time. Pretty much everyone does payment for order flow now, and some brokerages cut you in on it, all reflected in the price of the buy/sell. You should look at overall order quality and not just PFOF because places that do PFOF are trading better than national best average and places that do PFOF are doing worse, it’s a variable.
The hfts HAVE to give you at least as good execution as is available on the market, and if they trade while they are holding your order your order can’t execute at a worse price than their trades (Manning rule).
HFTs like retail orders because they don’t move the market, so you can collect some of the spread without worrying about getting run over by an informed institutional player.
Robinhood is "easy" and mobile first. It wins because of UX.
A conversation I had with a person yesterday. Him: My older coworkers asked me if I use all the new apps like Tik-Tok and Robinhood. Me: With everybody being free now, theres no real reason to start with robinhood. Him: "But is it as easy. If not, dont care."
My counterargument was customer service, but was not persuasive. He has no intention of ever picking up a phone or asking for help. He wants a toy to play with, while he and his friends cant be at the casino. The majority of his money is at Vanguard, hes not moving it to robinhood. It's just something to look at everyday for some entertainment value. Its the same mindset where "I made x today (or at the casino)" but ignore the losses or how much they put in. This is the same group of friends that are excited their $75 in dogecoin is up 50% today, or who are playing with options against Draftkings for the thrill of it. Gambling on gambling. Fun. Games. Thrill.
I can't say with a straight face that the Schwab or Fidelity have mobile apps that are as simple to pick up or navigate. They involve more clicks, and buried options. Free gave robinhood publicity and got people to give it a try. UX keeps them around. If Schwab, Fidelity, Merril, Goldman Sachs/Marcus want to compete in this space, they need lite versions of their platforms that are true mobile first apps AND some kind of value add above Robinhood to lure people to try it and convert. Maybe these arent the customers they are looking for, some of them at least.
Companies pay for retail order flow because retail is dumb; and, on average, is not going to have trades better than random noise. This is ideal for market makers so market makers pay for it and even offer better spreads to retail. Market makers don't want to be on the other side of "smart money" trades.
tl;dr you're not getting screwed by Robinhood selling your order flow, you're getting a benefit.
> After that come back and see how the WSJ article is just a poorly written hit piece on RH.
So I read Patrick's article and now I'm back. You're wrong.
Both articles are saying that Robinhood makes much more money from order flow than other brokerages. The WSJ is saying that this is because Robinhood takes the market makers' price improvements to itself instead of passing it on to their clients. Patrick is saying that Robinhood makes more money off of order flow because options trading (which Robinhood does a lot of) is much more profitable for the market makers. Now both hypotheses might be true. Robinhood could be offering their clients worse prices and at the same time get paid more by the market makers because of lots of options trading. I don't see anything in Patrick's article that contradicts the WSJ's explanation.
And given the following quote, I think the WSJ's analysis is pretty convincing:
One executive with a high-speed trading firm that executes orders for Robinhood said its price improvement is much worse than that of competing brokers.
That's a tough one. On one hand it should be easy because who wants to perform more clicks to get the same end result. On the other hand it shouldn't because it attracts people without proper knowledge who could possibly end up making a life altering mistake. I'm not really sure what a good compromise is here.
To expand on this, Robinhood offers instant gratification as well without requiring a wire transfer. They have "instant deposit" limits that allow you to start an ACH xfer and use the money to buy options/stock within a few seconds. Most brokerages require the multi-day ACH settling period before you can trade.
I tried using other platforms, but it is just annoying to use in one aspect or another. Not even talking about mobile apps (which are pretty important these days).
I tried placing an option trade on Fidelity web version on desktop. It took me forever to figure out how, and even if I memorized the flow, it would still be much much slower and annoying than on RH. And that's on web, I don't even want to mention how bad it is on their mobile app.
I get that Fidelity operates on "if it ain't broken, don't fix it" principle, but sorry, UX matters a lot to users. And when a vastly superior in UX alternative appears, you cannot just sit and do nothing.
Due to all of that, Fidelity has been designated to be used solely for 401k management for me (which is almost automatic anyway).
I don't option trade, but I don't think Fidelity is really that fair of a comparison for option trading, they don't market themselves as an active trading platform the way Ameritrade, Etrade or IB do.
After the outages, I don't see why a sophisticated trader who's doing option trading would trust Robinhood. I trade at IB and am very happy there. Just my 2 cents.
I don't have the exact numbers for outages for every platform, but it seems like during the most recent RH outage in March, Ameritrade and Vanguard were down as well[0]. Which only fuels my initial suspicion that the rest aren't any better when it comes to outages.
Why do you like IB? Genuine question, because that's the one I've never tried, but now I am curious to try it out, so I want to know what the major things that drew you to it are.
Their margin rates. I'm not interested in derivatives (don't trust myself not to flub it), I prefer old fashioned margin. I understand it better and it works for me. IB prices their rates with a spread based on the fed funds rate (I think), rather than just grabbing some random number out of the sky.
This stock market upheaval some other brokers are trying to have competitive margin rates, but in the past downturn when I was broker shopping, IB was blowing others away with ~2% rates while everyone was at ~7%.
IB is very much targeting advanced consumers all the way up to small funds and trading shops, so you can do a lot on their platform if you're interested.
Ah, I see, makes sense. Thanks for providing this explanation.
I really appreciate this perspective. I am way more into options trading, while keeping my savings in regular stocks, so I don't manually trade stocks much. But it is still good info to know, in case I change my mind on it later.
UX is good in some ways, but bad in others. Once you learn more about investing, you realize how much power robin hood just omits for the sake of a clean interface. I don't mind having things hidden out of the way, if you let me put things back. Their UX has also been prone to lag, can have problems with clearing funds, among other issues in recent months/years, which is exactly what you don't want from a brokerage.
A good deal of post-Depression financial regulation was about making it harder for laypeople to invest, because the layperson is not really a "rational" investor and because there was a decade of real economic harm from letting people treat the stock market as a casino. People in the '20s were going in debt to buy stocks and then when the bubble finally popped it was ugly.
I don't know that good UX is a positive for society in this scenario.
I should be the only person to decide that, already there are strict regulations about day trading, volume of trades on a mobile platform, access to margins and access to after hours trading.
Robinhood adheres to all these regulations and doesn't easily dole out features to anyone.
The reason this regulation exists is because enough people doing it is systemic risk.
You losing all your money impacts you. You and millions of other people losing all their money at the same time impacts society; they can't pay bills to their creditors, then those creditors can't pay, and soon enough we're talking bank runs and financial collapse.
Regardless of the intention behind the rules, the actual effect of so-called accredited investor rules is simply that the most potentially lucrative investments are only available to the already-rich class. The general public gets the dog investments.
If I want to gamble away a windfall $200K inheritance, I can easily and legally go to Vegas and have my loss "impact society." Why shouldn't I instead be allowed to invest that in a startup?
The country is generally not all at the slots at the same time, and if you do dumb things in Vegas that basically impacts you and the casino and any immediate creditors.
The entire country is in the stock market (401k and pensions, etc.) so gambling with valuations has real impact on things that aren't just you, and the blast radius of harm is so much larger. We already saw this happen in the Great Depression; bank runs, sudden, massive tightening of liquidity that screwed over creditors and suppliers in a cascading fashion, etc.
The real fundamental issue is that QE as the overwhelming response to 2007 mostly just massively inflated stocks and other rich people assets without meaningfully improving the financial prospects of middle and working class people, so now everyone is clamoring at the gates to be let in at the stock market. Look at how quickly BTC became a numbers game rather than the actual useful intrinsic value, with people who couldn't give two shits about the blockchain.
Many of the regulations are meant not to protect irrational actors but rather to protect rational actors from swindlers. For example, brokerages that push clients with zero investing experience to trade options.
Did you try the IB mobile app? It has quite a nice UI compared to the desktop trading software. For example the option chain builder is very easy to use on the app. Obviously if you need all the advanced features then the app will not be good enough.
Agreed the option chain & strategy builder is both better and seemingly more complete on mobile. For instance, there are far more expirations available for futures options on mobile than on TWS.
It's easy to end up ahead if you buy diversified index funds and hold them for a long period of time. Stock investing should be boring. The bigger issue is people want results now and not in 10 years, and that's when the speculative investments begin. People need understand that's not what the stock market is, and that strategy is very likely to end with having the rug pulled under you.
M1 deserves some credit for designing something in the same space, but for a different market, and encouraging different behavior. They built the app around setting it and forgetting it, making day trading impossible, and auto balancing. You set percentages, and when you deposit or autodeposit, it buys whatever proportion is the shortest. You can active pick stocks or index etfs, but the only proper way to use the tool is buy and hold. More firms would be wise to offer that kind of simplicity, without having to manage WHICH shares to buy.
It gives people a similar experience to buying a Total Stock Market ETF, but still lets them have some runway to be foolish. The 30% nanny state of investing software.
Honestly, putting your money in an ETF so you have a bit more money when you retire is stupid. You cant retire any earlier investing that way, and you are subsidizing all of the terrible sectors included in the etfs. Its brainwashing to do it.
Maybe. There are leveraged ETFs that do even better than the index, and most retail investors fail to beat the index anyway. Look at all the people on reddit talking about how they are coming back from a 90% loss or something crazy.
What I meant was, the returns will not have a material impact on your retirement. You may retire a year or five early. But if you just targeted your investments a bit more, you actually have a chance at making real money. Why are people working their whole lives? Pumping all their hard earned money into a security that wont do any better than their peers and thus gets them no further ahead? Its brainwashing sold to the masses.
Picking stocks is work. It's just another part-time job you can do, so you have to consider what it pays (usually negative), and how much you like the job.
If you like picking stocks and are demonstrably good at it, why are you messing around with doing it on your own instead of starting a hedge fund and having other people pay you for the privilege?
Investing advice that is ingested by the public from professional investors is the advice that applies to managing billions of dollars of capital. Its an insane situation that the public listens to people whos objectives, risk tolerances, benchmarks, and professional goals are completely different.
Active investors, who are professionals, that manage less than 50 million see extremely high returns. Commonly over 100%. When you get into the billions, you cannot make the same trades, and your clients DO NOT want you to loose their money. It is more so about simple wealth preservation.
Raising capital to start your own fund is extremely difficult, expensive, has extensive legal bookkeeping, and requires an immaculate pedigree. I work for FAANG and aggressively invest my money, will be retired before 40.
Both of you guys are missing something. Investing advice that is ingested by the public from professional investors is the advice that applies to managing billions of dollars of capital. Its an insane situation that the public listens to people whos objectives, risk tolerances, benchmarks, and professional goals are completely different.
Active investors, who are professionals, that manage less than 50 million see extremely high returns. When you get into the billions, you cannot make the same trades, and your clients DO NOT want you to loose their money. It is more so about simple wealth preservation.
So, basically, the usual answer from active investor proponents: There's a secret system! I can produce outsized returns, trust me, it's possible! I'm just don't have time to tell you what it is, but pinky swear there's totally a way!
> But if you just targeted your investments a bit more, you actually have a chance at making real money
1. I prefer passive investing. I already have one job.
2. More risk = more reward. I've purposely chosen this as my risk level.
3. Regardless of whether I'm smart or not, I'm not going to consistently beat the guy who eats-sleeps-and-drinks investing. Oh, and there are millions of him.
4. I believe it WILL allow me to retire earlier (given the power of compound interest and time).
I've read a few articles that have suggested it's like a mobile game for the millennial. They look at it as something to play and have fun with. Perhaps this trading platform is a form of entertainment for them, like a slot machine or roulette wheel........
They also have a surprisingly low margin interest rate for low net worth individuals. As far as I know only Interactive brokers beats them (and they beat everyone at every level). We like to take the piss with lol wsb and so on, but I know for a fact their clearing partners have a lot of respect for their operation. I see them as a Tesla tier operation: lots of haters, but they do more right than they do wrong.
Tesla is innovative but has shoddy quality.
They rank the lowest in quality even if you check insurance companies. But boy was the innovation needed in the car industry. I’m just happy it got enough in government subsidies to stay in the market.
This reads like a series of increasingly terrible decisions.
I don't have access to the full article but if they are laying the case for having Robinhood regulated (as I suspect) then I'd say what's even more unfair is preventing responsible people from having nice things because irresponsible people can't be trusted not to hurt themselves, or understand the risks they're taking.
Granted, that bit about gamefication does concern me, it's sort of dopamine abuse - I'd argue to an extent it's a dark pattern, just like frequent unsolicited attention grabbing notifications from other apps to encourage use.
It’s not really gamification, Robinhood just literally adds smiley faces next to alerts like “:) your order to sell 20 contracts was completed.” I imagine it is nearly identical to any other brokerages notifications but with an emoji added.
I can't really read the whole article, but from what it sounds like is a man put too much into the stock market, and lost. He took out even more to pay his debts, and lost that too.
This has nothing to do with the app, but the risk tolerance of those involved.
The worst cases of people losing their shirt tend to be people speculating with options, and it's definitely up to the broker what options trades (beyond those secured by cash or securities) they want to permit their customers to do.
There are different levels of options trading for a reason. Giving level 3 options trading out to anyone is reckless; in the hands of many people these are tools that are pretty much being used for making leveraged speculative bets, not careful hedges of risk.
If your mitigation of Robinhood's culpability would apply just as straightforwardly to an actual casino, that's a damning statement about what Robinhood is.
But all of these trades are just as possible in etrade, TD Ameritrade, etc. In robinhood, your trades even have to be cash-secured so your downside is capped to your deposit amount. The futures account I have on TD Ameritrade is much riskier than RH...
The app makes it very easy (and promotes) leveraging beyond your means which encourages subcultures like /r/wallstreetbets and influences young professionals to dump irresponsible amounts of money into the app. Robinhood 100% knows about this and benefits from it, you can argue how complicit they are but there is no doubting that they are in fact complicit.
Any broker can give you margin, robinhood does all the same things TD ameritrade and everyone else does. A discussion about wall street bets is another thing, but robinhood is not some unique platform in this regard.
I'm in the typical customer base for Robinhood. I've been using their app since late 2015 and I've never ran into issues like these. This is bound to happen if you're treating trading like gambling and listening to strangers on the internet about which stock to buy to get rich quickly.
Decades of historical data is helpful in figuring out that if you just spend time in the market (with decent ETFs or stocks), you'll gain money. Timing the market is way worse than just spending time in the market.
The examples cited in this article are people who are at the extremes and very tragic but I hope it serves as a warning to other young investors that Robinhood is not a game and the money is real, so tread lightly.
Disclaimer: I've put in around $10k into Robinhood and it's not my primary savings/long term investment brokerage.
Honest question: If you are using RH as a buy and hold investor and you have other brokerages that you consider your primary savings, why are you using RH at all?
> That growth has kept the money flowing in from venture capitalists. Sequoia Capital and New Enterprise Associates are among those that have poured $1.3 billion into Robinhood. In May, the company received a fresh $280 million.
What does a trading app do with $1.5 bn? Isn't trading a commodity technology?
The rapid consumption RH has of younger retail market seems to imply the answer is firmly "no". The backend of sending orders to exchanges without caring much about latency is surely simple, but the UI and UX clearly had plenty of room for improvement.
The line that stands out most to me concerns the driving force behind the obsession with Robinhood - the confetti and emoji-filled notifications that make it into a game.
It reminds me of the stories of children spending hundreds of dollars on apps like "Clash of Clans" and "Smurfs' Village" only for their parents to find out when they see the bill. Only now it's the parents that are getting taken advantage of.
As social media and TikTok-like products shorten our attention spans and continue providing instant gratification, it will become easier and easier to take advantage of people. These aspects, coupled with making the user feel smart (think "I'm a Wall Street trader"), and giving them the potential to make lots of money, may start getting applied to other spaces and could have drastic effects.
Well, is the counter true? That investing should feel like a corporate sludge, overcomplicated to anyone who isn't lucky enough to have someone to show them how?
Investing is scary for most people. I think a positive spin is that Robinhood makes it so groups of people underrepresented in stock trading can participate. The stock market already is a game, and it's being played by rich people making themselves richer. Isn't it cool that a 22 year old with $100 can get involved, and it's not just old rich people who benefit from the system?
The stock market is soaring, despite millions being out of work in the US. The US has two different economies, and I'm all for anything that gives the latter group the same tools the former group has.
Stock investing (i.e., owning stock for a long time, ideally with diversification, hoping to profit from new economic value created by the companies you own) is positive-sum, and I agree that it's beneficial to encourage that. Stock trading (i.e., buying and selling stocks over short periods, hoping to profit from short-term changes in price) is a zero-sum game of skill played against full-time professionals, with predictable results for an uninformed amateur.
Do you really think that 22-year-old is going to buy $100 worth of SPY and watch excitedly for their quarterly fifty-cent dividend? Or will they make a bunch of emotional trades, each one transferring some fraction of their hard-earned money (not every time, but in an expected value sense) to a professional's algorithm? Robinhood's marketing and user interface are designed to encourage the latter, and I believe that's net harmful to their clients. I'd rather know nothing about the stock market than believe falsely that uninformed trading of single stocks was a good idea.
Of course nothing stops you from using Robinhood to buy and hold an index fund; but to the extent their app is designed to encourage you not to, anyone who tries to use it that way is stealing cheese from mousetraps. New investors would be far better off going to Vanguard or similar, even if they have to save up a bit longer to meet the minimums.
Investing has been simplified to the point that you buy a single low cost target retirement fund and call it a day. You don't need to know more than that. The next step is to of course replicate that target date portfolio using the individual funds, thus reducing the expense ratio. Anything beyond that is pure luck for the vast majority of investors.
Its not that simple, retirement funds are complicated and can be more complicated if you work in different jobs/public or private sector, etc. Maybe you can only put in a certain % of your paycheck. Maybe you can't touch the money without a certain penalty. There are tons of complex rules compared to essentially venmo with equities and crypto.
Who said anything about using retirement accounts. I said use target date mutual funds. You can buy the Vanguard 2055 TR in a normal brokerage account. You can also get it in an IRA. I will admit that 401k and equivalent accounts can be a pain because you don't get to pick the available funds, but that wasn't the original issue being discussed.
I'm not sure what the interface for trading should be, but some interfaces are definitely meant to have friction. The common example is React's `dangerouslySetInnerHTML`. It's a long and annoying name, with the word "dangerous" in it, it just screams "code smell", and that's the idea. It makes it harder to do the wrong thing, and makes it more likely for only people who know what they're doing to use it.
Whether trading/stock markets should have friction, and how much? I honestly don't know. There's obvious questions about nanny states, and giving people freedom to take risks, but there's also large actors taking advantage of the fact that they understand risk more than individuals and exploiting them.
Robinhood definitely has some questionable tactics but it may actually be a positive. Much better to gain financial literacy when you only have a few thousand, and how else do kids or young adults gain the knowledge, especially if they don't have financially literate parents? Schools don't teach even rudimentary finance.
It's very hard to get ahead financially without understanding the power of compound interest or the importance of putting your money to work for you.
Robinhood enabled cheap buying/selling,which means deals are made more frequently and that's what kills most newbies. Imagine looking at your screen and seeing your Google shares going down by 20 points. People panick,they sell only to say two days later that it went back up by 60 points.
I suppose it's more of an indictment of trading stocks in the hands of a newbie, but RH is customized for newbies (low cost trades, fractional ownership, gamification) without (anecdotally) all some of the guard rails that more mature brokerages have. Also, I've read that RH has/had "a bug" (as described on Reddit) where an inexperienced trader could overleverage. I can't see how this risk profile is profitable for RH, especially if they specifically aim to have a large portion of the newbie trader market.
I know a few investors who think Robinhood is amazing. While they haven’t lost the sums highlighted in the article, they trade often and tend to not realize they lose money. I’ve noticed they tend to exaggerate movements in individual stocks; my theory is the scale of the default stock chart views encourage this.
They also don’t understand that Robinhood’s fractional shares and cryptocurrency are a degree more abstracted than traditional online brokerages and wallets.
So robinhood's crime was... making it easier to trade?
"After funding his account with $15,000 in credit card advances, he began spending more time on the app."
"As he repeatedly lost money, Mr. Dobatse took out two $30,000 home equity loans so he could buy and sell more speculative stocks and options, hoping to pay off his debts. "
"with whom he has three children"
Nothing Robinhood (or anything else) has will cure financial stupidity. Furthermore, anyone who -still- uses robinhood after their various crashes is asking for trouble. I've had zero issues with TD Ameritrade.
Which is part of why gambling is as regulated as it is. Robinhood has made trading so easy that it is effectively a gambling platform that doesn't have to adhere to gambling laws.
I wouldn't blame robin hood. It's not like the TD ameritrade app is any more difficult to blow your money with, yet they are getting a pass in this thread due to them being the institution and robinhood being a new and popular face.
gambling is regulated at the state level almost exclusively, which is almost impossible for the financial markets over the last century.
and in the financial markets, the federal government already has classist gatekeeping regulations because "poor people are dumb, rich people are smart", which should all be abolished
the finger pointing at Robinhood is based on ignorance of the entire sector.
to elaborate, federal financial regulatory gatekeeping is more about "not-rich people have life altering consequences", but to get over those hurdles and make your own choices is based on a baseless wealth and intelligence gap.
and of course, the observation that not-rich people have plenty of ways to lose their money in systems with negative expected value, so why apply that to financial systems with positive expected value.
It didn't just make it easier to trade, it systematically gamified trading through UX design including confetti graphics when someone makes a trade. It's basically using casino-like mechanisms to trick people into treating their money like monopoly currency.
It's plain unethical and ridiculous that 20 year olds with no steady income get access to highly leveraged financial instruments that can ruin them for life.
It looks like the person in your example was selling a call, which has potentially unlimited losses - that was a rather poor decision on his part. There are much safer methods of making "the same bet".
Gambling is a random game designed to extract money from people. The stock market is a math game that doesn't care if you gain or lose.
You can not directly use a credit card to gamble in Vegas. You can however get a cash advance at the ATM or the Cashier's Cage for a fee, so indirectly yes.
It bears mentioning that this is extremely uncommon situation.
I have both RobinHood account and IBKR and I don't see how I could do an unhedged short.
As a retail investor, the only way I see to short is via options and there you can only loose 100%.
It also bears mentioning that an average result in Vegas is: you loose.
Benchmark returns for stock market is S&P 500 which is 8-15% yearly return (over multiple years, depending on how good the economy is during those years).
And the chances of doing better are higher than chances of loosing money.
How much does a Vegas casino let the average person gamble that they don't already have?
So many of these stories involve highly-leveraged options stuff, reminiscent of stuff that even my schoolbook US history summation of the Great Depression described as super-dangerous.
> How much does a Vegas casino let the average person gamble that they don't already have?
Do people not just gamble on credit? I highly doubt casinos care about the average person's financials, as long as the money ends in their pockets.
I see no difference between the stock market and gambling, sure there's "smart strategies" to the stock market but at the end of the day it's the same result for anyone with a gambling addiction to either.
The difference is that in a casino you loose on average.
In stock market, you win on average.
Not to mention that stock market is much more a game of skill than game of chance (as is most of casino games).
I did very well in stock market and I don't feel like I'm gambling. I recognize there is risk and I lost money on some investments but I can usually pin point the reason I lost. It's not random.
They do have that money tho. The example given was a guy how took out cc advances and pulled equity. The casino doesn't care if you show up with a pocket full of cash from cc advances.
Twenty years is young, but is there a particular age at which someone should be "allowed" to lose money playing with stocks / options? If the minimum age for opening an account if 18, should we put further restrictions on saying, for example, you can only sell puts when above 21? There are only so many restrictions we as a society can place before it starts severely infringing on personal freedom.
If we agree that being able to own shares in companies is a worthwhile public good, that doesn't necessarily mean that options and other derivatives hold the same value to society.
Many options trades have an expected loss of nearly 100% - the same cant be said of holding stocks. Society has decided its OK to own houses, which certainly can decline in value, but outlaw ponzi schemes that for a substantial number of people are virtually guaranteed to wipe out their investment.
I don't think an age restriction is appropriate, other than 18/21/25, or some other reasonable definition of adult. But, I think it would be sensible to only allow options trades up to a certain percent of one's provable net worth - lets say 10% below $100k, 100% over $1M, or something like that.
trading is ok as long as the experience is convoluted and looks ugly? only people with a certain amount of wealth should be permitted to use aesthetically-pleasing interfaces? not sure what you're advocating for here.
They're advocating for protecting people from themselves.
Which is kind of terrifying for a country with democratic input. If people can't be trusted with their own money, why should they be trusted to decide who controls the American nuclear arsenal?
>>Which is kind of terrifying for a country with democratic input. If people can't be trusted with their own money, why should they be trusted to decide who controls the American nuclear arsenal?
With this analogy, I think you inadvertently supported the opposite argument: the nuclear arsenal itself is not democratically controlled. Rather, we elect someone who controls it (with several layers of checks and balances).
What's the check on the president hitting the button?
Is it just the willingness for military officials to follow the order? I'm pretty sure the president doesn't have to consult with congress or the supreme court before doing this.
I don't totally disagree. But, at some point, "let people make whatever stupid decisions they want to make" turns into we should also be able to kick those stupid people into the gutter and abandon them.
Actually they’re advocating for protecting people from predatory corporations that adversarially target and exploit their customers with weaponized psychology, bit of a difference
In a democracy, the people (and their legitimately elected representatives) are also allowed to structure markets and decide on what business practices are and are not allowed
>It's plain unethical and ridiculous that 20 year olds with no steady income get access to highly leveraged financial instruments that can ruin them for life.
None of these instruments can ruin a 20 year old for life. Worst case is 7 years of trashed credit from a bankruptcy.
Not necessarily. There aren't really that many frictionless ways to gamble hundreds of thousands of dollars on your phone. People, especially young people, may make stupid, reckless decisions, but those decisions are often harder to get into and limited in scope and damage.
Cash advance on credit card and you can gamble on whatever you want. The cash advance on the credit card is the dangerous part.
You could even cash advance on a credit card, buy a car, and wreck it and be in the same financial situation as you would if you gambled it away on robinhood.
None of the financial instruments did that. That person didn't even have actual debt, just one leg assigned on a spread that would have been resolved by the end of the weekend.
The entire stock market is just one big, gamified casino. It’s completely decoupled from the actual performance of any company. I do agree that they should not be letting people that don’t know what they are doing get access to margin trading and leveraged instruments though. That can be disastrous.
To be fair, before he moved the money to Robinhood (which could be routed to lottery tickets or Vegas or Bitcoin or a drug habit), he received "$15,000 in credit card advances".
Makes you wonder about the risk management practices and incentives of that particular credit card company.
Modern trading of the kind RobinHood provides is gambling. So is buying insurance. There are sometimes good reason to trade or buy insurance.
And most people who buy insurance, have a good reason to make that gamble. But many people who trade, certainly through RobinHood, have no reason to trade beyond gambling.
Robinhood's crime is that they make it easier (and some claim addictive) to gamble.
Agreed, some degree of personal responsibility is needed in the case of addictive behavior. Robinhood in that aspect (gamification) falls into the same category as gambling, and the only difference is that is that it comes from the Bay Area as opposed to Vegas or AC.
By that definition: does Strava and Duolingo fall into the same category as gambling?
Those are both highly gamified apps.
So maybe let's not play loose with meaning of words.
Gambling means 1 of 2:
"play games of chance for money; bet."
Investing is not a game of chance. I'm not making investing decisions randomly.
"take risky action in the hope of a desired result."
Investing could be gambling according to this definition (there are risky investment strategies) but on average investing in U.S. stock market is not risky.
If you abstain from doing risky things, you can have 8-15% yearly return by putting all your money in S&P 500 tracking stock.
And if you want to blame someone for people's risky investing, blame https://www.reddit.com/r/wallstreetbets/ (1.3 million people reading stories like "$35k -> $1.25 in 4 months") not Robinhood for making an easy to use stock trading app.
It's a textbook NYT hit piece. Catchy misleading title, but there's no substance. Robinhood did nothing wrong. This man clearly has a gambling addiction.
It is the price of democracy. When voting was democratized it allowed people with all different backgrounds and varying level of education to contribute to the political body of a country. Same thing happened with the democratizing of information with the arrival of the internet and search engines. It allowed the flow and availability of information, all kinds of information, including flat earth conspiracy theories, guides on how to perform violent acts ...etc.
One needs to look at the net sum. In my opinion, the net of the democratizing of stock trading, like other forms of democracies was a positive.
I don't think the issue is democratizing stock trading.
The issue, as I understand it, it's that Robinhood's UX has crossed the line from "easy, functional and usable" over to one that employs similar psychological tactics that social media, casinos, and lootboxes employ to keep users engaged with their product.
I'm not passing judgement on their implementation, instead likening it to similar pleasure cycles that lead to addiction like behavior in the aforementioned products above.
Maybe we shouldn't be throwing words like "addiction" willy nilly.
Is it really your opinion that the guy wouldn't fund his investments via credit card debt and then followed it up by borrowing $30k against his mortgage if only he used ETrade and not Robinhod?
> Is it really your opinion that the guy wouldn't fund his investments via credit card debt and then followed it up by borrowing $30k against his mortgage if only he used ETrade and not Robinhod?
Mechanically, ETrade does not allow you to fund your account via Credit Card. You could request a check from your credit card company I guess...
But yes, most brokerage apps are focused on data, and less about engagement.
> In my opinion, the net of the democratizing of stock trading
What exactly does this mean? I'm pretty sure you've been able to purchase stock as a retail investor for a long time now. I'm also pretty sure that the friction that used to exist to direct stock trading was a net positive for the average retail investor.
> As he repeatedly lost money, Mr. Dobatse took out two $30,000 home equity loans so he could buy and sell more speculative stocks and options, hoping to pay off his debts.
One really can't make an armchair diagnosis based off one observation, but this seems like a telltale sign of gambling addiction. The cycle of thinking that to make up for losses you need to dig the hole just a bit deeper to strike oil and float back out.
Most people are not trained to trade options with pressing a button. Many Robinhood users don't fully understand what the order they just placed mean, just look at r/wallstreetbets. Robinhood is pushing alcohol to minors in a sense.
Isn't everything? This is pushing alcohol to adults, mind you. Adults are making these decisions. That being said, its not like TD ameritrade trains me to trade options when I press the buy button on their cute mobile app.
You could replace "trading stocks" with "playing poker" and it's basically the same story. In other words, someone played way outside of their bankroll and got crushed.
For example if you have $200 and want to get better at poker, you don't sit down at a table and put $100 or $200 in chips. You'd likely want to sit down where the maximum buy-in is maybe $2 or $5 so you can actually get experience and ride a bunch of variance without losing everything immediately.
Sure, you won't be getting rich any time soon but if your goal is to improve, you will slowly be able to move up as you get better.
When in doubt, follow the Rounders quote of "you can't lose what you don't put in the middle".
This is a bad analogy. Lower-limit poker tables attract lower-skilled players for the reason you give, which means you're playing against lower-skilled opponents[1]. In the stock market, you're always playing against the world's top professionals and their computers. As in any game with a random element, unskilled players still sometimes win, but on average they lose.
Investing isn't gambling, and Robinhood's conflation of the two is exactly the reason to criticize them. It's very likely that a share of SPY will be worth more in real terms thirty years from now than it is today, and that makes it a useful vehicle to save for retirement. What it does in the next day, month, year, or even decade is much harder to predict. By encouraging naive users to trade frequently, Robinhood is encouraging users to expose themselves to that short-term volatility, with no benefit except fulfillment of an urge to gamble.
1. Unless you're playing online against some guy with a bunch of fake identities and a bot. Is that still a thing?
The analogy I was going for was this person took what sounds like his entire savings and then took loaned money against his house and put it all into trading super high variance options.
I'm not an experienced trader but I occasionally talk to some. They all say options trading like that is a massive gamble. There's a big difference between long term investing into an ETF and doing what this person did.
He could have chosen to put $500 into his account and hand picked some stocks or ETFs and then watched it grow or shrink over time as he learns how to trade but instead he chose to use 15k+ and then 2 big loans on high variance moves to either hit it big or go bust in a very short time frame. It just happened in this case he busted.
I think he would have had the same outcome on another platform if Robinhood didn't exist.
Hard to judge to what extent he was nudged by Robinhood's marketing and UI towards risk-taking vs. initially predisposed. I agree that most other brokerages allow--and often even encourage, just less effectively--their customers to take similar risks. The difference is just that Robinhood seems unusually good at the "encouraging", with UI frills like the confetti and such, and their customers do anecdotally seem unusually prone to blowing up.
I'd re-emphasize my point as to your opponent's skill. Poker (or most other games of combined chance and skill) gives you an opportunity to practice both at lower stakes and against less skilled opponents. In the public markets, you can risk as little as you want, but you're always playing against the world's best counterparties, unless you can find some instrument that's both too small to be worth the professionals' specific attention and too distinctive for their existing algorithms to generalize.
It's not like a paycheck loan product where you may get a desperate person buying it as a "last resort". People have to make an effort to find out about it, select a stock to buy, do some "research" even if it's reading bad advice on subreddits.
So it's hard for me to have too much sympathy for people who have lost money on this.
(I don't trade stocks very often. Every few months I rebalance things. This has worked well for 35+ years. I'm 57 now.)
What a crappy framing. From a publicly traded company that benefits from the stock market, no less.
The stock market is soaring, despite millions being out of work in the US. The US has two different economies, and I'm all for anything that gives the latter group the same tools the former group has.
Why should only rich people who know how to navigate beige clunky 1990s websites, or whose parents give them the number to their investment guy, be the only ones who get to trade?
And the frustrating part of this article is that they aren't saying trading is inherently risky, but rather that a certain group shouldn't be allowed to? It's a cliche that stock traders were jumping out of windows in 1929, but nobody said "we should shut down the stock market".
Everything can be overdone... gambling, sugar, video games. Why focus on the few people who take it too far, rather than the millions who now have the same access to wealth building that rich old people do?
I hate this framing too. I don't understand all the hand-wringing over people losing money in the stock market.
If you want to be mad about people losing money, be mad about the ones where it's rigged against them -- lotto/casinos. Not the ones where they average positive. Hard for me to take this even remotely seriously.
It really doesnt, and wish people would stop saying this. Vanguard ETFs include all sorts of companies that are basically zombie companies. Buy buying their products, you are subsidizing terrible companies.
> Everything can be overdone... gambling, sugar, video games. Why focus on the few people who take it too far, rather than the millions who now have the same access to wealth building that rich old people do?
Robinhood did not do this. Vanguard, Fidelity, Schwab have all existed for a long time now.
Sure. I can also go get licensed as a trader and join a firm. Any barriers to entry are still barriers, even if it's as dumb as "the website isn't mobile friendly". For lower-income people, they might only have a phone.
It sounds dumb, but... when you go to those, a lower income 20-something feels like they don’t belong and would leave. "Charles Schwab" feels like it's for people who look like Charles Schwab.
So letting them gamble it away on options and individual stocks is the answer? Like I get your point, but Robinhood isn't helping these people make good financial decisions.
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[ 4.9 ms ] story [ 255 ms ] threadI would hope that most people left their platform after they had those major outages during volatile trading days a few months ago. Any place that has outages lasting that long without properly explaining what happened shouldn't be licensed to deal in securities.
Now they're just preying on people that aren't knowledgeable in the financial markets by showing them how "easy" it is to trade. I have studied and worked in finance, and I'll be the first person to tell you, trading isn't the least bit "easy" and shouldn't be portrayed as such.
(None of this makes Robinhood good; it's just that PFOF doesn't explain why they're bad).
> the cost basis of trading with you is lower than with trading with the broader market
But this is exactly why Robinhood is bad. Trading with you (a retail investor) has a lower cost basis because retail investors are reliably less sophisticated than institutional investors. Therefore: an institution will pay to take the other side of a series of trades with you because it knows you aren't sophisticated, so it's likely to win in the long run.
From there, follow the incentives: Robinhood is incentivized to sell more order flow; which it does by increasing its trading volume; which it does by making trades easier. Robinhood is also incentivized to increase its net revenue per trade; which it does by increasing the price at which it can sell a given volume of order flow to institutions; which it does by making its average trade less sophisticated.
In summary: The most obvious way for Robinhood to optimize its revenue is to get its investors to make lots of bad trades.
The money they're making is just the spread. They can safely quote better spreads to retail investors than they can to execution firms trading for giant funds.
That concern might exist because I'm selling a big position and my order is the tip of that iceberg, as you say; but it could also exist because I'm trading on news that hasn't yet been incorporated into the share price, and my order will be followed by many other people selling once they learn that news themselves.
It's not about winning or losing, it's about getting "run over" by massive momentum. Retail investors move less volume and randomly take both sides of trades, so it's much less risky to trade with them. Conversely, large players can dump so much volume that they move the price against a market maker and decimate their revenue from whatever very small spread they usually collect.
> The most obvious way for Robinhood to optimize its revenue is to get its investors to make lots of bad trades.
Robinhood doesn't care whether trades are good or bad. A discount brokerage is a moving business, not a storage business (unless you count interest on cash balances, which Robinhood doesn't make much from). They make money from retail investors doing a lot of trades. Arguably that's against the interest of the investors because retail investors tend to make bad trades, but there's no malice on the part of Robinhood there. If all their clients made a lot of money presumably they'd use it to make more trades and make Robinhood more money.
So, let's say you are trading 1000 shares. Normally, you might pay around $10 for that with a real broker. Now you execute that same trade at RH (or some other zero-commission broker), and let's say your average price is just 2c worse than what the other broker would get you. Well, now you just paid $20 for your "free" trade. And this gets worse for odd-lot orders (those that are not multiples of 100 shares). Because with those the MM is not bound to the NBBO, and can give you an even worse fill. Given that a lot of these RH accounts are presumably rather small, that likely applies to a decent amount of orders executed.
> the cost basis of trading with you is lower than with trading with the broader market
These are market makers; they don't take directional bets, hence this is irrelevant, as they only trade in a reactive way while trying to maintain a neutral book. What you are presumably talking about is toxic (i.e. informed) vs non-toxic order flow. Having a big player, who knows more than the MM, is what they are afraid off, because they can lose a lot of money by being on the wrong side of the market. They know that retail traders are unlikely to be informed traders, hence their order flow is less risky. However, the volume retail traders are moving is a drop in the bucket compared to what instis do.
I'd love to know how that split gets decided. I guess it's "as much as possible to the brokerage without looking so lopsided that someone writes an article about it", except at brokerages like IB that publish data on execution quality and try to market based on that? Do the contracts between the brokerages and the market makers specify the quality of execution in any detail, or is that just a long-term reputational thing?
https://www.bloomberg.com/opinion/articles/2018-10-16/carl-i...
Is this actually true? If so it blows me away this this is not illegal, or that the press hasn't destroyed them for it.
RobinHood is has one of the most ridiculous branding efforts ever: 'borne of the Occupy Wall Street' movement, the idea was to empower Millennials to 'break the system' ... by 'buying into the system'??? It's like the perfect script written by a NY agency for a bank to re-position the exact same financial products under the banner of a ridiculous 'empowerment branding', like Exxon creating a hipster brand to sell 'clean oil'.
"Robinhood Raises $323M to Democratize Finance For All" [1].
"Trading app tries to fix a 'rigged' financial system" [2] from CNN.
How does a startup get major news agencies to consistently promote their narratives unchallenged, especially when they're so ridiculous? We saw this a lot with WeWork as well.
I can't figure out is how the press, particularly CNN bought into hook-line and sinker especially early on. They've been consistently promoting Robin Hood and their 'empowering message' with fluff stories, not remotely critical of the materiality of the business. Have a look [3]
Recently, they've started to question some things, and perhaps the press will fall out of love with them and it'll be narrative in the other direction.
There is absolutely something amiss here, if anyone with deep relationships in the PR and story placement care to comment, it would be enlightening as I think that's a big part of the underlying story.
Edit: another great example of the press point-blank driving RH's branding, in this case 'intergenerational' [4]. What kind of agency can get this kind of coverage?
[1] https://blog.robinhood.com/news/2019/7/21/robinhood-raises-3...
[2] https://www.cnn.com/videos/business/2018/09/21/robinhood-fou...
[3] https://money.cnn.com/2017/09/08/investing/robinhood-baiju-b...
[4] https://www.trtworld.com/magazine/robinhood-and-merry-millen...
"Schwab earned 1.4% of revenue from payment for order flow, TD Ameritrade about 8.4%, and E*TRADE about 6.1%. Interactive Brokers has historically been quite reticent about participating in internalization, because it doesn’t play well with their sophisticated clients; they earn about 1.1% from it."
Scroll down to "payment for order flow" https://www.kalzumeus.com/2019/6/26/how-brokerages-make-mone...
Schwab sells theirs as a feature/benefit. https://www.schwab.com/public/schwab/active_trader/trading_t...
"Why Robinhood earns more than the discount brokerages for order flow is readily apparent: their product encourages options trading. This is bad for customers, principally because the supermajority of Robinhood customers do not understand options trading and the risk/reward calculus for them is even more borked than it is for the vast majority of people who engage in it. The options trades they engage in are also less liquid, and so have higher spreads, and so are more lucrative for marketmakers, "
[1] https://en.wikipedia.org/wiki/National_best_bid_and_offer
[2] https://www.investopedia.com/robinhood-hit-with-usd1-25-mill...
HFTs like retail orders because they don’t move the market, so you can collect some of the spread without worrying about getting run over by an informed institutional player.
A conversation I had with a person yesterday. Him: My older coworkers asked me if I use all the new apps like Tik-Tok and Robinhood. Me: With everybody being free now, theres no real reason to start with robinhood. Him: "But is it as easy. If not, dont care."
My counterargument was customer service, but was not persuasive. He has no intention of ever picking up a phone or asking for help. He wants a toy to play with, while he and his friends cant be at the casino. The majority of his money is at Vanguard, hes not moving it to robinhood. It's just something to look at everyday for some entertainment value. Its the same mindset where "I made x today (or at the casino)" but ignore the losses or how much they put in. This is the same group of friends that are excited their $75 in dogecoin is up 50% today, or who are playing with options against Draftkings for the thrill of it. Gambling on gambling. Fun. Games. Thrill.
I can't say with a straight face that the Schwab or Fidelity have mobile apps that are as simple to pick up or navigate. They involve more clicks, and buried options. Free gave robinhood publicity and got people to give it a try. UX keeps them around. If Schwab, Fidelity, Merril, Goldman Sachs/Marcus want to compete in this space, they need lite versions of their platforms that are true mobile first apps AND some kind of value add above Robinhood to lure people to try it and convert. Maybe these arent the customers they are looking for, some of them at least.
https://www.wsj.com/articles/why-free-trading-on-robinhood-i...
tl;dr you're not getting screwed by Robinhood selling your order flow, you're getting a benefit.
After that come back and see how the WSJ article is just a poorly written hit piece on RH.
So I read Patrick's article and now I'm back. You're wrong.
Both articles are saying that Robinhood makes much more money from order flow than other brokerages. The WSJ is saying that this is because Robinhood takes the market makers' price improvements to itself instead of passing it on to their clients. Patrick is saying that Robinhood makes more money off of order flow because options trading (which Robinhood does a lot of) is much more profitable for the market makers. Now both hypotheses might be true. Robinhood could be offering their clients worse prices and at the same time get paid more by the market makers because of lots of options trading. I don't see anything in Patrick's article that contradicts the WSJ's explanation.
And given the following quote, I think the WSJ's analysis is pretty convincing:
One executive with a high-speed trading firm that executes orders for Robinhood said its price improvement is much worse than that of competing brokers.
I tried placing an option trade on Fidelity web version on desktop. It took me forever to figure out how, and even if I memorized the flow, it would still be much much slower and annoying than on RH. And that's on web, I don't even want to mention how bad it is on their mobile app.
I get that Fidelity operates on "if it ain't broken, don't fix it" principle, but sorry, UX matters a lot to users. And when a vastly superior in UX alternative appears, you cannot just sit and do nothing.
Due to all of that, Fidelity has been designated to be used solely for 401k management for me (which is almost automatic anyway).
After the outages, I don't see why a sophisticated trader who's doing option trading would trust Robinhood. I trade at IB and am very happy there. Just my 2 cents.
Why do you like IB? Genuine question, because that's the one I've never tried, but now I am curious to try it out, so I want to know what the major things that drew you to it are.
0. https://www.barrons.com/articles/robinhood-trading-app-has-o...
This stock market upheaval some other brokers are trying to have competitive margin rates, but in the past downturn when I was broker shopping, IB was blowing others away with ~2% rates while everyone was at ~7%.
IB is very much targeting advanced consumers all the way up to small funds and trading shops, so you can do a lot on their platform if you're interested.
I really appreciate this perspective. I am way more into options trading, while keeping my savings in regular stocks, so I don't manually trade stocks much. But it is still good info to know, in case I change my mind on it later.
I don't know that good UX is a positive for society in this scenario.
I should be the only person to decide that, already there are strict regulations about day trading, volume of trades on a mobile platform, access to margins and access to after hours trading.
Robinhood adheres to all these regulations and doesn't easily dole out features to anyone.
If I lose ALL my investments, it doesn't change my way of life or status in society. I have no dependents or collateral.
On the other hand, if my investments pay off, I have a real shot of upward social mobility within 5 years, instead of 5 decades.
You losing all your money impacts you. You and millions of other people losing all their money at the same time impacts society; they can't pay bills to their creditors, then those creditors can't pay, and soon enough we're talking bank runs and financial collapse.
I am not against regulations, I think all existing regulations are perfectly adequate to protect inexperienced investors from themselves.
If I want to gamble away a windfall $200K inheritance, I can easily and legally go to Vegas and have my loss "impact society." Why shouldn't I instead be allowed to invest that in a startup?
The entire country is in the stock market (401k and pensions, etc.) so gambling with valuations has real impact on things that aren't just you, and the blast radius of harm is so much larger. We already saw this happen in the Great Depression; bank runs, sudden, massive tightening of liquidity that screwed over creditors and suppliers in a cascading fashion, etc.
The real fundamental issue is that QE as the overwhelming response to 2007 mostly just massively inflated stocks and other rich people assets without meaningfully improving the financial prospects of middle and working class people, so now everyone is clamoring at the gates to be let in at the stock market. Look at how quickly BTC became a numbers game rather than the actual useful intrinsic value, with people who couldn't give two shits about the blockchain.
It gives people a similar experience to buying a Total Stock Market ETF, but still lets them have some runway to be foolish. The 30% nanny state of investing software.
I have plenty of experience in this, both my own behavior and that of many people I know.
This doesnt make sense, either you have more money and can retire earlier, or you dont.
If you like picking stocks and are demonstrably good at it, why are you messing around with doing it on your own instead of starting a hedge fund and having other people pay you for the privilege?
Active investors, who are professionals, that manage less than 50 million see extremely high returns. Commonly over 100%. When you get into the billions, you cannot make the same trades, and your clients DO NOT want you to loose their money. It is more so about simple wealth preservation.
Raising capital to start your own fund is extremely difficult, expensive, has extensive legal bookkeeping, and requires an immaculate pedigree. I work for FAANG and aggressively invest my money, will be retired before 40.
Source is I used to work at a hedge fund
Active investors, who are professionals, that manage less than 50 million see extremely high returns. When you get into the billions, you cannot make the same trades, and your clients DO NOT want you to loose their money. It is more so about simple wealth preservation.
I could go on and on. But I'm busy.
Source is I used to work at a hedge fund
1. I prefer passive investing. I already have one job.
2. More risk = more reward. I've purposely chosen this as my risk level.
3. Regardless of whether I'm smart or not, I'm not going to consistently beat the guy who eats-sleeps-and-drinks investing. Oh, and there are millions of him.
4. I believe it WILL allow me to retire earlier (given the power of compound interest and time).
https://amp.usatoday.com/amp/3249943001
Robinhood actually sent me an email and follow-up on outages, even though it didn't affect me one bit.
Robinhood actually gives tools and resources to explore and learn about investing, instead of it being "experts" only.
Every software platform has bugs and user issues but that risk is far outweighed by the services provided.
I don't have access to the full article but if they are laying the case for having Robinhood regulated (as I suspect) then I'd say what's even more unfair is preventing responsible people from having nice things because irresponsible people can't be trusted not to hurt themselves, or understand the risks they're taking.
Granted, that bit about gamefication does concern me, it's sort of dopamine abuse - I'd argue to an extent it's a dark pattern, just like frequent unsolicited attention grabbing notifications from other apps to encourage use.
This has nothing to do with the app, but the risk tolerance of those involved.
There are different levels of options trading for a reason. Giving level 3 options trading out to anyone is reckless; in the hands of many people these are tools that are pretty much being used for making leveraged speculative bets, not careful hedges of risk.
Decades of historical data is helpful in figuring out that if you just spend time in the market (with decent ETFs or stocks), you'll gain money. Timing the market is way worse than just spending time in the market.
The examples cited in this article are people who are at the extremes and very tragic but I hope it serves as a warning to other young investors that Robinhood is not a game and the money is real, so tread lightly.
Disclaimer: I've put in around $10k into Robinhood and it's not my primary savings/long term investment brokerage.
What does a trading app do with $1.5 bn? Isn't trading a commodity technology?
The rapid consumption RH has of younger retail market seems to imply the answer is firmly "no". The backend of sending orders to exchanges without caring much about latency is surely simple, but the UI and UX clearly had plenty of room for improvement.
It reminds me of the stories of children spending hundreds of dollars on apps like "Clash of Clans" and "Smurfs' Village" only for their parents to find out when they see the bill. Only now it's the parents that are getting taken advantage of.
As social media and TikTok-like products shorten our attention spans and continue providing instant gratification, it will become easier and easier to take advantage of people. These aspects, coupled with making the user feel smart (think "I'm a Wall Street trader"), and giving them the potential to make lots of money, may start getting applied to other spaces and could have drastic effects.
Investing is scary for most people. I think a positive spin is that Robinhood makes it so groups of people underrepresented in stock trading can participate. The stock market already is a game, and it's being played by rich people making themselves richer. Isn't it cool that a 22 year old with $100 can get involved, and it's not just old rich people who benefit from the system?
The stock market is soaring, despite millions being out of work in the US. The US has two different economies, and I'm all for anything that gives the latter group the same tools the former group has.
Do you really think that 22-year-old is going to buy $100 worth of SPY and watch excitedly for their quarterly fifty-cent dividend? Or will they make a bunch of emotional trades, each one transferring some fraction of their hard-earned money (not every time, but in an expected value sense) to a professional's algorithm? Robinhood's marketing and user interface are designed to encourage the latter, and I believe that's net harmful to their clients. I'd rather know nothing about the stock market than believe falsely that uninformed trading of single stocks was a good idea.
Of course nothing stops you from using Robinhood to buy and hold an index fund; but to the extent their app is designed to encourage you not to, anyone who tries to use it that way is stealing cheese from mousetraps. New investors would be far better off going to Vanguard or similar, even if they have to save up a bit longer to meet the minimums.
Whether trading/stock markets should have friction, and how much? I honestly don't know. There's obvious questions about nanny states, and giving people freedom to take risks, but there's also large actors taking advantage of the fact that they understand risk more than individuals and exploiting them.
It's very hard to get ahead financially without understanding the power of compound interest or the importance of putting your money to work for you.
They also don’t understand that Robinhood’s fractional shares and cryptocurrency are a degree more abstracted than traditional online brokerages and wallets.
"After funding his account with $15,000 in credit card advances, he began spending more time on the app."
"As he repeatedly lost money, Mr. Dobatse took out two $30,000 home equity loans so he could buy and sell more speculative stocks and options, hoping to pay off his debts. "
"with whom he has three children"
Nothing Robinhood (or anything else) has will cure financial stupidity. Furthermore, anyone who -still- uses robinhood after their various crashes is asking for trouble. I've had zero issues with TD Ameritrade.
and in the financial markets, the federal government already has classist gatekeeping regulations because "poor people are dumb, rich people are smart", which should all be abolished
the finger pointing at Robinhood is based on ignorance of the entire sector.
and of course, the observation that not-rich people have plenty of ways to lose their money in systems with negative expected value, so why apply that to financial systems with positive expected value.
It's plain unethical and ridiculous that 20 year olds with no steady income get access to highly leveraged financial instruments that can ruin them for life.
Famous example: https://www.investopedia.com/articles/investing/121515/how-s...
It looks like the person in your example was selling a call, which has potentially unlimited losses - that was a rather poor decision on his part. There are much safer methods of making "the same bet".
Gambling is a random game designed to extract money from people. The stock market is a math game that doesn't care if you gain or lose.
https://www.caesars.com/casino-credit
I have both RobinHood account and IBKR and I don't see how I could do an unhedged short.
As a retail investor, the only way I see to short is via options and there you can only loose 100%.
It also bears mentioning that an average result in Vegas is: you loose.
Benchmark returns for stock market is S&P 500 which is 8-15% yearly return (over multiple years, depending on how good the economy is during those years).
And the chances of doing better are higher than chances of loosing money.
So many of these stories involve highly-leveraged options stuff, reminiscent of stuff that even my schoolbook US history summation of the Great Depression described as super-dangerous.
Do people not just gamble on credit? I highly doubt casinos care about the average person's financials, as long as the money ends in their pockets.
I see no difference between the stock market and gambling, sure there's "smart strategies" to the stock market but at the end of the day it's the same result for anyone with a gambling addiction to either.
In stock market, you win on average.
Not to mention that stock market is much more a game of skill than game of chance (as is most of casino games).
I did very well in stock market and I don't feel like I'm gambling. I recognize there is risk and I lost money on some investments but I can usually pin point the reason I lost. It's not random.
Many options trades have an expected loss of nearly 100% - the same cant be said of holding stocks. Society has decided its OK to own houses, which certainly can decline in value, but outlaw ponzi schemes that for a substantial number of people are virtually guaranteed to wipe out their investment.
I don't think an age restriction is appropriate, other than 18/21/25, or some other reasonable definition of adult. But, I think it would be sensible to only allow options trades up to a certain percent of one's provable net worth - lets say 10% below $100k, 100% over $1M, or something like that.
Which is kind of terrifying for a country with democratic input. If people can't be trusted with their own money, why should they be trusted to decide who controls the American nuclear arsenal?
With this analogy, I think you inadvertently supported the opposite argument: the nuclear arsenal itself is not democratically controlled. Rather, we elect someone who controls it (with several layers of checks and balances).
Is it just the willingness for military officials to follow the order? I'm pretty sure the president doesn't have to consult with congress or the supreme court before doing this.
Ultimately, I'm not sure a free society, a welfare state, and universal suffrage can all co-exist in the long term.
I think any two could survive, but all three seem like a longshot.
I'm actually having trouble figuring out which two I'm rooting for.
In a democracy, the people (and their legitimately elected representatives) are also allowed to structure markets and decide on what business practices are and are not allowed
None of these instruments can ruin a 20 year old for life. Worst case is 7 years of trashed credit from a bankruptcy.
And I have no defense for the "something else"s -- casino gambling exploits people in exactly the same way: https://www.theatlantic.com/magazine/archive/2016/12/losing-...
You could even cash advance on a credit card, buy a car, and wreck it and be in the same financial situation as you would if you gambled it away on robinhood.
Makes you wonder about the risk management practices and incentives of that particular credit card company.
And most people who buy insurance, have a good reason to make that gamble. But many people who trade, certainly through RobinHood, have no reason to trade beyond gambling.
Robinhood's crime is that they make it easier (and some claim addictive) to gamble.
Just because TDAmeritrade has a very spartan UX doesn't mean people haven't made very stupid trades on it.
Robinhood is more agressive when it comes to margin calls, that actually protects inexperienced investors.
Those are both highly gamified apps.
So maybe let's not play loose with meaning of words.
Gambling means 1 of 2:
"play games of chance for money; bet."
Investing is not a game of chance. I'm not making investing decisions randomly.
"take risky action in the hope of a desired result."
Investing could be gambling according to this definition (there are risky investment strategies) but on average investing in U.S. stock market is not risky.
If you abstain from doing risky things, you can have 8-15% yearly return by putting all your money in S&P 500 tracking stock.
And if you want to blame someone for people's risky investing, blame https://www.reddit.com/r/wallstreetbets/ (1.3 million people reading stories like "$35k -> $1.25 in 4 months") not Robinhood for making an easy to use stock trading app.
One needs to look at the net sum. In my opinion, the net of the democratizing of stock trading, like other forms of democracies was a positive.
The issue, as I understand it, it's that Robinhood's UX has crossed the line from "easy, functional and usable" over to one that employs similar psychological tactics that social media, casinos, and lootboxes employ to keep users engaged with their product.
I'm not passing judgement on their implementation, instead likening it to similar pleasure cycles that lead to addiction like behavior in the aforementioned products above.
Is it really your opinion that the guy wouldn't fund his investments via credit card debt and then followed it up by borrowing $30k against his mortgage if only he used ETrade and not Robinhod?
Somehow, I really don't think so.
Mechanically, ETrade does not allow you to fund your account via Credit Card. You could request a check from your credit card company I guess...
But yes, most brokerage apps are focused on data, and less about engagement.
What exactly does this mean? I'm pretty sure you've been able to purchase stock as a retail investor for a long time now. I'm also pretty sure that the friction that used to exist to direct stock trading was a net positive for the average retail investor.
One really can't make an armchair diagnosis based off one observation, but this seems like a telltale sign of gambling addiction. The cycle of thinking that to make up for losses you need to dig the hole just a bit deeper to strike oil and float back out.
You could replace "trading stocks" with "playing poker" and it's basically the same story. In other words, someone played way outside of their bankroll and got crushed.
For example if you have $200 and want to get better at poker, you don't sit down at a table and put $100 or $200 in chips. You'd likely want to sit down where the maximum buy-in is maybe $2 or $5 so you can actually get experience and ride a bunch of variance without losing everything immediately.
Sure, you won't be getting rich any time soon but if your goal is to improve, you will slowly be able to move up as you get better.
When in doubt, follow the Rounders quote of "you can't lose what you don't put in the middle".
Investing isn't gambling, and Robinhood's conflation of the two is exactly the reason to criticize them. It's very likely that a share of SPY will be worth more in real terms thirty years from now than it is today, and that makes it a useful vehicle to save for retirement. What it does in the next day, month, year, or even decade is much harder to predict. By encouraging naive users to trade frequently, Robinhood is encouraging users to expose themselves to that short-term volatility, with no benefit except fulfillment of an urge to gamble.
1. Unless you're playing online against some guy with a bunch of fake identities and a bot. Is that still a thing?
The analogy I was going for was this person took what sounds like his entire savings and then took loaned money against his house and put it all into trading super high variance options.
I'm not an experienced trader but I occasionally talk to some. They all say options trading like that is a massive gamble. There's a big difference between long term investing into an ETF and doing what this person did.
He could have chosen to put $500 into his account and hand picked some stocks or ETFs and then watched it grow or shrink over time as he learns how to trade but instead he chose to use 15k+ and then 2 big loans on high variance moves to either hit it big or go bust in a very short time frame. It just happened in this case he busted.
I think he would have had the same outcome on another platform if Robinhood didn't exist.
I'd re-emphasize my point as to your opponent's skill. Poker (or most other games of combined chance and skill) gives you an opportunity to practice both at lower stakes and against less skilled opponents. In the public markets, you can risk as little as you want, but you're always playing against the world's best counterparties, unless you can find some instrument that's both too small to be worth the professionals' specific attention and too distinctive for their existing algorithms to generalize.
So it's hard for me to have too much sympathy for people who have lost money on this.
(I don't trade stocks very often. Every few months I rebalance things. This has worked well for 35+ years. I'm 57 now.)
Isn't there some element of personal responsibility here? Is Robinhood responsible for the disastrous financial decisions of an individual?
We don't actually need social media marketers doing a PR campaign to warn us. Get a better excuse.
The stock market is soaring, despite millions being out of work in the US. The US has two different economies, and I'm all for anything that gives the latter group the same tools the former group has.
Why should only rich people who know how to navigate beige clunky 1990s websites, or whose parents give them the number to their investment guy, be the only ones who get to trade?
And the frustrating part of this article is that they aren't saying trading is inherently risky, but rather that a certain group shouldn't be allowed to? It's a cliche that stock traders were jumping out of windows in 1929, but nobody said "we should shut down the stock market".
Everything can be overdone... gambling, sugar, video games. Why focus on the few people who take it too far, rather than the millions who now have the same access to wealth building that rich old people do?
If you want to be mad about people losing money, be mad about the ones where it's rigged against them -- lotto/casinos. Not the ones where they average positive. Hard for me to take this even remotely seriously.
Robinhood encourages active trading, which is almost always a bad bet for small traders.
Robinhood also provides access to much riskier things like trading on margin.
Except, you know, easier and faster than via vanguard.com
Literally every brokerage allows trading on margin because they all make more money that way (via interest fees).
Banks flood people with credit card offers (instant, unsecured $10k loan) and allow you to irresponsibly borrow against your mortgage.
How are those other companies any different than Robinhood?
This is also unethical and not ok
Robinhood did not do this. Vanguard, Fidelity, Schwab have all existed for a long time now.
It sounds dumb, but... when you go to those, a lower income 20-something feels like they don’t belong and would leave. "Charles Schwab" feels like it's for people who look like Charles Schwab.