6 ms·

This really just feels like a smear. Robinhood has been instrumental in crushing fees for trading individual stocks (a year ago Vanguard charged $7 per trade if

by jdhn 6y ago

This really just feels like a smear. Robinhood has been instrumental in crushing fees for trading individual stocks (a year ago Vanguard charged $7 per trade if your account didn't have enough money, and now it's $0), and is an incredibly user friendly way to get involved in investing. Seriously, compare Robinhood's UI to anybody else (Schwab, IB, Vanguard), and they absolutely crush it. If you're starting off and don't have enough money to open an account with a legacy broker (I believe Vanguard requires $3k to open a Roth, not sure about their regular accounts), Robinhood makes it incredibly easy to start building a portfolio with a small pool of money (say $1k). I feel like Taibbi had an axe to grind against Robinhood or else he would have tried to separate the "bad" (puts, options, a sense of gambling) vs the good (low barrier to entry, easy to buy what you want, etc).

paulgb 6y ago
Robinhood has been criticized a bunch for taking payment for order flow, but I've yet to see someone actually make a quantitative case that if you make an $x trade you will lose $y on average because of PFOF. The argument instead always relies on a zero-sum figuring that if someone else is willing to pay for the order flow it must be costing you somehow, but that's not really how it works.
- bcherny 6y ago
  That’s not the problem with making money off order flow. The problem is that it fundamentally misaligns incentives: while Robinhood makes money the more people transact (and is the reason its fee structure and UX incentivize transacting), it’s not in peoples’ financial best interest to transact as often as possible.
  - cwyers 6y ago
    But that's true of brokers that charge customers per trade too: they too are incentivized for customers to trade more.
    - bcherny 6y ago
      Maybe. I’d be curious to see a breakdown of a traditional broker’s revenue compared to Robinhood. I bet Robinhood makes most of its money off order flow (it was founded by HFT traders, after all), while traditional brokers make more money off fees, reinvesting, upselling other products, etc.
      - bostik 6y ago
        IIRC traditional brokers make most of their money off of interest on their float. I wish I could remember where this came up because without a solid reference it sounds utterly absurd.
        disgruntledphd2 6y ago
        That doesn't surprise me at all, given that most insurers make all their money off investing the premiums before claims happen. When part of your service is to hold money, it's kinda the natural business model. Of course, this is not working out well for insurers in a world of very low interest rates (which is one of the reasons lots of insure-tech startups are getting funded now).
        thedufer 6y ago
        I'm not sure if this is the source you meant, but patio11 wrote a good overview of various brokerages' revenue sources: https://www.kalzumeus.com/2019/6/26/how-brokerages-make-money/ https://www.kalzumeus.com/2019/6/26/how-brokerages-make-mone...
  - gnicholas 6y ago
    Exactly. And apparently their order flow compensation differs in a key way — they make more money not just based on how often you trade, but on the size of the bid-ask spread. > Also, Robinhood’s compensation model differs from E-Trade and other firms. As an analysis by the investment bank Piper Sandler put it this summer, “Robinhood receives a fixed rate per spread (vs. a fixed rate per share by the other eBrokers).”
- logicslave 6y ago
  All the other retail brokers except interactive brokers also take payment for order flow
  - benmanns 6y ago
    IBKR Lite takes payment for order flow, which is IBKR’s commission free account type. You can look up a brokers 606 report for info.
    - logicslave 6y ago
      Whats funny though is options trading on robinhood is "free". I've tested robinhoods execution versus charles schwabb, theres really not much difference. Schwabb charges .65 cents a contract, if you make a 50k options trade, it could be hundreds to open and close. Robinhood is giving these brokerages a run for their money
- jrumbut 6y ago
  The issue is that the only people with access to the information to make a case are the ones making money on it. There's a lack of transparency. And it's not just a theoretical concern, the article states that Robinhood has already been fined for not executing orders at the best price.
bcherny 6y ago
Some might argue it’s precisely this good UX and low fees that incentivize risk-seeking behavior in a set of users who are largely uneducated about the risks of frequent trading, margin, investing on gut feel, etc.
- raziel2701 6y ago
  I think a major factor in popularizing Robinhood and introducing and exacerbating the gambling degeneracy are places like wallstreetbets and corners of twitter and discord where you're constantly exposed to screenshots of heavy losses and gains. You look at the 20-100k and beyond returns these crazy people get and you rationalize you can do it too. Soon you find yourself in a community that helps you (in their own way) deal with your losses while promoting the next play. It also doesn't help that being in a bubble, the adage "stonks only go up" has been true since the March crash and meme stocks outperform and achieve extreme valuations against all conventional wisdom. Robinhood is the shovel-seller that has undercut the other players with lower prices and lower barrier to entry and better UI. The Fed is the one pumping this asset bubble that keeps the narrative going: stocks only go up and fundamentals don't matter.
  - sjtindell 6y ago
    Agreed, and there’s another angle to that community too. They literally refer to each other and themselves as retards. There is a comical, almost aggressive pride in being uninformed and purely in it for the high. Nobody there thinks they are going to be a trader, they just want to get rich. Super interesting.
skybrian 6y ago
They did something mildly interesting, but I think you're giving them too much credit for stuff that's either unimportant or possibly harmful. (I would put a low barrier to entry in the possibly-harmful column.) It's nice that free trades are the new normal and I don't think there is anything wrong with payment for order flow, but on the other hand, $7 is just not that bad a price. If you can't afford $7 trades then either you are trading too often, or you should stick to paying off your credit card debt and building up an emergency fund. Vanguard's UI isn't pretty but it's functional and not hard to use. How often are you going to use it anyway?
- jjeaff 6y ago
  Exactly. Applauding them for lowering trading fees to $0 is like applauding a pharmaceutical company for bringing down the cost of opiates. Or applauding a cigarette maker for making cigarettes cheaper. In other words, the cost of opiates is not the bigger problem in the industry. And the problem with cigarettes is not the cost. It's the overusage on both fronts. If making trades free leads to more day trading (it does), then we are most certainly going to see a net negative effect on consumers.
  - baryphonic 6y ago
    > Exactly. Applauding them for lowering trading fees to $0 is like applauding a pharmaceutical company for bringing down the cost of opiates. Or applauding a cigarette maker for making cigarettes cheaper. Trading stocks doesn't lead people to physical dependence, nor does it typically ruin their lives. Buy-and-hold will almost always lead to returns, provided that a portfolio is diversified enough. Smoking, taking opiates recreationally, etc. almost always lead to premature death. Robinhood (and Wall Street overall) isn't beyond criticism, but this seems like a particularly bonkers analogy.
    - __jem 6y ago
      > Buy-and-hold will almost always lead to returns, provided that a portfolio is diversified enough. Smoking, taking opiates recreationally, etc. almost always lead to premature death. This is ignoring the original point, though. Commission fees are practically irrelevant to a buy and hold strategy because of the time scales involved. Commission fees only matter for trading, which does in fact ruin lives.
dreamcompiler 6y ago
If you can't afford $3K to open an account, you can't afford to day-trade. Fentanyl is a great drug in the hands of trained professionals who know what they're doing. But it shouldn't be sold on the street to just anybody because it's exceptionally dangerous if you're not trained. Robinhood is giving away the digital equivalent of Fentanyl to everybody. This can only end in disaster.
- smsm42 6y ago
  > I believe Vanguard requires $3k to open a Roth Do you really use you Roth account for day-trading? I don't think it's what it is for. > Robinhood is giving away the digital equivalent of Fentanyl to everybody. Absolutely baseless claim. You can analogize anything to anything - that does not make them equal. Stock trading is in no way similar to a deadly drug. At least no more than any other activity that may be addictive to a small minority - like eating, drinking coffee, playing D&D, having sex or reading articles on the Internet about medieval armor making. None of it is Fentanyl.
- jjeaff 6y ago
  Or a more direct comparison is that they are bringing legalized going to the masses.
- renewiltord 6y ago
  No, if you can't afford $3k, you can't afford to day-trade. Other people have other risk tolerances.
- im3w1l 6y ago
  All the attention around Robinhood centers on daytrading. But it works perfectly fine for the buying and holding usecase. It's a smooth polished app. Easy signup flow.
fermienrico 6y ago
Robinhood's UI is just great for beginners but not for seasoned traders. TD Ameritrade has far superior UI for people who know what they're doing. "They absolutely crush it" - No, they don't. Not even close.
ptero 6y ago
I agree with your points. Another defense of RH (from an unusual angle): Just for inversing, $7 trades are not a big deal, as others said (if it looks they are, stop trading as much). Also, free or super cheap trades encourage people to participate in zero-sum risky trading schemes (HFT, complex options, etc.) where they are at a big disadvantage against pros. That said, I still see RH as a very useful thing. Many (most?) people starting to invest will try many stupid things and complex strategies and will lose a lot of money. Sometimes more than once before they learn not to do some things. Sim accounts seldom work for this -- the lessons require losing real money. It is a lot better to lose $1k that you can ill afford to lose early in life than lose $100k that you can ill afford to lose later. My 2c.
kyawzazaw 6y ago
Why can't the other three copy Robinhood's UI?

by jdhn 6y ago

paulgb 6y ago

Robinhood has been criticized a bunch for taking payment for order flow, but I've yet to see someone actually make a quantitative case that if you make an $x trade you will lose $y on average because of PFOF. The argument instead always relies on a zero-sum figuring that if someone else is willing to pay for the order flow it must be costing you somehow, but that's not really how it works.

bcherny 6y ago
That’s not the problem with making money off order flow. The problem is that it fundamentally misaligns incentives: while Robinhood makes money the more people transact (and is the reason its fee structure and UX incentivize transacting), it’s not in peoples’ financial best interest to transact as often as possible.
- cwyers 6y ago
  But that's true of brokers that charge customers per trade too: they too are incentivized for customers to trade more.
  - bcherny 6y ago
    Maybe. I’d be curious to see a breakdown of a traditional broker’s revenue compared to Robinhood. I bet Robinhood makes most of its money off order flow (it was founded by HFT traders, after all), while traditional brokers make more money off fees, reinvesting, upselling other products, etc.
    - bostik 6y ago
      IIRC traditional brokers make most of their money off of interest on their float. I wish I could remember where this came up because without a solid reference it sounds utterly absurd.
      - disgruntledphd2 6y ago
        That doesn't surprise me at all, given that most insurers make all their money off investing the premiums before claims happen. When part of your service is to hold money, it's kinda the natural business model. Of course, this is not working out well for insurers in a world of very low interest rates (which is one of the reasons lots of insure-tech startups are getting funded now).
      - thedufer 6y ago
        I'm not sure if this is the source you meant, but patio11 wrote a good overview of various brokerages' revenue sources: https://www.kalzumeus.com/2019/6/26/how-brokerages-make-money/ https://www.kalzumeus.com/2019/6/26/how-brokerages-make-mone...
- gnicholas 6y ago
  Exactly. And apparently their order flow compensation differs in a key way — they make more money not just based on how often you trade, but on the size of the bid-ask spread. > Also, Robinhood’s compensation model differs from E-Trade and other firms. As an analysis by the investment bank Piper Sandler put it this summer, “Robinhood receives a fixed rate per spread (vs. a fixed rate per share by the other eBrokers).”
logicslave 6y ago
All the other retail brokers except interactive brokers also take payment for order flow
- benmanns 6y ago
  IBKR Lite takes payment for order flow, which is IBKR’s commission free account type. You can look up a brokers 606 report for info.
  - logicslave 6y ago
    Whats funny though is options trading on robinhood is "free". I've tested robinhoods execution versus charles schwabb, theres really not much difference. Schwabb charges .65 cents a contract, if you make a 50k options trade, it could be hundreds to open and close. Robinhood is giving these brokerages a run for their money
jrumbut 6y ago
The issue is that the only people with access to the information to make a case are the ones making money on it. There's a lack of transparency. And it's not just a theoretical concern, the article states that Robinhood has already been fined for not executing orders at the best price.

bcherny 6y ago

Some might argue it’s precisely this good UX and low fees that incentivize risk-seeking behavior in a set of users who are largely uneducated about the risks of frequent trading, margin, investing on gut feel, etc.

raziel2701 6y ago
I think a major factor in popularizing Robinhood and introducing and exacerbating the gambling degeneracy are places like wallstreetbets and corners of twitter and discord where you're constantly exposed to screenshots of heavy losses and gains. You look at the 20-100k and beyond returns these crazy people get and you rationalize you can do it too. Soon you find yourself in a community that helps you (in their own way) deal with your losses while promoting the next play. It also doesn't help that being in a bubble, the adage "stonks only go up" has been true since the March crash and meme stocks outperform and achieve extreme valuations against all conventional wisdom. Robinhood is the shovel-seller that has undercut the other players with lower prices and lower barrier to entry and better UI. The Fed is the one pumping this asset bubble that keeps the narrative going: stocks only go up and fundamentals don't matter.
- sjtindell 6y ago
  Agreed, and there’s another angle to that community too. They literally refer to each other and themselves as retards. There is a comical, almost aggressive pride in being uninformed and purely in it for the high. Nobody there thinks they are going to be a trader, they just want to get rich. Super interesting.

skybrian 6y ago

They did something mildly interesting, but I think you're giving them too much credit for stuff that's either unimportant or possibly harmful. (I would put a low barrier to entry in the possibly-harmful column.) It's nice that free trades are the new normal and I don't think there is anything wrong with payment for order flow, but on the other hand, $7 is just not that bad a price. If you can't afford $7 trades then either you are trading too often, or you should stick to paying off your credit card debt and building up an emergency fund. Vanguard's UI isn't pretty but it's functional and not hard to use. How often are you going to use it anyway?

jjeaff 6y ago
Exactly. Applauding them for lowering trading fees to $0 is like applauding a pharmaceutical company for bringing down the cost of opiates. Or applauding a cigarette maker for making cigarettes cheaper. In other words, the cost of opiates is not the bigger problem in the industry. And the problem with cigarettes is not the cost. It's the overusage on both fronts. If making trades free leads to more day trading (it does), then we are most certainly going to see a net negative effect on consumers.
- baryphonic 6y ago
  > Exactly. Applauding them for lowering trading fees to $0 is like applauding a pharmaceutical company for bringing down the cost of opiates. Or applauding a cigarette maker for making cigarettes cheaper. Trading stocks doesn't lead people to physical dependence, nor does it typically ruin their lives. Buy-and-hold will almost always lead to returns, provided that a portfolio is diversified enough. Smoking, taking opiates recreationally, etc. almost always lead to premature death. Robinhood (and Wall Street overall) isn't beyond criticism, but this seems like a particularly bonkers analogy.
  - __jem 6y ago
    > Buy-and-hold will almost always lead to returns, provided that a portfolio is diversified enough. Smoking, taking opiates recreationally, etc. almost always lead to premature death. This is ignoring the original point, though. Commission fees are practically irrelevant to a buy and hold strategy because of the time scales involved. Commission fees only matter for trading, which does in fact ruin lives.

dreamcompiler 6y ago

If you can't afford $3K to open an account, you can't afford to day-trade. Fentanyl is a great drug in the hands of trained professionals who know what they're doing. But it shouldn't be sold on the street to just anybody because it's exceptionally dangerous if you're not trained. Robinhood is giving away the digital equivalent of Fentanyl to everybody. This can only end in disaster.

smsm42 6y ago
> I believe Vanguard requires $3k to open a Roth Do you really use you Roth account for day-trading? I don't think it's what it is for. > Robinhood is giving away the digital equivalent of Fentanyl to everybody. Absolutely baseless claim. You can analogize anything to anything - that does not make them equal. Stock trading is in no way similar to a deadly drug. At least no more than any other activity that may be addictive to a small minority - like eating, drinking coffee, playing D&D, having sex or reading articles on the Internet about medieval armor making. None of it is Fentanyl.
jjeaff 6y ago
Or a more direct comparison is that they are bringing legalized going to the masses.
renewiltord 6y ago
No, if you can't afford $3k, you can't afford to day-trade. Other people have other risk tolerances.
im3w1l 6y ago
All the attention around Robinhood centers on daytrading. But it works perfectly fine for the buying and holding usecase. It's a smooth polished app. Easy signup flow.

fermienrico 6y ago

Robinhood's UI is just great for beginners but not for seasoned traders. TD Ameritrade has far superior UI for people who know what they're doing. "They absolutely crush it" - No, they don't. Not even close.

ptero 6y ago

I agree with your points. Another defense of RH (from an unusual angle): Just for inversing, $7 trades are not a big deal, as others said (if it looks they are, stop trading as much). Also, free or super cheap trades encourage people to participate in zero-sum risky trading schemes (HFT, complex options, etc.) where they are at a big disadvantage against pros. That said, I still see RH as a very useful thing. Many (most?) people starting to invest will try many stupid things and complex strategies and will lose a lot of money. Sometimes more than once before they learn not to do some things. Sim accounts seldom work for this -- the lessons require losing real money. It is a lot better to lose $1k that you can ill afford to lose early in life than lose $100k that you can ill afford to lose later. My 2c.

kyawzazaw 6y ago

Why can't the other three copy Robinhood's UI?