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Robinhood and How to Lose Money

255 points by asaramis 6y ago

porkshoulder 6y ago
That debate at the end over how the NYT portrayed how much money is made off of the order flows is interesting. Is it reasonable for the NYT journalist to use total payment order flow revenue / average dollar amount per account instead of diving by total number of accounts? The latter seems like it would be a cleaner way to say "this is, on average, how much they're making off of each person" Whatever it is - Robinhood is cleaning up. Wish I was invested in the company instead of just using it.
- asaramis 6y ago
  I'll give credit to the NYT journalist at least for showing their work in this thread: https://twitter.com/nathanielpopper/status/1281247124915580928 https://twitter.com/nathanielpopper/status/12812471249155809...
- IAmEveryone 6y ago
  The "value" of order flow is not "per person". Ordinarily, it should correlate with order volume, but RH is getting far more than expected on (something close, but not exactly) that measure. I wonder if RH customers maybe trade far more than those of other brokerages? Maybe that data isn't publicly available, requiring them to use average account value as a proxy? Anyway, the point here is to stoke anger from RH customers by calling them stupid (making bad trades). Dividing their revenue by number of accounts would tell a different story, one that would also anger customers because, again, it paints them in a bad light. But this time their stupidity would manifest itself by allowing RH to profit so much more than other brokerages.
  - JumpCrisscross 6y ago
    > if RH customers maybe trade far more than those of other brokerages? I believe this is true. The metric, revenue per mean dollar, is used in the industry as a measure of how productively customers’ assets are being monetised. It lets bank managers compare e.g. trading and wealth management. Given a lot of compliance costs scale with accounts and assets, not volumes, the measure makes sense.
dlivingston 6y ago
Robinhood was an absolute game changer for me. Outside of my 401k (and a Viacom stock my mom bought me 20+ years ago to teach me about the stock market), my investment portfolio was nil. I now maintain a growing but conservative portfolio of stocks thanks partly to the frictionless UX of Robinhood - but, primarily, to the addition of fractional shares. To pay $1500 for a share of TSLA? When I could put that precious money into my savings account? Pass. But if I can buy 0.1 shares at $150? Now we’re talking. Hey, TSLA went up a bit today. I’ll buy another 0.1 shares. Etc. That, without hyperbole, is truly the beginnings of the democratization of the stock market.
- nknealk 6y ago
  Mutual funds and ETFs are basically that but you get a sliver of like several hundred high quality companies instead of just one. I’d argue those products did more for democratization because they allowed investors with small sums of money to achieve diversification.
  - porkshoulder 6y ago
    The only thing to remember is, as a customer, you’d be paying for that service in really bad execution. I still think this is genuinely democratizing but looks like Fidelity has this also (called the absurd “stock by the slice”)
    - crooked-v 6y ago
      Betterment is extremely painless (outside of their slightly awkward checking accounts), and has fractional shares as an automatic part of diversified portfolios.
- platz 6y ago
  You can do those things on any brokerage. You can buy options pretty much anywhere. Not seeing where the democratization is coming from that is different from the status quo
  - 6y ago
dmoy 6y ago
I do not get the appeal of largely gambling with your money on RH instead of just passively investing for the long term. Maybe with some of your money, but not to the extent a lot of people are doing. People want to get rich quick I guess? Even if you do want to do that, why not pick a brokerage which doesn't take as much from you, like IBKR? It's just a surreal situation to me.
- renewiltord 6y ago
  Same with gambling, I imagine. The utility of 107% guaranteed of this dollar is less than a less than one in a billion chance at a billion dollars. The net expected value of the dollar doesn't have to be positive. Losing $2000 over 80 years of your life is certainly worth is a non-factor for many. Add in the fact that RH has reduced barriers to entry to investing. It's way easier to get RH and buy VOOG than to get Vanguard set up. I have enough in both to know.
  - toastal 6y ago
    I know a couple of people that did just that. With the lowered barrier to entry (free), people have been able to buy say a single share per paycheck instead of having to hold on for months to get a cost effective amount of cash to make it worth the trade. Not only this, but you can effectively dollar cost average your way into the market to minimize losing to bad timing. The trade fees were always absolute and not a percentage so it just never accessible to a lot of people -- and now, a lot of the big discount brokers went to 0-1¢ fees.
    - JumpCrisscross 6y ago
      > people have been able to buy say a single share per paycheck instead of having to hold on for months to get a cost effective amount of cash to make it worth the trade This is the problem solved by ETFs. Small amounts of money buying lots of diversification.
      - toastal 6y ago
aripickar 6y ago
I disagree with the premise of the article, since it takes the POV of an experiences trader, but that isn’t necessarily the whole story. The alternative for a lot of Robinhood traders wasn’t / isn’t trading on e trade or another platform, it’s not investing at all. If the market is going to be growing, which is the assumption of any economic theory, it should follow that people want to get money into the market in order to grow their wealth. Options are unlikely to convey on any platform, but stock ownership and investment is unquestionably a good thing, when compared to money sitting in a bank account.
- JumpCrisscross 6y ago
  > stock ownership and investment is unquestionably a good thing, when compared to money sitting in a bank account Agreed. But cash in a day trading account at the hands of an inexperienced trader has a lower expected return than that bank account. Particularly if they’re trading options. The net effect of Robinhood is we’re training a generation of investors with self-destructive habits. It’s possible to use Robinhood responsively. But its UX is antagonistic to that use pattern.
  - GlennS 6y ago
    > The net effect of Robinhood is we’re training a generation of investors with self-destructive habits. When they lose a lot of money for the first time, won't they unlearn this training?
    - Traster 6y ago
      I think it's unlikely people lose all their money trading on RH and take the lesson "Better trade more responsibly next time", more likely the lesson is either "Next time I've got to be more aggressive" or "I'm never putting money in the stock market again".
system2 6y ago
What's the reason of this article showing RH as an evil corp? People also gamble in Las Vegas, no one is stopping them. It is a good tool, thought me a lot about stocks and options. I am not investing heavily, but overhead of my investments would be far more higher with other competitors. The other trading companies literally asked my lifestory, bunch of scans and very long process of acceptance. Let alone their extremely cumbersome software would possibly (I am certain) lose more money because of the mistakes I would make.
- WalterBright 6y ago
  > literally asked my lifestory That's a result of federal regulation and lawsuits. Investors have a tendency to sue brokerages when they lose money, arguing that "nobody told me stocks could go down!" Hence brokerages try to head this off by refusing to sell to you if you don't certify you are a "sophisticated" investor.
- jariel 6y ago
  "People also gamble in Las Vegas, no one is stopping them." If Robin Hood was positioned and sold as 'gambling' and regulated a such, nobody would have a problem with it. But if anyone doesn't see the maximal hypocrisy in their branding (literally: Robin Hood) and the materiality of their offer, then that's the issue right there. By 'gravy' the author means 'fish' in gambling terms. There's just no way kids on their app, are, on the aggregate going to be able to be beating pros esp. on sophisticated things like options trading, but that's the whole point.
  - kjksf 6y ago
    In stock market you're not playing against other people, including the "pros". You try to pick companies that will grow in the future. If you pick well, then it doesn't really matter if other people (including "pros") pick the same company or not because there's enough future growth for everybody. And I have much less reverence towards pros than you. The pros were saying that Amazon's valuation is so crazy that even if they sold every book in the universe, it still would be too high. In which they were right except they couldn't see that Amazon is not a book store. The pros were writing articles about how Nokia is, and will be, the king of the world a year after iPhone debuted and people were camping overnight and lining around the block to get it. And today an average price target on Tesla is 1/3 of the current price. The pros at predicting future price of the stock are failing spectacularly to do so, despite being paid big bucks by the most prestige financial institutions and having more access to information than anyone else. While I'm not playing against the pros, I sure am getting better returns than 90% of them.
enilakla 6y ago
Lol...They can sell my order flow all they want as long as I’m still earning Edit: Downvote all you want. That all brokers (well, not all, depending on your account) sell your flow to Citadel et el is well discussed, and RH has an even better client base to ‘sell out’... The point I’m making is that for some users they don’t really care it it currently ‘works well enough’ for whatever they’re doing.
tleite 6y ago
People that complain Robinhood is too easy and "the people can't handle it" are akin to the Catholic church in the dark ages forbidding the translation of the bible from Latin.
hftrader998 6y ago
I work in the industry and these kind of articles are always full of bad information about order routing. * Robinhood order flow is informed and toxic like all other brokerages. Taking the opposing side of all Robinhood trades would cause a broker-dealer to lose all of their capital very quickly. * The "bad prices" the "novices" are trading at, are in fact, the same market price that all participants trade at (at or inside the bid/offer). If the prices were obviously bad, there is free money available to the author here by simply quoting inside the spread. * Recall that the majority of trades on lit exchanges are from professional or institutional investors. For this reason, spreads are wide because providing liquidity means you will likely get run over. Robinhood orders do not exhibit as much short term momentum, and so trading against them is safer for broker-dealers because there is less risk. This risk profile is valuable, and you might wonder what's a fair way to allocate that value. One option is to not capture it, and send all Robinhood orders directly to the market. The author implies this makes sense (a gravy-free approach), but it does not, the retail customer actually ends up worse off. Another option, the one that occurs in practice now is for the value to get split between the counterparty taking on risk (Citadel, in the form of less toxicity on orders), the customer (the Robinhood client, in the form of price improvement over the national bid/offer), and Robinhood themselves for sourcing the flow (a commission or payment).
- d_silin 6y ago
  Would you mind explaining a few of those terms? "Informed" and "toxic", specifically.
  - seanhunter 6y ago
    If you're a broker/dealer, you spend a lot of your time facilitating other people's trades. By "facilitating" here, we mean that you don't only put their trade on the market for them, you often trade with them "on risk" by taking the other side of their trades and then unwinding them. So if you want to sell 1000 tesla I might (as a broker/dealer) just buy them off you and look to sell them myself later either at market or directly without touching the market as part of executing someone else's trade later. This is more efficient for everyone as it means you don't pay the exchange fees for those trades you can "cross off" against a colleague or another client and therefore can offer a slightly better price to the end client. It also allows traders to manage the market impact of big orders more effectively, allowing large trades to be completed without moving the market as much. If you're large enough, your client base represents the market generally. That means your client base by definition doesn't outperform the market (ie has zero alpha). So that means that facilitating their trading earns you the commission and the trades you have to unwind have net zero alpha. This is not entirely true because it ignores some important effects around how commissions work etc (which end up meaning that broker/dealers are structurally long the market in general) but is not false enough to matter for the purposes of this discussion. Imagine you had one client who knew the future (ie every trade they made would make them money). By definition taking the other side of that trade would therefore lose you money. Their orderflow would be "toxic" - by trading with them you would always lose money. When someone says that orderflow is "informed" what they mean (usually) is that the people making the trades have more information than the rest of the market and therefore will trade when beneficial to them which is likely to be net/net not beneficial to you (if as a broker you're on the other side of the trade). Now, whether or not robinhood order flow is on the whole informed or toxic is another question. Personally I would be surprised if that turns out to be true but I could be wrong.
vmception 6y ago
> In the first three months of 2020 ... [Robinhood users] also bought and sold 88 times as many risky options contracts as Schwab customers, relative to the average account size > And let’s remember that options are far more illiquid and opaque than standard equities. Okay, first of all the growth of the options market is AMAZING, and their utility increases the more liquid the market is. So massive new groups of traders with a low barrier of entry make options much more liquid, and this is amazing. There used to only be one series of options that expired once per quarter and had 5 cent ($5) bid and ask spreads, and strikes only every $5 or $10 dollars. Now there are 20 series trading at once and pretty much all indice constituent companies, let alone the index itself, alongside strikes every $1 - $2.5 dollars, even $.50 cents sometimes. There are so many strategies that were unviable because the spreads were too wide, the strikes were too few and far between, and the commissions structure was prohibitive. That's all changed now, and that's the other perspective. Robinhood is also still handicapping users, as the regulations allow for much greater amounts of leverage and margin capabilities, which Robinhood doesn't offer yet, which TD Ameritrade and others have offered all along. So all the surprise and angst directed at Robinhood is as ignorant as the speculators that you are worried about. This is an education problem, not an access problem. They are mutually exclusive. To the people not using options for what they were made for: "Just avoid holding it in that way." - Steve Jobs
- JumpCrisscross 6y ago
  > new groups of traders with a low barrier of entry make options much more liquid Are you claiming Robinhood users are responsible for a significant fraction of option market liquidity over the past year? Because that’s categorically wrong.
  - vmception 6y ago
    All additional participants to the options market makes options more liquid. No, I am not quantifying Robinhood users, only elated to see one chisel helping narrow the bid and ask spreads across expiration dates. Shouldn't bother you that much.
ab_testing 6y ago
I think that title of this article is click bait. The author himself acknowledges that Robinhood is not the only firm that sells order flow data. Infact all the well known so called discount brokerages sell order flow data and have done so for many years before Robinhood came along. In addition to that, all these firms were selling the order flow data and still charging their customers $7 per trade. That practise would have continued unabated had Robinhood or some other startup not come along and provided free trading platform. Also from a real world perspective, I have tried Robinhood and Schwab market orders and they are very close to each other (most of the times - same price down to the penny). So I am not sure why Robinhood is geting paid more for their order flow, compared to the other discount brokerages. Also Robinhood is great for buy and hold investment.
- JumpCrisscross 6y ago
  > all the well known so called discount brokerages sell order flow The order flow selling is sensationalised. Everyone does it. But Robinhood’s order flow being so much more valuable than competitors’ is interesting. And the difference cannot be explained solely by small order size. The market is betting Robinhood trades are profitable to trade against. Given how the UX encourages over-trading and complex trading, I’m inclined to agree.
  - blaser-waffle 6y ago
    > The market is betting Robinhood trades are profitable to trade against. LOL. Fuck you retail investors, essentially. And it's not a bad approach, tbh.
ping_pong 6y ago
I don't think Robinhood is doing anything wrong. They are making things easy, which it should be. They still need to use the NBBO price, so it's not like they are making things more expensive for traders. But I've seen this exact same pattern during the dot com boom. Lots of people making a ton of money day trading. This usually culminates in a heavy crash and many people are completely wiped out. /r/wallstreetbets is hand-in-hand with Robinhood and wsb more than RH is really making a huge game out of this, and it's crazy. I know people that have gotten sucked in by wsb and started buying crazy amounts of options just to lose all their money. If there is a big crash, I hope RH ends up IPO'ing before this, otherwise all their investors and employees will be holding onto worthless stock as trading volumes goes to zero, like it did after the dotcom-bust.
- totalZero 6y ago
  Their platform has had outages during periods of extreme market volatility, and they allow unsophisticated traders to take option risk that they may not readily understand. /r/wallstreetbets doesn't have any fiduciary responsibility to anyone. RH does.
  - NovemberWhiskey 6y ago
    Is RH actually acting as an investment adviser in these transactions, or just a discount brokerage? If the latter, generally not a fiduciary, I think?
    - totalZero 6y ago
      You are correct. I should have used the term "suitability." What I was trying to communicate is that RH could be liable in a situation where it approves people for margin or L2 options accounts who have no business accessing those kinds of products. RH may benefit from increased order flow, but is not permitted to cultivate order flow that is clearly inappropriate for its clients.
jeffrallen 6y ago
Here's a rule of thumb that has served me well: If you're not paying someone to manage your portfolio, you're paying too much. But: it has only served me well because the person I pay is trustworthy beyond reproach, and has earned that trust from my family over decades. This is, unfortunately, not a scalable solution.
- mrep 6y ago
  What fees do they charge and what rate of return have you gotten? Your manager may be lucky or exceptional but most people on average will get better returns avoiding those fees and just buying index funds.
xondono 6y ago
I’ve started to learn about options, but for now I’m staying with long term stock investment. Maybe I’m not understanding the language, but I thought RH and eToro and the like made money through enabling high frequency trading against their customers. My guess/intuition is that this would increase volatility but reduce the expected returns of their users when compared to trading stocks through a broker. Am I terribly lost here?
AznHisoka 6y ago
I love Robinhood as a product (simple, easy to use) but agree it’s advantages also can lead to recklessness. For me, I simply delete the mobile app for my phone and use another app to set price alerts. This prevents me from overtrading and obsessing over the markets everyday.
- p7hwfizeONj 6y ago
  Do you have a recommendation for price alerts? Both E-Trade and Robinhood don't notify me immediately when a price target or percentage change is hit. A 90 day limit order does execute quickly enough but it isn't exactly what I'm looking for because there might be new information that would have made me not want to buy.
  - AznHisoka 6y ago
    I use Fidelity. You can probably open an account there with nothing in it, and get price alerts for any security.
jtdev 6y ago
Nothing prevents one from taking a more passive “buy and hold” approach on Robinhood - these articles critical of Robinhood seem to conflate Robinhood as a brokerage platform and poor investing discipline... it has nothing to do with the brokerage and everything to do with the investor.
mam2 6y ago
It's only "gambling" for the losers who don't understand how the stock market works and lose their money. They see the ones winning and say "oh, this MUST be luck"
simonebrunozzi 6y ago
> in investing, more than probably any other area of life, assume everyone is at least partially lying. This sounds quite true.
timavr 6y ago
This is just nuts, people know zilch about risk management. It is just a wealth transfer from people with zero knowledge to professional traders and brokers. Paying of credit cards, maximising your tax return, investing in things you 100% understand, way easier ways to make money. People still might get lucky and make epic money, but it is in the same zip code as driving drunk and not getting into a crash.
- hansvm 6y ago
  > People still might get lucky and make epic money, but it is in the same zip code as driving drunk and not getting into a crash. The rest of your post notwithstanding, this is a moderately common misconception. Most drunk driving does not result in crashes, and that's part of the danger -- after dozens of successful trips you might delude yourself into thinking you're somehow able to overcome the reduced reflexes and whatnot, but as soon as anything atypical hits the road (like a family crossing) you probably won't be able to respond adequately.
  - timavr 6y ago
    That was my point.
- commandlinefan 6y ago
  > investing in things you 100% understand Well, most of us (myself included) "invest" in a 401(k) that we don't really understand that well, but common wisdom is that this is still the best way to save for retirement.
  - qes 6y ago
    > common wisdom is that this is still the best way to save for retirement Because the tax advantage on the account makes it so largely irregardless of how well you understand it. Also the options available are generally quite limited so that a) even if you did understand it you wouldn't have much choice within the tax advantaged account, and b) your choices are largely constrained to relatively safe index funds.
cs702 6y ago
The main point of this article is that Robinhood has brought Silicon Valley-style maximization of user engagement to retail stock-market trading without regard for the psychological, social, and financial consequences to the people who use the service. The author claims that for Robinhood, "maximizing user engagement" translates into blindly optimizing for getting more and more individuals to trade more and more. Those individuals are not paying for the product; they are the product. More precisely, they are the raw material for generating as much order flow as possible for sale to Wall Street firms. Robinhood, in other words, is in the business of MANUFACTURING as much order flow as possible from its raw material, retail investors. This is probably Not a Good Thing™ for retail investors.
- rchaud 6y ago
  At this point, I'm inclined to think that the only benefit VC-funded companies provide to the consumer is by subsidizing the price of the service. Uber, WeWork, DoorDash etc are all piling up losses by undercutting competitors to gain market share. That cannot last. At some point, the other shoe will drop. Be ready to jump ship if the benefits no longer exceed the costs (lock-in, bad business practices, sale of personal information), etc.
  - vinay427 6y ago
    I find this characterization somewhat amusing, in a positive way. This makes it sound like someone implemented (rather poorly) an ambitious wealth gap reduction plan that uses insufficient approximations and no government oversight, leaving a significant number of people behind.
    - deleted 6y ago
      [deleted]
    - jmalicki 6y ago
      Is this a wealth gap reduction scheme? After all, the ultimate investors (outside of sovereign wealth funds at least) are usually pension funds, which tend to be pretty middle class. The beneficiaries of VC here are usually the upper middle class for both actual employees of these firms, and a lot of the beneficiaries of Uber, AirBNB, etc. This could be wrong, but I think the direction of wealth transfer is worth considering - is this wealth redistribution, or is it the rich and powerful looting the middle class?
jasonv 6y ago
I was looking at trading platforms lately, and noticed "robo-trading", but don't see it as part of the discussion here. Is it a reasonable alternative to trading on your own?
anonu 6y ago
The SEC and finra need to regulate this gambling platform immediately.

255 points by asaramis 6y ago

That debate at the end over how the NYT portrayed how much money is made off of the order flows is interesting. Is it reasonable for the NYT journalist to use total payment order flow revenue / average dollar amount per account instead of diving by total number of accounts? The latter seems like it would be a cleaner way to say "this is, on average, how much they're making off of each person" Whatever it is - Robinhood is cleaning up. Wish I was invested in the company instead of just using it.

asaramis 6y ago
I'll give credit to the NYT journalist at least for showing their work in this thread: https://twitter.com/nathanielpopper/status/1281247124915580928 https://twitter.com/nathanielpopper/status/12812471249155809...
IAmEveryone 6y ago
The "value" of order flow is not "per person". Ordinarily, it should correlate with order volume, but RH is getting far more than expected on (something close, but not exactly) that measure. I wonder if RH customers maybe trade far more than those of other brokerages? Maybe that data isn't publicly available, requiring them to use average account value as a proxy? Anyway, the point here is to stoke anger from RH customers by calling them stupid (making bad trades). Dividing their revenue by number of accounts would tell a different story, one that would also anger customers because, again, it paints them in a bad light. But this time their stupidity would manifest itself by allowing RH to profit so much more than other brokerages.
- JumpCrisscross 6y ago
  > if RH customers maybe trade far more than those of other brokerages? I believe this is true. The metric, revenue per mean dollar, is used in the industry as a measure of how productively customers’ assets are being monetised. It lets bank managers compare e.g. trading and wealth management. Given a lot of compliance costs scale with accounts and assets, not volumes, the measure makes sense.

dlivingston 6y ago

Robinhood was an absolute game changer for me. Outside of my 401k (and a Viacom stock my mom bought me 20+ years ago to teach me about the stock market), my investment portfolio was nil. I now maintain a growing but conservative portfolio of stocks thanks partly to the frictionless UX of Robinhood - but, primarily, to the addition of fractional shares. To pay $1500 for a share of TSLA? When I could put that precious money into my savings account? Pass. But if I can buy 0.1 shares at $150? Now we’re talking. Hey, TSLA went up a bit today. I’ll buy another 0.1 shares. Etc. That, without hyperbole, is truly the beginnings of the democratization of the stock market.

nknealk 6y ago
Mutual funds and ETFs are basically that but you get a sliver of like several hundred high quality companies instead of just one. I’d argue those products did more for democratization because they allowed investors with small sums of money to achieve diversification.
- porkshoulder 6y ago
  The only thing to remember is, as a customer, you’d be paying for that service in really bad execution. I still think this is genuinely democratizing but looks like Fidelity has this also (called the absurd “stock by the slice”)
  - crooked-v 6y ago
    Betterment is extremely painless (outside of their slightly awkward checking accounts), and has fractional shares as an automatic part of diversified portfolios.
platz 6y ago
You can do those things on any brokerage. You can buy options pretty much anywhere. Not seeing where the democratization is coming from that is different from the status quo
- 6y ago

dmoy 6y ago

I do not get the appeal of largely gambling with your money on RH instead of just passively investing for the long term. Maybe with some of your money, but not to the extent a lot of people are doing. People want to get rich quick I guess? Even if you do want to do that, why not pick a brokerage which doesn't take as much from you, like IBKR? It's just a surreal situation to me.

renewiltord 6y ago
Same with gambling, I imagine. The utility of 107% guaranteed of this dollar is less than a less than one in a billion chance at a billion dollars. The net expected value of the dollar doesn't have to be positive. Losing $2000 over 80 years of your life is certainly worth is a non-factor for many. Add in the fact that RH has reduced barriers to entry to investing. It's way easier to get RH and buy VOOG than to get Vanguard set up. I have enough in both to know.
- toastal 6y ago
  I know a couple of people that did just that. With the lowered barrier to entry (free), people have been able to buy say a single share per paycheck instead of having to hold on for months to get a cost effective amount of cash to make it worth the trade. Not only this, but you can effectively dollar cost average your way into the market to minimize losing to bad timing. The trade fees were always absolute and not a percentage so it just never accessible to a lot of people -- and now, a lot of the big discount brokers went to 0-1¢ fees.
  - JumpCrisscross 6y ago
    > people have been able to buy say a single share per paycheck instead of having to hold on for months to get a cost effective amount of cash to make it worth the trade This is the problem solved by ETFs. Small amounts of money buying lots of diversification.
    - toastal 6y ago

aripickar 6y ago

I disagree with the premise of the article, since it takes the POV of an experiences trader, but that isn’t necessarily the whole story. The alternative for a lot of Robinhood traders wasn’t / isn’t trading on e trade or another platform, it’s not investing at all. If the market is going to be growing, which is the assumption of any economic theory, it should follow that people want to get money into the market in order to grow their wealth. Options are unlikely to convey on any platform, but stock ownership and investment is unquestionably a good thing, when compared to money sitting in a bank account.

JumpCrisscross 6y ago
> stock ownership and investment is unquestionably a good thing, when compared to money sitting in a bank account Agreed. But cash in a day trading account at the hands of an inexperienced trader has a lower expected return than that bank account. Particularly if they’re trading options. The net effect of Robinhood is we’re training a generation of investors with self-destructive habits. It’s possible to use Robinhood responsively. But its UX is antagonistic to that use pattern.
- GlennS 6y ago
  > The net effect of Robinhood is we’re training a generation of investors with self-destructive habits. When they lose a lot of money for the first time, won't they unlearn this training?
  - Traster 6y ago
    I think it's unlikely people lose all their money trading on RH and take the lesson "Better trade more responsibly next time", more likely the lesson is either "Next time I've got to be more aggressive" or "I'm never putting money in the stock market again".

system2 6y ago

What's the reason of this article showing RH as an evil corp? People also gamble in Las Vegas, no one is stopping them. It is a good tool, thought me a lot about stocks and options. I am not investing heavily, but overhead of my investments would be far more higher with other competitors. The other trading companies literally asked my lifestory, bunch of scans and very long process of acceptance. Let alone their extremely cumbersome software would possibly (I am certain) lose more money because of the mistakes I would make.

WalterBright 6y ago
> literally asked my lifestory That's a result of federal regulation and lawsuits. Investors have a tendency to sue brokerages when they lose money, arguing that "nobody told me stocks could go down!" Hence brokerages try to head this off by refusing to sell to you if you don't certify you are a "sophisticated" investor.
jariel 6y ago
"People also gamble in Las Vegas, no one is stopping them." If Robin Hood was positioned and sold as 'gambling' and regulated a such, nobody would have a problem with it. But if anyone doesn't see the maximal hypocrisy in their branding (literally: Robin Hood) and the materiality of their offer, then that's the issue right there. By 'gravy' the author means 'fish' in gambling terms. There's just no way kids on their app, are, on the aggregate going to be able to be beating pros esp. on sophisticated things like options trading, but that's the whole point.
- kjksf 6y ago
  In stock market you're not playing against other people, including the "pros". You try to pick companies that will grow in the future. If you pick well, then it doesn't really matter if other people (including "pros") pick the same company or not because there's enough future growth for everybody. And I have much less reverence towards pros than you. The pros were saying that Amazon's valuation is so crazy that even if they sold every book in the universe, it still would be too high. In which they were right except they couldn't see that Amazon is not a book store. The pros were writing articles about how Nokia is, and will be, the king of the world a year after iPhone debuted and people were camping overnight and lining around the block to get it. And today an average price target on Tesla is 1/3 of the current price. The pros at predicting future price of the stock are failing spectacularly to do so, despite being paid big bucks by the most prestige financial institutions and having more access to information than anyone else. While I'm not playing against the pros, I sure am getting better returns than 90% of them.

enilakla 6y ago

Lol...They can sell my order flow all they want as long as I’m still earning Edit: Downvote all you want. That all brokers (well, not all, depending on your account) sell your flow to Citadel et el is well discussed, and RH has an even better client base to ‘sell out’... The point I’m making is that for some users they don’t really care it it currently ‘works well enough’ for whatever they’re doing.

tleite 6y ago

People that complain Robinhood is too easy and "the people can't handle it" are akin to the Catholic church in the dark ages forbidding the translation of the bible from Latin.

hftrader998 6y ago

I work in the industry and these kind of articles are always full of bad information about order routing. * Robinhood order flow is informed and toxic like all other brokerages. Taking the opposing side of all Robinhood trades would cause a broker-dealer to lose all of their capital very quickly. * The "bad prices" the "novices" are trading at, are in fact, the same market price that all participants trade at (at or inside the bid/offer). If the prices were obviously bad, there is free money available to the author here by simply quoting inside the spread. * Recall that the majority of trades on lit exchanges are from professional or institutional investors. For this reason, spreads are wide because providing liquidity means you will likely get run over. Robinhood orders do not exhibit as much short term momentum, and so trading against them is safer for broker-dealers because there is less risk. This risk profile is valuable, and you might wonder what's a fair way to allocate that value. One option is to not capture it, and send all Robinhood orders directly to the market. The author implies this makes sense (a gravy-free approach), but it does not, the retail customer actually ends up worse off. Another option, the one that occurs in practice now is for the value to get split between the counterparty taking on risk (Citadel, in the form of less toxicity on orders), the customer (the Robinhood client, in the form of price improvement over the national bid/offer), and Robinhood themselves for sourcing the flow (a commission or payment).

d_silin 6y ago
Would you mind explaining a few of those terms? "Informed" and "toxic", specifically.
- seanhunter 6y ago
  If you're a broker/dealer, you spend a lot of your time facilitating other people's trades. By "facilitating" here, we mean that you don't only put their trade on the market for them, you often trade with them "on risk" by taking the other side of their trades and then unwinding them. So if you want to sell 1000 tesla I might (as a broker/dealer) just buy them off you and look to sell them myself later either at market or directly without touching the market as part of executing someone else's trade later. This is more efficient for everyone as it means you don't pay the exchange fees for those trades you can "cross off" against a colleague or another client and therefore can offer a slightly better price to the end client. It also allows traders to manage the market impact of big orders more effectively, allowing large trades to be completed without moving the market as much. If you're large enough, your client base represents the market generally. That means your client base by definition doesn't outperform the market (ie has zero alpha). So that means that facilitating their trading earns you the commission and the trades you have to unwind have net zero alpha. This is not entirely true because it ignores some important effects around how commissions work etc (which end up meaning that broker/dealers are structurally long the market in general) but is not false enough to matter for the purposes of this discussion. Imagine you had one client who knew the future (ie every trade they made would make them money). By definition taking the other side of that trade would therefore lose you money. Their orderflow would be "toxic" - by trading with them you would always lose money. When someone says that orderflow is "informed" what they mean (usually) is that the people making the trades have more information than the rest of the market and therefore will trade when beneficial to them which is likely to be net/net not beneficial to you (if as a broker you're on the other side of the trade). Now, whether or not robinhood order flow is on the whole informed or toxic is another question. Personally I would be surprised if that turns out to be true but I could be wrong.

vmception 6y ago

> In the first three months of 2020 ... [Robinhood users] also bought and sold 88 times as many risky options contracts as Schwab customers, relative to the average account size > And let’s remember that options are far more illiquid and opaque than standard equities. Okay, first of all the growth of the options market is AMAZING, and their utility increases the more liquid the market is. So massive new groups of traders with a low barrier of entry make options much more liquid, and this is amazing. There used to only be one series of options that expired once per quarter and had 5 cent ($5) bid and ask spreads, and strikes only every $5 or $10 dollars. Now there are 20 series trading at once and pretty much all indice constituent companies, let alone the index itself, alongside strikes every $1 - $2.5 dollars, even $.50 cents sometimes. There are so many strategies that were unviable because the spreads were too wide, the strikes were too few and far between, and the commissions structure was prohibitive. That's all changed now, and that's the other perspective. Robinhood is also still handicapping users, as the regulations allow for much greater amounts of leverage and margin capabilities, which Robinhood doesn't offer yet, which TD Ameritrade and others have offered all along. So all the surprise and angst directed at Robinhood is as ignorant as the speculators that you are worried about. This is an education problem, not an access problem. They are mutually exclusive. To the people not using options for what they were made for: "Just avoid holding it in that way." - Steve Jobs

JumpCrisscross 6y ago
> new groups of traders with a low barrier of entry make options much more liquid Are you claiming Robinhood users are responsible for a significant fraction of option market liquidity over the past year? Because that’s categorically wrong.
- vmception 6y ago
  All additional participants to the options market makes options more liquid. No, I am not quantifying Robinhood users, only elated to see one chisel helping narrow the bid and ask spreads across expiration dates. Shouldn't bother you that much.

ab_testing 6y ago

I think that title of this article is click bait. The author himself acknowledges that Robinhood is not the only firm that sells order flow data. Infact all the well known so called discount brokerages sell order flow data and have done so for many years before Robinhood came along. In addition to that, all these firms were selling the order flow data and still charging their customers $7 per trade. That practise would have continued unabated had Robinhood or some other startup not come along and provided free trading platform. Also from a real world perspective, I have tried Robinhood and Schwab market orders and they are very close to each other (most of the times - same price down to the penny). So I am not sure why Robinhood is geting paid more for their order flow, compared to the other discount brokerages. Also Robinhood is great for buy and hold investment.

JumpCrisscross 6y ago
> all the well known so called discount brokerages sell order flow The order flow selling is sensationalised. Everyone does it. But Robinhood’s order flow being so much more valuable than competitors’ is interesting. And the difference cannot be explained solely by small order size. The market is betting Robinhood trades are profitable to trade against. Given how the UX encourages over-trading and complex trading, I’m inclined to agree.
- blaser-waffle 6y ago
  > The market is betting Robinhood trades are profitable to trade against. LOL. Fuck you retail investors, essentially. And it's not a bad approach, tbh.

ping_pong 6y ago

I don't think Robinhood is doing anything wrong. They are making things easy, which it should be. They still need to use the NBBO price, so it's not like they are making things more expensive for traders. But I've seen this exact same pattern during the dot com boom. Lots of people making a ton of money day trading. This usually culminates in a heavy crash and many people are completely wiped out. /r/wallstreetbets is hand-in-hand with Robinhood and wsb more than RH is really making a huge game out of this, and it's crazy. I know people that have gotten sucked in by wsb and started buying crazy amounts of options just to lose all their money. If there is a big crash, I hope RH ends up IPO'ing before this, otherwise all their investors and employees will be holding onto worthless stock as trading volumes goes to zero, like it did after the dotcom-bust.

totalZero 6y ago
Their platform has had outages during periods of extreme market volatility, and they allow unsophisticated traders to take option risk that they may not readily understand. /r/wallstreetbets doesn't have any fiduciary responsibility to anyone. RH does.
- NovemberWhiskey 6y ago
  Is RH actually acting as an investment adviser in these transactions, or just a discount brokerage? If the latter, generally not a fiduciary, I think?
  - totalZero 6y ago
    You are correct. I should have used the term "suitability." What I was trying to communicate is that RH could be liable in a situation where it approves people for margin or L2 options accounts who have no business accessing those kinds of products. RH may benefit from increased order flow, but is not permitted to cultivate order flow that is clearly inappropriate for its clients.

jeffrallen 6y ago

Here's a rule of thumb that has served me well: If you're not paying someone to manage your portfolio, you're paying too much. But: it has only served me well because the person I pay is trustworthy beyond reproach, and has earned that trust from my family over decades. This is, unfortunately, not a scalable solution.

mrep 6y ago
What fees do they charge and what rate of return have you gotten? Your manager may be lucky or exceptional but most people on average will get better returns avoiding those fees and just buying index funds.

xondono 6y ago

I’ve started to learn about options, but for now I’m staying with long term stock investment. Maybe I’m not understanding the language, but I thought RH and eToro and the like made money through enabling high frequency trading against their customers. My guess/intuition is that this would increase volatility but reduce the expected returns of their users when compared to trading stocks through a broker. Am I terribly lost here?

AznHisoka 6y ago

I love Robinhood as a product (simple, easy to use) but agree it’s advantages also can lead to recklessness. For me, I simply delete the mobile app for my phone and use another app to set price alerts. This prevents me from overtrading and obsessing over the markets everyday.

p7hwfizeONj 6y ago
Do you have a recommendation for price alerts? Both E-Trade and Robinhood don't notify me immediately when a price target or percentage change is hit. A 90 day limit order does execute quickly enough but it isn't exactly what I'm looking for because there might be new information that would have made me not want to buy.
- AznHisoka 6y ago
  I use Fidelity. You can probably open an account there with nothing in it, and get price alerts for any security.

jtdev 6y ago

Nothing prevents one from taking a more passive “buy and hold” approach on Robinhood - these articles critical of Robinhood seem to conflate Robinhood as a brokerage platform and poor investing discipline... it has nothing to do with the brokerage and everything to do with the investor.

mam2 6y ago

It's only "gambling" for the losers who don't understand how the stock market works and lose their money. They see the ones winning and say "oh, this MUST be luck"

simonebrunozzi 6y ago

> in investing, more than probably any other area of life, assume everyone is at least partially lying. This sounds quite true.

timavr 6y ago

This is just nuts, people know zilch about risk management. It is just a wealth transfer from people with zero knowledge to professional traders and brokers. Paying of credit cards, maximising your tax return, investing in things you 100% understand, way easier ways to make money. People still might get lucky and make epic money, but it is in the same zip code as driving drunk and not getting into a crash.

hansvm 6y ago
> People still might get lucky and make epic money, but it is in the same zip code as driving drunk and not getting into a crash. The rest of your post notwithstanding, this is a moderately common misconception. Most drunk driving does not result in crashes, and that's part of the danger -- after dozens of successful trips you might delude yourself into thinking you're somehow able to overcome the reduced reflexes and whatnot, but as soon as anything atypical hits the road (like a family crossing) you probably won't be able to respond adequately.
- timavr 6y ago
  That was my point.
commandlinefan 6y ago
> investing in things you 100% understand Well, most of us (myself included) "invest" in a 401(k) that we don't really understand that well, but common wisdom is that this is still the best way to save for retirement.
- qes 6y ago
  > common wisdom is that this is still the best way to save for retirement Because the tax advantage on the account makes it so largely irregardless of how well you understand it. Also the options available are generally quite limited so that a) even if you did understand it you wouldn't have much choice within the tax advantaged account, and b) your choices are largely constrained to relatively safe index funds.

cs702 6y ago

The main point of this article is that Robinhood has brought Silicon Valley-style maximization of user engagement to retail stock-market trading without regard for the psychological, social, and financial consequences to the people who use the service. The author claims that for Robinhood, "maximizing user engagement" translates into blindly optimizing for getting more and more individuals to trade more and more. Those individuals are not paying for the product; they are the product. More precisely, they are the raw material for generating as much order flow as possible for sale to Wall Street firms. Robinhood, in other words, is in the business of MANUFACTURING as much order flow as possible from its raw material, retail investors. This is probably Not a Good Thing™ for retail investors.

rchaud 6y ago
At this point, I'm inclined to think that the only benefit VC-funded companies provide to the consumer is by subsidizing the price of the service. Uber, WeWork, DoorDash etc are all piling up losses by undercutting competitors to gain market share. That cannot last. At some point, the other shoe will drop. Be ready to jump ship if the benefits no longer exceed the costs (lock-in, bad business practices, sale of personal information), etc.
- vinay427 6y ago
  I find this characterization somewhat amusing, in a positive way. This makes it sound like someone implemented (rather poorly) an ambitious wealth gap reduction plan that uses insufficient approximations and no government oversight, leaving a significant number of people behind.
  - deleted 6y ago
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  - jmalicki 6y ago
    Is this a wealth gap reduction scheme? After all, the ultimate investors (outside of sovereign wealth funds at least) are usually pension funds, which tend to be pretty middle class. The beneficiaries of VC here are usually the upper middle class for both actual employees of these firms, and a lot of the beneficiaries of Uber, AirBNB, etc. This could be wrong, but I think the direction of wealth transfer is worth considering - is this wealth redistribution, or is it the rich and powerful looting the middle class?

jasonv 6y ago

I was looking at trading platforms lately, and noticed "robo-trading", but don't see it as part of the discussion here. Is it a reasonable alternative to trading on your own?

anonu 6y ago

The SEC and finra need to regulate this gambling platform immediately.