11 ms·

Robinhood’s big gamble

103 points by hhs 5y ago

sleavey 5y ago
I think in principle reducing the barriers to trading on stock markets is a good thing, but gamifying it is not. How much Robinhood are guilty of the latter, I don't know.
notyourwork 5y ago
The internet makes risky behavior more accessible by very nature of connectivity. You can talk to someone on the other side of the world with much less friction. Similarly, a fintech company like Robinhood decided to make stock trading more modern and reduce the barrier to entry. Granted, this wasn't really a big change in accessibility if you wanted to trade stocks. One could simply goto Fidelity ore other brokers and do the same thing. However, Robinhood's app is much more approachable for someone new to finance. Reducing the barrier to entry isn't a bad thing and will always lead to some percentage of new comers doing dumb things. That doesn't mean Robinhood is encouraging it intentionally. I think its merely a side effect of their apps approachability for someone less familiar with financial instruments.
- sithlord 5y ago
  Although robinhood's app was pretty revolutionary, I think their real "innovation" was removing the cost of trades, basically forced the entire market to remove that. Before, it would cost 4.99+ to execute a trade, so if you were not buying significant amounts that could EASILY eat up a lot of profits.
  - pfisch 5y ago
    There have been brokers like that for at least 15 years. Zecco was doing it back in like 2006.
    - emteycz 5y ago
      Yeah, it is standard in Europe for at least the whole last decade.
      - md_ 5y ago
        Note that it's illegal in the UK and being scrutinized in the EU: https://www.ft.com/content/3254a7c5-3c9b-468c-9ed4-a324f5e42474 https://www.ft.com/content/3254a7c5-3c9b-468c-9ed4-a324f5e42....
        emteycz 5y ago
        Yeah, another example of the "great" EU "helping" the people...
        md_ 5y ago
        Agreed; it's disappointing that the UK beat them to banning it.
  - sniperjzp 5y ago
    It’s looks like free but it isn’t, RH makes money by selling trading requests to high frequency trading firms like Citadel, which buy/sell before the actual order in a better position so they can earn a penny from selling to or buying from you. The more transactions, the more they earn. - https://fortune.com/2020/07/08/robinhood-makes-millions-selling-your-stock-trades-is-that-so-wrong/ https://fortune.com/2020/07/08/robinhood-makes-millions-sell...
    - thebean11 5y ago
      All brokerages do this. RH started charging $0 + (selling order flow) while everyone was charging $5-10 + (selling order flow). For smaller trades that's charging 99+% less than their competitors at the time..
    - AdamN 5y ago
      That's still 'free'. Every business makes money somewhere and when you're not paying money directly to that business, we generally call that 'free'.
    - makomk 5y ago
      The existing retail brokers were also, with very few exceptions, selling trading requests on top of the fees they charged. (Also, in general this actually results in better-than-market prices because the trading firms know that retail traders aren't likely to have information they don't and aren't likely to be making large market-shifting trades, so they can relatively safely make money by market making between people who want to buy and people who want to sell at slightly different times.)
    - cjpearson 5y ago
      That would be front-running and it's illegal. The article you linked explains what PFOF is, but in general there's nothing wrong with market makers fulfilling brokerage orders. It means traders get a better price on their order and the market makers earn a profit. The concern is that when market makers share that profit with brokerages they encourage brokerages to select the market maker that gives them the biggest cut rather than the one who gives the best price for the trader. Still, the trader will never get a worse price than what's available on the exchange. (That's also illegal.)
  - dmoy 5y ago
    Nobody moved to remove the cost of trades until after IBKR in 2019. The large brokers more or less did not care when robinhood did the same thing years and years and years ago.
- cowmoo728 5y ago
  Isn't pushing Robinhood gold (leverage) onto users with repeated in app messaging about how great it is, Robinhood pushing users to do irresponsible things? Or the fact that if you end the day down, your whole app is red, unless you deposit enough additional cash to cover your losses and then it switches back to green? (edit note: not sure if this is still the case but it was true in the early days of the android app). The app feels like a mobile game developer switched to the stock market.
  - themanmaran 5y ago
    If you deposit more cash than you lost in a day, does it flip back to green? As far as I remember, it's just based on the gains / losses you had during the day. So depositing cash at the end of the day shouldn't affect your gain/loss.
    - cowmoo728 5y ago
      I deleted Robinhood about a year ago but I remember early in Robinhood days that I deposited cash and it flipped back to green. Hopefully they changed that behavior by now.
    - raziel2701 5y ago
      Yes it does flip it back to green.
  - dylan604 5y ago
    Sounds like the ultimate "Deposit another coin to Continue or Restart".
- pembrook 5y ago
  > That doesn't mean Robinhood is encouraging it intentionally This is news to me. As far as I can tell, everything about their app is designed for you to treat the stock market like a game. From the notification defaults down to the content layout. They also sign users up for a daily stock market newsletter that encourages "trading the news" and their unofficial user forum is essentially Wall Street Bets, which they have never tried to distance themselves from. Making it easier to trade stocks through better UI design isn't inherently a bad thing, I agree. However, looking at the insanely disproportionate amount of their revenue that comes from "day" traders and speculative option junkies, they're extremely incentivized to keep milking this customer group over their more sane buy-and-hold users. And we all know the data, a vast majority of these users will lose money on a risk adjusted basis compared to just buying the whole market in a passive ETF. But there's no money to be made in passive ETFs, so Robinhood will likely never roll out automated passive ETF investing a la Wealthfront. Robinhood has a responsibility to its investors to maximize profits, therefore its hilarious to think they won't do anything to keep encouraging their most profitable user segment to keep trading.
  - jack_pp 5y ago
    The stock market is, was and always will be a game.
    - lexapro 5y ago
      Life is, was and always will be a game.
      - deleted 5y ago
        [deleted]
- annexrichmond 5y ago
  All the annoying emojis and push notifications talking to me like I’m an ignorant child trading stocks (“HOORAY!! YOU GOT DIVIDEND HIGH FIVE”) is what made me realize this app wasn’t for me. I guess that’s exactly what to expect when you apply that SV-type growth hacker PMs to a trading platform.
  - notyourwork 5y ago
    Agreed, I typically disable push on most apps because they are regularly worthless and not helpful.
dimmke 5y ago
Why not both? Why are these things supposed to be mutually exclusive?
MR4D 5y ago
Both. But then again, Hedge funds for rich people also encourage risky behavior (leveraging up their models, as imperfect as they are from time to time is definitely risky).
- dcolkitt 5y ago
  The basis of US securities law is that rich people ("accredited investors") know enough to be responsible to take risks. Whereas poor people are too stupid to make risky investments without turning into degenerate gamblers. A lot of debates about financial regulation basically come down to whether this is a good principle or not. Too many times, both sides are arguing at cross purposes, because one implicitly assumes this is common sense, whereas the other thinks it's classist and paternalistic.
  - NortySpock 5y ago
    "Rich people" can also afford time / money / labor costs to do independent due diligence to confirm if a company's finances are true and correct, or an elaborate sham.
    - JakeTheAndroid 5y ago
      Yet WeWork happened still. And tons of investors get screwed by scams or companies completely lying. Makeup company Coty couldn't verify Kylie Jenners companies earning and once they audited it they found out that it wasn't making nearly as much as they thought. So it's not like its uncommon for investors to get taken for a ride. Why should we then treat them differently than lower income investors?
  - JumpCrisscross 5y ago
    > rich people ("accredited investors") know enough to be responsible to take risks This is a straw man. The real argument: someone with more money is less likely to become destitute as a result of a bad investment. Also: someone with more money is less likely to become a political problem that shuts down the market, or a drain on the public purse, when they lose money. When it comes to private investments, someone investing e.g. $10k cannot afford to do legal diligence. They are also unlikely to unilaterally pursue someone who sued them in court. That almost guarantees they’ll be the sucker in the long run.
pueblito 5y ago
Robinhood seems to being doing both, but it feels like small retail investors are getting the blame for a speculative bubble that they have little fault for.
- walleeee 5y ago
  And even if small investors do share some fault, it is incoherent to end a critique with them and their (perhaps understandable ab)use of Robinhood's business model, and skip the pervasive estrangement of financial speculation from productive enterprise, a situation for which the largest players are predominantly responsible
endisneigh 5y ago
what's really dumb is the fact it takes 3 days for a trade to settle. why can't I buy $SPY and get my money immediately? it's 2021, jeez.
- nightski 5y ago
  From what I have heard is that they are working towards 1 day settlement, which isn't too bad. Intraday settlement may sound good on paper but it also opens up a whole bunch of extra problems that you might not like.
  - endisneigh 5y ago
    > From what I have heard is that they are working towards 1 day settlement, which isn't too bad. awesome - any more details? I saw this: https://www.cnbc.com/2021/02/24/wall-street-clearing-firm-proposes-1-day-trade-settlement-after-robinhood-controversy.html https://www.cnbc.com/2021/02/24/wall-street-clearing-firm-pr... I assume that's what you're referring to? > Intraday settlement may sound good on paper but it also opens up a whole bunch of extra problems that you might not like. I can imagine problems like liquidity or fraud on certain tickers, anything else? is it even possible to reverse a trade under any circumstances now?
- partiallypro 5y ago
  I agree, but that's an SEC rule and not something brokers can control.
liquidise 5y ago
Articles like this strike me as FUD no matter how hard i try and read them another way. "Risk" is such a wide spectrum when it comes to financial investments. Just look at the crypto crash today, and there are hundreds of billions invested there still. Robinhood giving younger people access to options is hardly a doomsday risk scenario in my mind. Robinhood may well be responsible for a generation gaining investment literacy decade(s) before adults have in the past. Some of these young investors might be burned early, but i'd take the long view and wager that those who start learning now come out ahead in 10-20 years.
- RosanaAnaDana 5y ago
  Cost of tuition.
- andreilys 5y ago
  Or they end up spending the next 10-20 years paying off margin and credit card lines they used to invest in high risk assets. This guy literally maxed out credit cards and bought doge on margin. https://www.nytimes.com/2021/05/14/technology/hes-a-dogecoin-millionaire-and-hes-not-selling.html https://www.nytimes.com/2021/05/14/technology/hes-a-dogecoin...
  - nexuist 5y ago
    How is this any different from spending $70k a year on some useless degree with 0 job prospects? People will always find ways to lose money.
  - s1artibartfast 5y ago
    Isn't this the point of bankruptcy. If this guy ends up bankrupt, it will be signal to future creditors that maybe they aren't the most prudent investor. From the other perspective, isn't it the individuals risk to take? Even if it is essentially gambling, this is something that people are allowed to do. Why would a person be permitted to bet their life savings and max credit on black in a casino, but not some speculative coin? Random fact: Terrance Watanabe may be the largest looser in the history of las vegas gambling, having lost over 220M over a 5 year period. He was also sued by Casinos for over 15M of credit they provided him to gamble with.
void_mint 5y ago
Only in the same way that all credit card companies encourage risky behavior.
ireliamain 5y ago
Working in a sports gambling field, I know the data shows that less than 1% of total players actually make a consistent profit. I wonder how similar it is for nonpassive traders(not investors) on the market, regardless of the platform. People trading futures or actively trading might not be making much money at all. Investing has been very profitable for a layman, but I do definitely believe that trading has been over glorified as a money investment method.
- zie 5y ago
  The professional "active investors" generally lose money after fees are taken into account: "When performance is measured using before-fee model alphas and compared across the cross-sectional distribution, any active fund performance advantage is substantially less than one would conclude from benchmarking to average index fund performance. Moreover, any advantage of the top active managers over the top index funds is much less than the advantage of the worst index funds over the worst active funds. When performance accounts for residual risk, active funds no longer outperform index funds. " -https://www.cambridge.org/core/services/aop-cambridge-core/content/view/F025DBD6823F2948F6119050E95DA457/S0022109017000904a.pdf/passive_versus_active_fund_performance_do_index_funds_have_skill.pdf https://www.cambridge.org/core/services/aop-cambridge-core/c... JOURNAL OF FINANCIAL AND QUANTITATIVE ANALYSIS Vol. 53, No. 1, Feb. 2018, pp. 33–64 COPYRIGHT 2018, MICHAEL G. FOSTER SCHOOL OF BUSINESS, UNIVERSITY OF WASHINGTON, SEATTLE, WA 98195doi:10.1017/S0022109017000904 Passive versus Active Fund Performance: Do Index Funds Have Skill? Alan D.Crane and Kevin Crotty I'm sure there are better sources, but I'm lazy today. Day traders get even worse: https://mathinvestor.org/2020/07/day-trading-in-the-age-of-coronavirus/ https://mathinvestor.org/2020/07/day-trading-in-the-age-of-c...
snarkypixel 5y ago
What's risky? If there were one easy and legal way to make a lot of money in a non-risky way, then everyone would do that. Is it more risky to invest in Doge or to give it to some professional hedge funds that have been losing money every year? Maybe S&P is the closest to legal, free, easy, little-risk?
- FPGAhacker 5y ago
  Look up wash sales. I personally did not know about that. I made some money “scalping” on doge volatility, then learned of this tax rule, and I’m left wondering if I’m going to get a tax bill that wipes out what I made. It’s not a stock, so maybe not. But I hadn’t even heard of such a rule and it was an eye opener. I could have gotten into a pretty deep hole and had no idea. Not Robinhood’s fault, but a risk nonetheless.
cblconfederate 5y ago
I always viewed the stock market as another form of gambling. Regulation existed to create enough friction to justify calling it "not gambling", but it was always gambling. Absent of regulation the two are indistingushable, robinhood is just taking advantage of the asymmetry
- tehsauce 5y ago
  I think it’d more accurate to say all interactions with the stock market exist on a spectrum between gambling and creating real value, depending on your strategy.
- ouid 5y ago
  >just another form of gambling Everything is gambling. Gambling in a casino is just a form where the expectation is always negative.
- mediaman 5y ago
  To say that the stock market is gambling is to say that all forms of putting money at risk are gambling. Buy a house as a rental investment? That's gambling. Loan money to someone to start their business? Gambling. Buy inventory of a product to resell it? Gambling. One can make the argument that any money at risk is gambling, but this broadens the meaning of gambling so far as to make it useless. Unlike actual gambling - where the expected return of each gambler is negative - stock market investing, like owning other assets, on average has positive expected returns. Yes, it is possible to make bad investments. Just like it's possible to loan money to someone and have it go bad, or it's possible to buy a house and have renters stop paying. But we don't call those things gambling, so why call stock market investing gambling?
Someone1234 5y ago
I have a Schwab brokerage account, until recently I could trade OTCs and can still trade warrants and futures. These are riskier securities than common stock. None of which is possible on RH as far as I know. When I created my Schwab account I received and was offered no specific training, and largely learned how to trade on YT, Investopedia, and articles. My point is this: RH has become the media's favorite whipping boy because retail trading has seen a spike in popularity not witnessed since the .COM Bubble. A lot of this critique is aimed at RH's interface/app because it is substantially better than the existing brokerages still using websites from the 1990s (this article criticizes it for being "slick" and complains about confetti). The reality is that you can be a risky investor and lose it all on any brokerage, including Schwab, Fidelity, or TDA. RH has made some mistakes and isn't actually a good broker in my opinion, but dog piling them is just a proxy for arguments against retail investors being allowed to invest freely in the market (e.g. I've read multiple arguments for banning options trading for accounts under $25K for one example).
- callamdelaney 5y ago
  Yes, but Robinhood have taken actions which purposefully harmed its users in order to benefit their corporate customers(Citadel). https://www.independent.co.uk/news/business/robinhood-gamestop-class-action-trading-suspended-b1794934.html https://www.independent.co.uk/news/business/robinhood-gamest...
  - eckmLJE 5y ago
    It will be interesting to see if this can be proven. Until then it seems more accurate to simply say that Robinhood took actions that harmed its users and benefited its corporate customers.
  - dehrmann 5y ago
    I think Schwab does this, too, and it supposedly gets traders better prices.
  - gruez 5y ago
    ...lawsuit alleges.
diabeticApe 5y ago
Well seeing as stock trading is inherently risky, democratizing trading makes this risky activity more accessible to more people. Now instead of just the elite manipulating the market to benefit themselves at the expense of the public, the public gets a chance to turn the tables. Some of the newbies will make mistakes or do stupid things along the way. To consider them mutually exclusive seems a bit disingenuous. Also I dont recall this much media turmoil over the credit default swap mortgage crisis fiasco of 2008. But then again that only screwed over the entire economy instead of the few elites that benefited from everyone else's loss.
- quickthrowman 5y ago
  > Also I dont recall this much media turmoil over the credit default swap mortgage crisis fiasco of 2008. Were you a small child in 2008 or something? The GFC and its causes (CDS and CDO blowups, among other things) were widely talked about when it was happening, you couldnt go a day without hearing about exotic derivatives and their effects on the economy/markets in the news.
yalogin 5y ago
I would love ve to understand what kind of user data they sell to what kind of clients and how those clients use it. Feels to me they might have opened up a can of worms that was kept shut or may be it already happened before too.
joncp 5y ago
Definitely. Here's a couple of things that hit me in the face when I use RH: 1) You open the app and the first view is the one-day graph with the bottom lopped off of the y-axis. This encourages day trading and reacting to tiny fluctuations in the market. If they want to encourage investing over gambling, they'd show you the long-term graph of your portfolio. Or maybe skip the graph and take me to the fundamentals. 2) They use the word "investments" to refer to crypto holdings. Crypto has never and can never be an investment, but calling it that subtly emboldens users to trade in it without understanding the risks.
- arcticfox 5y ago
  > Crypto has never and can never be an investment Whether you like or dislike crypto, this seems false according to both the dictionary and common use definition
  - grey-area 5y ago
    Speculation, not investment. The use value of cryptocurrencies is near 0.
    - kwertyoowiyop 5y ago
      Tomato, tomahto
  - dehrmann 5y ago
    It's a speculative investment (or asset). Whatever you call it, not including that word is disingenuous.
shubik22 5y ago
Last time I checked on Robinhood (and maybe they've changed it since then), when you want to buy options on their app, their UI gives you two options: "I think the stock is going to go up" and "I think the stock is going to go down." Say what you will about "democratizing" finance, but even if you think enabling retail investors to buy options is a laudable goal, surely they should at least know what a "put" and a "call" is? (The point being options are complicated to understand, and if you don't even know their names, you probably don't understand how they work. And if you don't understand how they work, maybe you shouldn't be buying them.) I feel like a lot of the arguments I see in favor of "democratizing finance" could be applied to a company making some incredibly harmful drug. Ok, maybe we shouldn't make it illegal for companies to produce or sell that substance, but surely we can all agree that company is actively doing harm to its customers? And we don't need to pretend that the company is "democratizing" chemical consumption.
- vineyardmike 5y ago
  >surely they should at least know what a "put" and a "call" is? You do learn what this is, but the "i think its going up" is just the starting UI and tbh its more approachable and faster to navigate since you don't need to memorize turns.
- zachrip 5y ago
  Making things easier to understand does not mean the person doesn't understand it. Just because adults struggle to understand common core math, doesn't mean kids aren't just as capable of solving an equation. Options don't need to be confusing and I actually find RH's educational material and examples pretty good to get a basic understanding of how they work.
  - Traster 5y ago
    Disclaimer: I haven't used RH. However, if the person you're responding to is correct about their UI it's negligent. The price of an option does not vary only with whether "you think the price will go up". Essentially it's mis-representing an option as a delta trade which it isn't.
6gvONxR4sf7o 5y ago
> Tenev acknowledged some early mistakes. “I’m the first to admit, our compliance procedures, especially in those early years, were the compliance procedures of a growing company,” he said. I hate so much that this is such a typical startup path. Talk about a euphemism.
99_00 5y ago
Everyone is encouraging risk taking. If you don't follow suit you will won't make money. It's basic strategy. Eventually the risk taking will result in you no longer making money when things go bad. But at that point when your fund, brokerage, whatever, goes bust you will have a very nice personal bank account. The person who didn't encourage risk will also go out of business (because everything will be dragged down) but they won't have a nice personal bank account. Why would you choose to be the poor person?
- haskellandchill 5y ago
  Because you actually believe in things and don't just follow trends. Fundamentals work, they really do.
- derivagral 5y ago
  There's an assumption here that you can get out in time. What if you can't tell when and you miss conversions due to any number of reasons (congestion, availability, liquidity, counterparty risk in defi, etc) I ask because I don't get the sense that most risk-on investors in crypto regularly convert gains back to fiat.
  - 99_00 5y ago
    It depends. People who have skin in the game are going to be the most responsible. People who's compensation is based on bonuses... not so much.
- ghufran_syed 5y ago
  Seemed to work well for Vanguard: https://en.wikipedia.org/wiki/The_Vanguard_Group https://en.wikipedia.org/wiki/The_Vanguard_Group
ullevaal 5y ago
I think democratising asset investments is a worthwhile goal. The gamifying and the fact that RobinHood makes it money from trades does lead to some strained incentives, where most people would probably be better of maximising their tax advantaged pension contributions or setting or forgetting an index fund savings plan. However, I think also direct access to small and free to stock picks is generally good, so hopefully RobinHood is able to thread the needle, and make some money also when their customers make money.
- md_ 5y ago
  But statistically speaking it empirically isn't. Piketty, as mentioned by Tenev in the article, does indeed point out that one of the reasons return on capital is higher for the wealthy is because of access to lower-cost asset management and higher-return esoteric investments that the rest of us don't enjoy, but it's absurd to suggest (as Tenev does) that this is materially changed by bringing the cost of retail stock purchases from $4 down to $0.
deleted 5y ago
[deleted]
md_ 5y ago
The thing I don't see mentioned in this thread is how incongruous Robinhood's image is (a professed goal of fighting inequality by giving the working classes access to the same return on capital as the wealthy enjoy) in relation to their business model. Say what you will about Wall St, but customers of traditional brokers tend to know what the brokers are in it for: the money. Robinhood's big product innovation might be zero-commission trades and a gamified UX, but their big marketing innovation is to wrap themselves in the ever-dingier cloak of Silicon Valley "changing the world". I can't help but think of this absolutely spot-on parody from "Silicon Valley": https://www.youtube.com/watch?v=B8C5sjjhsso https://www.youtube.com/watch?v=B8C5sjjhsso.
- fullshark 5y ago
  If you throw away all the pretense is it just the case that RH has a better business model compared to etrade, Schwab etc? They recognized that consumers prefer zero commission trades, a good UX smartphone app, and don't care about the fact that RH sells order flow? All that other stuff is noise.
  - md_ 5y ago
    If I'm being candid, what bugs me about this kind of marketing is that I work for a Silicon Valley company which spends a lot of hot air on "doing what's right"—and I want it to be true. So, for {altruistic, self-interested} reasons, I want to push back on the dilution of "doing good by doing well." To directly answer your questions on Robinhood, though: I believe (with low confidence) that the big innovation is gamification. That's it. And I have trouble feeling like that's beneficial. If Robinhood had gamified saving for retirement in a boring 3-fund portfolio with zero commission trades, I don't think we'd be having this conversation. But PFOF on once-a-month 401k inputs wouldn't be very good for their investors.
MangoCoffee 5y ago
one good thing that Robinhood did is eliminated the commission fee and now every broker have remove it. i have a Scottrade/td ameritrade account, it was the lowest commission at the time ($7 per trade) when i open the account and now there is no commission fee anymore.
nimbius 5y ago
>is the app democratizing finance or encouraging risky behavior? For anyone who paid attention to the WSB fiasco This isnt a meaningful question. When Robinhood halted trading on a stock that had the very real potential to harm monied, cloistered elites it basically confirmed whatever definition of "finance" it claimed to represent was rigged from the start. the app is no different than facebook. You arent an empowered investor, you are their product.
jkingsbery 5y ago
Did anyone else on reading the headline picture Cary Elwes asking "An archery contest?"
throwitaway1235 5y ago
Robinhood did not have an "outage" as many people are saying in relation to the GameStop manipulation. I don't recall the specific date, but I and x number of people put purchase orders in during the overnight that were not executed when the market opened. Calling this an outage is disingenuous. Especially considering purchase orders for other stocks on that specific date/time were executed.

103 points by hhs 5y ago

I think in principle reducing the barriers to trading on stock markets is a good thing, but gamifying it is not. How much Robinhood are guilty of the latter, I don't know.

notyourwork 5y ago

The internet makes risky behavior more accessible by very nature of connectivity. You can talk to someone on the other side of the world with much less friction. Similarly, a fintech company like Robinhood decided to make stock trading more modern and reduce the barrier to entry. Granted, this wasn't really a big change in accessibility if you wanted to trade stocks. One could simply goto Fidelity ore other brokers and do the same thing. However, Robinhood's app is much more approachable for someone new to finance. Reducing the barrier to entry isn't a bad thing and will always lead to some percentage of new comers doing dumb things. That doesn't mean Robinhood is encouraging it intentionally. I think its merely a side effect of their apps approachability for someone less familiar with financial instruments.

sithlord 5y ago
Although robinhood's app was pretty revolutionary, I think their real "innovation" was removing the cost of trades, basically forced the entire market to remove that. Before, it would cost 4.99+ to execute a trade, so if you were not buying significant amounts that could EASILY eat up a lot of profits.
- pfisch 5y ago
  There have been brokers like that for at least 15 years. Zecco was doing it back in like 2006.
  - emteycz 5y ago
    Yeah, it is standard in Europe for at least the whole last decade.
    - md_ 5y ago
      Note that it's illegal in the UK and being scrutinized in the EU: https://www.ft.com/content/3254a7c5-3c9b-468c-9ed4-a324f5e42474 https://www.ft.com/content/3254a7c5-3c9b-468c-9ed4-a324f5e42....
      - emteycz 5y ago
        Yeah, another example of the "great" EU "helping" the people...
        md_ 5y ago
        Agreed; it's disappointing that the UK beat them to banning it.
- sniperjzp 5y ago
  It’s looks like free but it isn’t, RH makes money by selling trading requests to high frequency trading firms like Citadel, which buy/sell before the actual order in a better position so they can earn a penny from selling to or buying from you. The more transactions, the more they earn. - https://fortune.com/2020/07/08/robinhood-makes-millions-selling-your-stock-trades-is-that-so-wrong/ https://fortune.com/2020/07/08/robinhood-makes-millions-sell...
  - thebean11 5y ago
    All brokerages do this. RH started charging $0 + (selling order flow) while everyone was charging $5-10 + (selling order flow). For smaller trades that's charging 99+% less than their competitors at the time..
  - AdamN 5y ago
    That's still 'free'. Every business makes money somewhere and when you're not paying money directly to that business, we generally call that 'free'.
  - makomk 5y ago
    The existing retail brokers were also, with very few exceptions, selling trading requests on top of the fees they charged. (Also, in general this actually results in better-than-market prices because the trading firms know that retail traders aren't likely to have information they don't and aren't likely to be making large market-shifting trades, so they can relatively safely make money by market making between people who want to buy and people who want to sell at slightly different times.)
  - cjpearson 5y ago
    That would be front-running and it's illegal. The article you linked explains what PFOF is, but in general there's nothing wrong with market makers fulfilling brokerage orders. It means traders get a better price on their order and the market makers earn a profit. The concern is that when market makers share that profit with brokerages they encourage brokerages to select the market maker that gives them the biggest cut rather than the one who gives the best price for the trader. Still, the trader will never get a worse price than what's available on the exchange. (That's also illegal.)
- dmoy 5y ago
  Nobody moved to remove the cost of trades until after IBKR in 2019. The large brokers more or less did not care when robinhood did the same thing years and years and years ago.
cowmoo728 5y ago
Isn't pushing Robinhood gold (leverage) onto users with repeated in app messaging about how great it is, Robinhood pushing users to do irresponsible things? Or the fact that if you end the day down, your whole app is red, unless you deposit enough additional cash to cover your losses and then it switches back to green? (edit note: not sure if this is still the case but it was true in the early days of the android app). The app feels like a mobile game developer switched to the stock market.
- themanmaran 5y ago
  If you deposit more cash than you lost in a day, does it flip back to green? As far as I remember, it's just based on the gains / losses you had during the day. So depositing cash at the end of the day shouldn't affect your gain/loss.
  - cowmoo728 5y ago
    I deleted Robinhood about a year ago but I remember early in Robinhood days that I deposited cash and it flipped back to green. Hopefully they changed that behavior by now.
  - raziel2701 5y ago
    Yes it does flip it back to green.
- dylan604 5y ago
  Sounds like the ultimate "Deposit another coin to Continue or Restart".
pembrook 5y ago
> That doesn't mean Robinhood is encouraging it intentionally This is news to me. As far as I can tell, everything about their app is designed for you to treat the stock market like a game. From the notification defaults down to the content layout. They also sign users up for a daily stock market newsletter that encourages "trading the news" and their unofficial user forum is essentially Wall Street Bets, which they have never tried to distance themselves from. Making it easier to trade stocks through better UI design isn't inherently a bad thing, I agree. However, looking at the insanely disproportionate amount of their revenue that comes from "day" traders and speculative option junkies, they're extremely incentivized to keep milking this customer group over their more sane buy-and-hold users. And we all know the data, a vast majority of these users will lose money on a risk adjusted basis compared to just buying the whole market in a passive ETF. But there's no money to be made in passive ETFs, so Robinhood will likely never roll out automated passive ETF investing a la Wealthfront. Robinhood has a responsibility to its investors to maximize profits, therefore its hilarious to think they won't do anything to keep encouraging their most profitable user segment to keep trading.
- jack_pp 5y ago
  The stock market is, was and always will be a game.
  - lexapro 5y ago
    Life is, was and always will be a game.
    - deleted 5y ago
      [deleted]
annexrichmond 5y ago
All the annoying emojis and push notifications talking to me like I’m an ignorant child trading stocks (“HOORAY!! YOU GOT DIVIDEND HIGH FIVE”) is what made me realize this app wasn’t for me. I guess that’s exactly what to expect when you apply that SV-type growth hacker PMs to a trading platform.
- notyourwork 5y ago
  Agreed, I typically disable push on most apps because they are regularly worthless and not helpful.

dimmke 5y ago

Why not both? Why are these things supposed to be mutually exclusive?

MR4D 5y ago

Both. But then again, Hedge funds for rich people also encourage risky behavior (leveraging up their models, as imperfect as they are from time to time is definitely risky).

dcolkitt 5y ago
The basis of US securities law is that rich people ("accredited investors") know enough to be responsible to take risks. Whereas poor people are too stupid to make risky investments without turning into degenerate gamblers. A lot of debates about financial regulation basically come down to whether this is a good principle or not. Too many times, both sides are arguing at cross purposes, because one implicitly assumes this is common sense, whereas the other thinks it's classist and paternalistic.
- NortySpock 5y ago
  "Rich people" can also afford time / money / labor costs to do independent due diligence to confirm if a company's finances are true and correct, or an elaborate sham.
  - JakeTheAndroid 5y ago
    Yet WeWork happened still. And tons of investors get screwed by scams or companies completely lying. Makeup company Coty couldn't verify Kylie Jenners companies earning and once they audited it they found out that it wasn't making nearly as much as they thought. So it's not like its uncommon for investors to get taken for a ride. Why should we then treat them differently than lower income investors?
- JumpCrisscross 5y ago
  > rich people ("accredited investors") know enough to be responsible to take risks This is a straw man. The real argument: someone with more money is less likely to become destitute as a result of a bad investment. Also: someone with more money is less likely to become a political problem that shuts down the market, or a drain on the public purse, when they lose money. When it comes to private investments, someone investing e.g. $10k cannot afford to do legal diligence. They are also unlikely to unilaterally pursue someone who sued them in court. That almost guarantees they’ll be the sucker in the long run.

pueblito 5y ago

Robinhood seems to being doing both, but it feels like small retail investors are getting the blame for a speculative bubble that they have little fault for.

walleeee 5y ago
And even if small investors do share some fault, it is incoherent to end a critique with them and their (perhaps understandable ab)use of Robinhood's business model, and skip the pervasive estrangement of financial speculation from productive enterprise, a situation for which the largest players are predominantly responsible

endisneigh 5y ago

what's really dumb is the fact it takes 3 days for a trade to settle. why can't I buy $SPY and get my money immediately? it's 2021, jeez.

nightski 5y ago
From what I have heard is that they are working towards 1 day settlement, which isn't too bad. Intraday settlement may sound good on paper but it also opens up a whole bunch of extra problems that you might not like.
- endisneigh 5y ago
  > From what I have heard is that they are working towards 1 day settlement, which isn't too bad. awesome - any more details? I saw this: https://www.cnbc.com/2021/02/24/wall-street-clearing-firm-proposes-1-day-trade-settlement-after-robinhood-controversy.html https://www.cnbc.com/2021/02/24/wall-street-clearing-firm-pr... I assume that's what you're referring to? > Intraday settlement may sound good on paper but it also opens up a whole bunch of extra problems that you might not like. I can imagine problems like liquidity or fraud on certain tickers, anything else? is it even possible to reverse a trade under any circumstances now?
partiallypro 5y ago
I agree, but that's an SEC rule and not something brokers can control.

liquidise 5y ago

Articles like this strike me as FUD no matter how hard i try and read them another way. "Risk" is such a wide spectrum when it comes to financial investments. Just look at the crypto crash today, and there are hundreds of billions invested there still. Robinhood giving younger people access to options is hardly a doomsday risk scenario in my mind. Robinhood may well be responsible for a generation gaining investment literacy decade(s) before adults have in the past. Some of these young investors might be burned early, but i'd take the long view and wager that those who start learning now come out ahead in 10-20 years.

RosanaAnaDana 5y ago
Cost of tuition.
andreilys 5y ago
Or they end up spending the next 10-20 years paying off margin and credit card lines they used to invest in high risk assets. This guy literally maxed out credit cards and bought doge on margin. https://www.nytimes.com/2021/05/14/technology/hes-a-dogecoin-millionaire-and-hes-not-selling.html https://www.nytimes.com/2021/05/14/technology/hes-a-dogecoin...
- nexuist 5y ago
  How is this any different from spending $70k a year on some useless degree with 0 job prospects? People will always find ways to lose money.
- s1artibartfast 5y ago
  Isn't this the point of bankruptcy. If this guy ends up bankrupt, it will be signal to future creditors that maybe they aren't the most prudent investor. From the other perspective, isn't it the individuals risk to take? Even if it is essentially gambling, this is something that people are allowed to do. Why would a person be permitted to bet their life savings and max credit on black in a casino, but not some speculative coin? Random fact: Terrance Watanabe may be the largest looser in the history of las vegas gambling, having lost over 220M over a 5 year period. He was also sued by Casinos for over 15M of credit they provided him to gamble with.

void_mint 5y ago

Only in the same way that all credit card companies encourage risky behavior.

ireliamain 5y ago

Working in a sports gambling field, I know the data shows that less than 1% of total players actually make a consistent profit. I wonder how similar it is for nonpassive traders(not investors) on the market, regardless of the platform. People trading futures or actively trading might not be making much money at all. Investing has been very profitable for a layman, but I do definitely believe that trading has been over glorified as a money investment method.

zie 5y ago
The professional "active investors" generally lose money after fees are taken into account: "When performance is measured using before-fee model alphas and compared across the cross-sectional distribution, any active fund performance advantage is substantially less than one would conclude from benchmarking to average index fund performance. Moreover, any advantage of the top active managers over the top index funds is much less than the advantage of the worst index funds over the worst active funds. When performance accounts for residual risk, active funds no longer outperform index funds. " -https://www.cambridge.org/core/services/aop-cambridge-core/content/view/F025DBD6823F2948F6119050E95DA457/S0022109017000904a.pdf/passive_versus_active_fund_performance_do_index_funds_have_skill.pdf https://www.cambridge.org/core/services/aop-cambridge-core/c... JOURNAL OF FINANCIAL AND QUANTITATIVE ANALYSIS Vol. 53, No. 1, Feb. 2018, pp. 33–64 COPYRIGHT 2018, MICHAEL G. FOSTER SCHOOL OF BUSINESS, UNIVERSITY OF WASHINGTON, SEATTLE, WA 98195doi:10.1017/S0022109017000904 Passive versus Active Fund Performance: Do Index Funds Have Skill? Alan D.Crane and Kevin Crotty I'm sure there are better sources, but I'm lazy today. Day traders get even worse: https://mathinvestor.org/2020/07/day-trading-in-the-age-of-coronavirus/ https://mathinvestor.org/2020/07/day-trading-in-the-age-of-c...

snarkypixel 5y ago

What's risky? If there were one easy and legal way to make a lot of money in a non-risky way, then everyone would do that. Is it more risky to invest in Doge or to give it to some professional hedge funds that have been losing money every year? Maybe S&P is the closest to legal, free, easy, little-risk?

FPGAhacker 5y ago
Look up wash sales. I personally did not know about that. I made some money “scalping” on doge volatility, then learned of this tax rule, and I’m left wondering if I’m going to get a tax bill that wipes out what I made. It’s not a stock, so maybe not. But I hadn’t even heard of such a rule and it was an eye opener. I could have gotten into a pretty deep hole and had no idea. Not Robinhood’s fault, but a risk nonetheless.

cblconfederate 5y ago

I always viewed the stock market as another form of gambling. Regulation existed to create enough friction to justify calling it "not gambling", but it was always gambling. Absent of regulation the two are indistingushable, robinhood is just taking advantage of the asymmetry

tehsauce 5y ago
I think it’d more accurate to say all interactions with the stock market exist on a spectrum between gambling and creating real value, depending on your strategy.
ouid 5y ago
>just another form of gambling Everything is gambling. Gambling in a casino is just a form where the expectation is always negative.
mediaman 5y ago
To say that the stock market is gambling is to say that all forms of putting money at risk are gambling. Buy a house as a rental investment? That's gambling. Loan money to someone to start their business? Gambling. Buy inventory of a product to resell it? Gambling. One can make the argument that any money at risk is gambling, but this broadens the meaning of gambling so far as to make it useless. Unlike actual gambling - where the expected return of each gambler is negative - stock market investing, like owning other assets, on average has positive expected returns. Yes, it is possible to make bad investments. Just like it's possible to loan money to someone and have it go bad, or it's possible to buy a house and have renters stop paying. But we don't call those things gambling, so why call stock market investing gambling?

Someone1234 5y ago

I have a Schwab brokerage account, until recently I could trade OTCs and can still trade warrants and futures. These are riskier securities than common stock. None of which is possible on RH as far as I know. When I created my Schwab account I received and was offered no specific training, and largely learned how to trade on YT, Investopedia, and articles. My point is this: RH has become the media's favorite whipping boy because retail trading has seen a spike in popularity not witnessed since the .COM Bubble. A lot of this critique is aimed at RH's interface/app because it is substantially better than the existing brokerages still using websites from the 1990s (this article criticizes it for being "slick" and complains about confetti). The reality is that you can be a risky investor and lose it all on any brokerage, including Schwab, Fidelity, or TDA. RH has made some mistakes and isn't actually a good broker in my opinion, but dog piling them is just a proxy for arguments against retail investors being allowed to invest freely in the market (e.g. I've read multiple arguments for banning options trading for accounts under $25K for one example).

callamdelaney 5y ago
Yes, but Robinhood have taken actions which purposefully harmed its users in order to benefit their corporate customers(Citadel). https://www.independent.co.uk/news/business/robinhood-gamestop-class-action-trading-suspended-b1794934.html https://www.independent.co.uk/news/business/robinhood-gamest...
- eckmLJE 5y ago
  It will be interesting to see if this can be proven. Until then it seems more accurate to simply say that Robinhood took actions that harmed its users and benefited its corporate customers.
- dehrmann 5y ago
  I think Schwab does this, too, and it supposedly gets traders better prices.
- gruez 5y ago
  ...lawsuit alleges.

diabeticApe 5y ago

Well seeing as stock trading is inherently risky, democratizing trading makes this risky activity more accessible to more people. Now instead of just the elite manipulating the market to benefit themselves at the expense of the public, the public gets a chance to turn the tables. Some of the newbies will make mistakes or do stupid things along the way. To consider them mutually exclusive seems a bit disingenuous. Also I dont recall this much media turmoil over the credit default swap mortgage crisis fiasco of 2008. But then again that only screwed over the entire economy instead of the few elites that benefited from everyone else's loss.

quickthrowman 5y ago
> Also I dont recall this much media turmoil over the credit default swap mortgage crisis fiasco of 2008. Were you a small child in 2008 or something? The GFC and its causes (CDS and CDO blowups, among other things) were widely talked about when it was happening, you couldnt go a day without hearing about exotic derivatives and their effects on the economy/markets in the news.

yalogin 5y ago

I would love ve to understand what kind of user data they sell to what kind of clients and how those clients use it. Feels to me they might have opened up a can of worms that was kept shut or may be it already happened before too.

joncp 5y ago

Definitely. Here's a couple of things that hit me in the face when I use RH: 1) You open the app and the first view is the one-day graph with the bottom lopped off of the y-axis. This encourages day trading and reacting to tiny fluctuations in the market. If they want to encourage investing over gambling, they'd show you the long-term graph of your portfolio. Or maybe skip the graph and take me to the fundamentals. 2) They use the word "investments" to refer to crypto holdings. Crypto has never and can never be an investment, but calling it that subtly emboldens users to trade in it without understanding the risks.

arcticfox 5y ago
> Crypto has never and can never be an investment Whether you like or dislike crypto, this seems false according to both the dictionary and common use definition
- grey-area 5y ago
  Speculation, not investment. The use value of cryptocurrencies is near 0.
  - kwertyoowiyop 5y ago
    Tomato, tomahto
- dehrmann 5y ago
  It's a speculative investment (or asset). Whatever you call it, not including that word is disingenuous.

shubik22 5y ago

Last time I checked on Robinhood (and maybe they've changed it since then), when you want to buy options on their app, their UI gives you two options: "I think the stock is going to go up" and "I think the stock is going to go down." Say what you will about "democratizing" finance, but even if you think enabling retail investors to buy options is a laudable goal, surely they should at least know what a "put" and a "call" is? (The point being options are complicated to understand, and if you don't even know their names, you probably don't understand how they work. And if you don't understand how they work, maybe you shouldn't be buying them.) I feel like a lot of the arguments I see in favor of "democratizing finance" could be applied to a company making some incredibly harmful drug. Ok, maybe we shouldn't make it illegal for companies to produce or sell that substance, but surely we can all agree that company is actively doing harm to its customers? And we don't need to pretend that the company is "democratizing" chemical consumption.

vineyardmike 5y ago
>surely they should at least know what a "put" and a "call" is? You do learn what this is, but the "i think its going up" is just the starting UI and tbh its more approachable and faster to navigate since you don't need to memorize turns.
zachrip 5y ago
Making things easier to understand does not mean the person doesn't understand it. Just because adults struggle to understand common core math, doesn't mean kids aren't just as capable of solving an equation. Options don't need to be confusing and I actually find RH's educational material and examples pretty good to get a basic understanding of how they work.
- Traster 5y ago
  Disclaimer: I haven't used RH. However, if the person you're responding to is correct about their UI it's negligent. The price of an option does not vary only with whether "you think the price will go up". Essentially it's mis-representing an option as a delta trade which it isn't.

6gvONxR4sf7o 5y ago

> Tenev acknowledged some early mistakes. “I’m the first to admit, our compliance procedures, especially in those early years, were the compliance procedures of a growing company,” he said. I hate so much that this is such a typical startup path. Talk about a euphemism.

99_00 5y ago

Everyone is encouraging risk taking. If you don't follow suit you will won't make money. It's basic strategy. Eventually the risk taking will result in you no longer making money when things go bad. But at that point when your fund, brokerage, whatever, goes bust you will have a very nice personal bank account. The person who didn't encourage risk will also go out of business (because everything will be dragged down) but they won't have a nice personal bank account. Why would you choose to be the poor person?

haskellandchill 5y ago
Because you actually believe in things and don't just follow trends. Fundamentals work, they really do.
derivagral 5y ago
There's an assumption here that you can get out in time. What if you can't tell when and you miss conversions due to any number of reasons (congestion, availability, liquidity, counterparty risk in defi, etc) I ask because I don't get the sense that most risk-on investors in crypto regularly convert gains back to fiat.
- 99_00 5y ago
  It depends. People who have skin in the game are going to be the most responsible. People who's compensation is based on bonuses... not so much.
ghufran_syed 5y ago
Seemed to work well for Vanguard: https://en.wikipedia.org/wiki/The_Vanguard_Group https://en.wikipedia.org/wiki/The_Vanguard_Group

ullevaal 5y ago

I think democratising asset investments is a worthwhile goal. The gamifying and the fact that RobinHood makes it money from trades does lead to some strained incentives, where most people would probably be better of maximising their tax advantaged pension contributions or setting or forgetting an index fund savings plan. However, I think also direct access to small and free to stock picks is generally good, so hopefully RobinHood is able to thread the needle, and make some money also when their customers make money.

md_ 5y ago
But statistically speaking it empirically isn't. Piketty, as mentioned by Tenev in the article, does indeed point out that one of the reasons return on capital is higher for the wealthy is because of access to lower-cost asset management and higher-return esoteric investments that the rest of us don't enjoy, but it's absurd to suggest (as Tenev does) that this is materially changed by bringing the cost of retail stock purchases from $4 down to $0.

deleted 5y ago

[deleted]

md_ 5y ago

The thing I don't see mentioned in this thread is how incongruous Robinhood's image is (a professed goal of fighting inequality by giving the working classes access to the same return on capital as the wealthy enjoy) in relation to their business model. Say what you will about Wall St, but customers of traditional brokers tend to know what the brokers are in it for: the money. Robinhood's big product innovation might be zero-commission trades and a gamified UX, but their big marketing innovation is to wrap themselves in the ever-dingier cloak of Silicon Valley "changing the world". I can't help but think of this absolutely spot-on parody from "Silicon Valley": https://www.youtube.com/watch?v=B8C5sjjhsso https://www.youtube.com/watch?v=B8C5sjjhsso.

fullshark 5y ago
If you throw away all the pretense is it just the case that RH has a better business model compared to etrade, Schwab etc? They recognized that consumers prefer zero commission trades, a good UX smartphone app, and don't care about the fact that RH sells order flow? All that other stuff is noise.
- md_ 5y ago
  If I'm being candid, what bugs me about this kind of marketing is that I work for a Silicon Valley company which spends a lot of hot air on "doing what's right"—and I want it to be true. So, for {altruistic, self-interested} reasons, I want to push back on the dilution of "doing good by doing well." To directly answer your questions on Robinhood, though: I believe (with low confidence) that the big innovation is gamification. That's it. And I have trouble feeling like that's beneficial. If Robinhood had gamified saving for retirement in a boring 3-fund portfolio with zero commission trades, I don't think we'd be having this conversation. But PFOF on once-a-month 401k inputs wouldn't be very good for their investors.

MangoCoffee 5y ago

one good thing that Robinhood did is eliminated the commission fee and now every broker have remove it. i have a Scottrade/td ameritrade account, it was the lowest commission at the time ($7 per trade) when i open the account and now there is no commission fee anymore.

nimbius 5y ago

>is the app democratizing finance or encouraging risky behavior? For anyone who paid attention to the WSB fiasco This isnt a meaningful question. When Robinhood halted trading on a stock that had the very real potential to harm monied, cloistered elites it basically confirmed whatever definition of "finance" it claimed to represent was rigged from the start. the app is no different than facebook. You arent an empowered investor, you are their product.

jkingsbery 5y ago

Did anyone else on reading the headline picture Cary Elwes asking "An archery contest?"

throwitaway1235 5y ago

Robinhood did not have an "outage" as many people are saying in relation to the GameStop manipulation. I don't recall the specific date, but I and x number of people put purchase orders in during the overnight that were not executed when the market opened. Calling this an outage is disingenuous. Especially considering purchase orders for other stocks on that specific date/time were executed.