7 ms·

Robinhood Raises $13M to Democratize Stock Market with Zero-Commission Trading

68 points by juanplusjuan 12y ago

WalterBright 12y ago
For anyone wanting to go to town with this, don't forget the IRS. All your trades need to be tracked and reported on your income tax forms so the IRS gets their cut. If you're doing lots of small trades under $100, what you wind up paying your tax preparer to add up the nickels and dimes will overwhelm the value of the trades. Of course, part of this app must be automation of preparing the tax paperwork and liability. The more pragmatic (and ultimately more successful) way to trade is to buy and hold - and hold, and hold, and hold. Statistically, dead people are more successful investors because they don't actively trade. http://www.businessinsider.com/forgetful-investors-performed-best-2014-9 http://www.businessinsider.com/forgetful-investors-performed...
- nmjohn 12y ago
  That's not 100% accurate - rather how you make it sound like it works isn't quite right. Yes, all your trades are tracked and you will pay taxes on short term gains and can offset tax liabilities with losses. But that isn't something you - or your accountant does - your brokerage firm (any of them) will issue you a tax document (I can't think of the name at the moment) which summarizes everything for you - it gets inputed on your tax return, and you are done. However your last point - tends to be very true - unless you really know what you're doing, buying and holding is the way to go.
  - exelius 12y ago
    Even if you do know what you're doing, it's still not a good idea. You're not likely to be successful without the resources of a large firm backing you up. Every arbitrage opportunity you can recognize will be completely priced in to the asset in the time it takes you to click "buy". Of course, anyone who know what they're doing knows this. Buy and hold is literally the only plausible strategy for an individual investor. If you want to invest with a specific trading strategy, find a fund that employs that strategy and buy that fund. I guarantee you that your trading strategy is not novel; if it works, someone has already done it.
    - vasilipupkin 12y ago
      well, you can buy an index fund tracking ETF such as SPY or QQQ or any of the other ones and the trades would be free as opposed to through a normal brokerage. Using this doesn't equate automatically with day trading.
      - kasey_junk 12y ago
        It won't be free. There is always execution cost. One form that is mentioned in the article is the 3 days of float they are collecting on all of their client accounts. Now whether the execution costs on robinhood are greater or lesser than other platforms is up in the air. But it won't be free.
        vasilipupkin 12y ago
        right. Well, they won't charge you a brokerage fee, at least
      - exelius 12y ago
        Right, but it's still a buy and hold strategy. People hear "free trades!" and the assumption is that it's a day trading platform, because $7 to execute a $5000 trade (which is roughly what a normal online brokerage charges) isn't an insane fee if you're pursuing a buy and hold strategy.
  - lutusp 12y ago
    > unless you really know what you're doing, buying and holding is the way to go. The Wall Street Journal dartboard contest, which ran for several years, shows that, statistically speaking, even if you do think you know what you're doing, a buy & hold index fund is still a better choice than an active portfolio. http://www.investorhome.com/darts.htm http://www.investorhome.com/darts.htm Quote: "The pros barely edged the DJIA by a margin of 51 to 49 contests. In other words, simply investing passively in the Dow, an investor would have beaten the picks of the pros in roughly half the contests (that is, without even considering transactions costs or taxes for taxable investors)."
    - deleted 12y ago
      [deleted]
  - ryandrake 12y ago
    The brokerage won't necessarily do it all for you. Back when I used to gamble on the stock market, my broker would annoyingly only list sales in the document, and it was up to me to comb through my records for each trade's cost basis. Would be a total pain if I was making 10+ tiny trades a day.
    - maxerickson 12y ago
      There was a rule change. See all the stuff about covered securities here: http://www.irs.gov/instructions/i1099b/ar02.html http://www.irs.gov/instructions/i1099b/ar02.html edit: Expanding a bit: brokers are required to track and report the cost basis of most securities purchased after 2010.
  - WalterBright 12y ago
    Hah, I get those "tax documents" every year from the broker. They are frankly rather useless. I have to go back to the trade confirms to get the correct info. (For example, Etrade "forgets" what I paid for stocks and when I bought them after a few years, even if I bought them through Etrade.)
- lutusp 12y ago
  > The more pragmatic (and ultimately more successful) way to trade is to buy and hold - and hold, and hold, and hold. Good for you for posting this truth about investing. It's something that brokerage houses wish people wouldn't find out. Warren Buffet has recently revealed his estate plans for his inheritors after his passing: He has set them all up with index funds. More here: http://arachnoid.com/equities_myths http://arachnoid.com/equities_myths
  - deleted 12y ago
    [deleted]
- fleitz 12y ago
  Yeah, just like waiters diligently record their tips. The IRS isn't going to be beating down anyone's door for $100 in unclaimed cap gains.
- jcdavis 12y ago
  I completely agree with buy + hold vs day trading, but I think you are totally off basis with the tax documentation concerns. Robinhood will surely be issuing people nicely-formatting 1099s and there is no reason to assume you can't do the filings yourself - turbotax already has nice importers from all the big brokerages so you don't even need to enter data yourself. Long gone are the days of having to manually keep track of any purchase dates and cost basises
junto 12y ago
Beats TD Waterhouse that used to charge me £17.50 per trade!
- lingben 12y ago
  before you can assert that you have to calculate how much worse your fill rate will be due to the selling of your order flow smart traders know that fills are what counts. great brokers can get consistently better fill rates while terrible brokers will not only charge you a commission and get you bad fills or in this case, not even try to get that for you because their business model is based on it
  - yummyfajitas 12y ago
    Your fill rate cannot be worse. The mechanics: 1) Place a trade. 2) Trade goes to internal dark pool. Maybe someone who paid for order flow fills it, maybe not. 3) In the absence of a fill on the internal dark pool, the trade is routed to the markets at large. The only difference is who your anonymized counterparty is.
    - kasey_junk 12y ago
      "Your fill rate cannot be worse" I don't think that is true, conceptually. Lets say that by going to the dark pool and being processed through to the exchange you lose priority on your order. Then your fill rate could be worse. Not that I think this is a reason to chose to use robinhood or not.
      - yummyfajitas 12y ago
        Oh, you mean because of the added latency on the dark pool check? As I understand the mechanics of these, it's as follows: 1) Place an order. 2) Broker checks the darkpool - if a match is found, trade internally. 3) Route to the public market. Step 2 can add latency, reducing your fill rate. So can playing music on youtube while doing step 1 probably adds more latency. And the latency in both cases is vastly lower than the latency you get from trading over 3g (robinhood is a mobile app, which to me seems moronic).
mikkom 12y ago
So if I understand this correctly, they assume they are going to make profit purely based on rebates? I don't think this kind of business model has been tested yet so this is quite interesting.
- falsestprophet 12y ago
  They are going to sell their uninformed customer's order flow to market makers (edit: I assume) and internalize trades. That's a circuitous way to mark up the prices their customers are paying for securities. It is structurally different from but conceptually similar to the mark up you pay when you exchange currency. No free lunches, as they say. edit: See http://en.wikipedia.org/wiki/Payment_for_order_flow http://en.wikipedia.org/wiki/Payment_for_order_flow and http://www.sec.gov/answers/payordf.htm http://www.sec.gov/answers/payordf.htm
  - kasey_junk 12y ago
    I'm reasonably certain there is a legal requirement to disclose this to their customers. Has this disclosure happened or are you just assuming they are selling order flow (it was the first thing I assumed when I saw their original business plan). I don't know how they are going to make money any other way, but their vague handwaving about it sure is suspicious. If they are going to make most of their money from rebates are they going to prevent people from taking liquidity? [edit] chollida1 confirms that they are selling order flow: https://news.ycombinator.com/item?id=8358217 https://news.ycombinator.com/item?id=8358217
  - fleitz 12y ago
    Yup, in the market, you're either screwing the other guy, or you're the one getting screwed. This app is like throwing buckets of chum in the water. I bet the market is salivating for the day people start making protest sales based on whatever the rage is on Twitter. I can just imagine it now, a week after some viral video knocking a company, they find out it was orchestrated by some Wall St types to make their quarterlies. A 'no fee' app called Robinhood, something tells me it's not the banks that are getting robbed. Can't wait til they open this up to pink sheets.
  - deleted 12y ago
kolev 12y ago
Nice... but where's my invite? :)
rdl 12y ago
This is one company where all they need to do is add Bitcoin support and I'll put up with any problems trusting a startup with money. (Next on their roadmap I'd hope would be handling retirement accounts; I generally trade within my Roth IRA because it's tax-immune)
falsestprophet 12y ago
This democratizes the stock market like online casinos democratize gambling. Fees are the least of the layperson's problems in the stock market or a casino.
- apostate 12y ago
  Are you suggesting that it is a bad idea for laypeople to participate equity markets?
  - timtamboy63 12y ago
    It's bad because the majority of people who invest their own money invest without enough information about the company. Finance is almost deliberately obfuscated to keep retail investors out, and unless you have the time and the knowledge, it's going to be difficult to make decent returns unless you're investing in mutual funds, ETF's, etc. Disclaimer - founder of http://capp.io http://capp.io and this is basically what we found in our market research.
    - Guvante 12y ago
      > Finance is almost deliberately obfuscated to keep retail investors out Is it retail investors they are worried about, or is it expecting that the market won't undo any trickery?
      - timtamboy63 12y ago
        No idea. I think investing is advanced enough that you typically need somewhat complex jargon and data to actually make money - over time it's basically become an old boys club and no-one's really trying to make it accessible to regular investor.
    - apostate 12y ago
      Your use of disclaimers shows that you are well versed in compliance matters when it comes to dispensing investment advice ;)
Sommer 12y ago
I seem to recall their original model being around paid developer access to the platform. That is fairly intriguing as the ability to create value-added tools/techs and partner with any other discount brokerage is very difficult. Seems like a large enough user base would enable an app-marketplace where many of the quant/social-stream/chatter-arbitrage tools that currently [try to] sell direct to investors could have a chance at more distribution. Couple this with something like Quantopian ... profit!
- kasey_junk 12y ago
  Except in the mean time they are eating all the exchange fees.
BillFranklin 12y ago
Making investment decisions from your iPhone is pretty silly. Building an app exactly for this purpose is damn dangerous. They also say +80% of their early adopters are under 30. I wonder how many are underage?
- grimtrigger 12y ago
  How about this scenario: you're sitting at lunch when you hear on the news that Apple is issuing a recall because the iPhone 6 sometimes catches on fire. At that moment you'd be saying "damn, I wish I an app where I could short apple ASAP".
  - pktgen 12y ago
    I would think the professional/algorithmic traders would have done that the millisecond the news came out. By the time you're hearing about it at lunch, it would be too late.
    - grimtrigger 12y ago
      Too late to save all your money, but unless its at the bottom you still have something to save.
- GrinningFool 12y ago
  Well, reading the TC article, we come away with: "Ditching fees has led to 80 percent of beta users being under the age of 30." And " Engagement looks promising. Fifty percent of customers who’ve made a trade come back every day, and 90% come back every week." But both of these are rendered meaningless by: "Robinhood is still in friends and family private beta" That aside, if "coming back" means making additional trades... that lends support to the idea that that this kind of super-simplified trading encourages hasty trades that aren't thought out. And of course, that's the choice of people making those trades - but it seems to me that it's going to lead to some bad publicity for robinhood not too far down the road.
slykat 12y ago
While I applaud them for reducing fees, I don't think key problem facing retail investors in America is $7-$10 trading commissions from brokerages. If you think that a $7-$10 trade commission is significant barrier to investing, you are not thinking about investing correctly. The key problem I see with the investing world is that 1) most Americans lack a basic understanding of how financial instruments works 2) the media & investing culture encourages a speculative investing mindset that makes most people act like gamblers rather than rational thinkers 3) the incentives are misaligned - financial institutions are not incentivized or built to encourage people to invest smartly. None of these problems are solved from zero trading commission structure. To be honest, this seems like a feature that day & algorithmic traders would care about rather than a normal investor. You could even argue that zero commission trades will exacerbate the issue by pushing the investing mindset to be even more short term focused; this mindset is what causes most investors to lose performance. This seems more like a clever PR angle for Robinhood ("we are helping real Americans") rather than something impactful. I doubt their aim & monetization strategy is geared towards the everyday investor.
valdiorn 12y ago
okay, so who pays for the exchange access?? Because NYSE haven't been known to let people connect and get their data for free, ya know?

68 points by juanplusjuan 12y ago

For anyone wanting to go to town with this, don't forget the IRS. All your trades need to be tracked and reported on your income tax forms so the IRS gets their cut. If you're doing lots of small trades under $100, what you wind up paying your tax preparer to add up the nickels and dimes will overwhelm the value of the trades. Of course, part of this app must be automation of preparing the tax paperwork and liability. The more pragmatic (and ultimately more successful) way to trade is to buy and hold - and hold, and hold, and hold. Statistically, dead people are more successful investors because they don't actively trade. http://www.businessinsider.com/forgetful-investors-performed-best-2014-9 http://www.businessinsider.com/forgetful-investors-performed...

nmjohn 12y ago
That's not 100% accurate - rather how you make it sound like it works isn't quite right. Yes, all your trades are tracked and you will pay taxes on short term gains and can offset tax liabilities with losses. But that isn't something you - or your accountant does - your brokerage firm (any of them) will issue you a tax document (I can't think of the name at the moment) which summarizes everything for you - it gets inputed on your tax return, and you are done. However your last point - tends to be very true - unless you really know what you're doing, buying and holding is the way to go.
- exelius 12y ago
  Even if you do know what you're doing, it's still not a good idea. You're not likely to be successful without the resources of a large firm backing you up. Every arbitrage opportunity you can recognize will be completely priced in to the asset in the time it takes you to click "buy". Of course, anyone who know what they're doing knows this. Buy and hold is literally the only plausible strategy for an individual investor. If you want to invest with a specific trading strategy, find a fund that employs that strategy and buy that fund. I guarantee you that your trading strategy is not novel; if it works, someone has already done it.
  - vasilipupkin 12y ago
    well, you can buy an index fund tracking ETF such as SPY or QQQ or any of the other ones and the trades would be free as opposed to through a normal brokerage. Using this doesn't equate automatically with day trading.
    - kasey_junk 12y ago
      It won't be free. There is always execution cost. One form that is mentioned in the article is the 3 days of float they are collecting on all of their client accounts. Now whether the execution costs on robinhood are greater or lesser than other platforms is up in the air. But it won't be free.
      - vasilipupkin 12y ago
        right. Well, they won't charge you a brokerage fee, at least
    - exelius 12y ago
      Right, but it's still a buy and hold strategy. People hear "free trades!" and the assumption is that it's a day trading platform, because $7 to execute a $5000 trade (which is roughly what a normal online brokerage charges) isn't an insane fee if you're pursuing a buy and hold strategy.
- lutusp 12y ago
  > unless you really know what you're doing, buying and holding is the way to go. The Wall Street Journal dartboard contest, which ran for several years, shows that, statistically speaking, even if you do think you know what you're doing, a buy & hold index fund is still a better choice than an active portfolio. http://www.investorhome.com/darts.htm http://www.investorhome.com/darts.htm Quote: "The pros barely edged the DJIA by a margin of 51 to 49 contests. In other words, simply investing passively in the Dow, an investor would have beaten the picks of the pros in roughly half the contests (that is, without even considering transactions costs or taxes for taxable investors)."
  - deleted 12y ago
    [deleted]
- ryandrake 12y ago
  The brokerage won't necessarily do it all for you. Back when I used to gamble on the stock market, my broker would annoyingly only list sales in the document, and it was up to me to comb through my records for each trade's cost basis. Would be a total pain if I was making 10+ tiny trades a day.
  - maxerickson 12y ago
    There was a rule change. See all the stuff about covered securities here: http://www.irs.gov/instructions/i1099b/ar02.html http://www.irs.gov/instructions/i1099b/ar02.html edit: Expanding a bit: brokers are required to track and report the cost basis of most securities purchased after 2010.
- WalterBright 12y ago
  Hah, I get those "tax documents" every year from the broker. They are frankly rather useless. I have to go back to the trade confirms to get the correct info. (For example, Etrade "forgets" what I paid for stocks and when I bought them after a few years, even if I bought them through Etrade.)
lutusp 12y ago
> The more pragmatic (and ultimately more successful) way to trade is to buy and hold - and hold, and hold, and hold. Good for you for posting this truth about investing. It's something that brokerage houses wish people wouldn't find out. Warren Buffet has recently revealed his estate plans for his inheritors after his passing: He has set them all up with index funds. More here: http://arachnoid.com/equities_myths http://arachnoid.com/equities_myths
- deleted 12y ago
  [deleted]
fleitz 12y ago
Yeah, just like waiters diligently record their tips. The IRS isn't going to be beating down anyone's door for $100 in unclaimed cap gains.
jcdavis 12y ago
I completely agree with buy + hold vs day trading, but I think you are totally off basis with the tax documentation concerns. Robinhood will surely be issuing people nicely-formatting 1099s and there is no reason to assume you can't do the filings yourself - turbotax already has nice importers from all the big brokerages so you don't even need to enter data yourself. Long gone are the days of having to manually keep track of any purchase dates and cost basises

junto 12y ago

Beats TD Waterhouse that used to charge me £17.50 per trade!

lingben 12y ago
before you can assert that you have to calculate how much worse your fill rate will be due to the selling of your order flow smart traders know that fills are what counts. great brokers can get consistently better fill rates while terrible brokers will not only charge you a commission and get you bad fills or in this case, not even try to get that for you because their business model is based on it
- yummyfajitas 12y ago
  Your fill rate cannot be worse. The mechanics: 1) Place a trade. 2) Trade goes to internal dark pool. Maybe someone who paid for order flow fills it, maybe not. 3) In the absence of a fill on the internal dark pool, the trade is routed to the markets at large. The only difference is who your anonymized counterparty is.
  - kasey_junk 12y ago
    "Your fill rate cannot be worse" I don't think that is true, conceptually. Lets say that by going to the dark pool and being processed through to the exchange you lose priority on your order. Then your fill rate could be worse. Not that I think this is a reason to chose to use robinhood or not.
    - yummyfajitas 12y ago
      Oh, you mean because of the added latency on the dark pool check? As I understand the mechanics of these, it's as follows: 1) Place an order. 2) Broker checks the darkpool - if a match is found, trade internally. 3) Route to the public market. Step 2 can add latency, reducing your fill rate. So can playing music on youtube while doing step 1 probably adds more latency. And the latency in both cases is vastly lower than the latency you get from trading over 3g (robinhood is a mobile app, which to me seems moronic).

mikkom 12y ago

So if I understand this correctly, they assume they are going to make profit purely based on rebates? I don't think this kind of business model has been tested yet so this is quite interesting.

falsestprophet 12y ago
They are going to sell their uninformed customer's order flow to market makers (edit: I assume) and internalize trades. That's a circuitous way to mark up the prices their customers are paying for securities. It is structurally different from but conceptually similar to the mark up you pay when you exchange currency. No free lunches, as they say. edit: See http://en.wikipedia.org/wiki/Payment_for_order_flow http://en.wikipedia.org/wiki/Payment_for_order_flow and http://www.sec.gov/answers/payordf.htm http://www.sec.gov/answers/payordf.htm
- kasey_junk 12y ago
  I'm reasonably certain there is a legal requirement to disclose this to their customers. Has this disclosure happened or are you just assuming they are selling order flow (it was the first thing I assumed when I saw their original business plan). I don't know how they are going to make money any other way, but their vague handwaving about it sure is suspicious. If they are going to make most of their money from rebates are they going to prevent people from taking liquidity? [edit] chollida1 confirms that they are selling order flow: https://news.ycombinator.com/item?id=8358217 https://news.ycombinator.com/item?id=8358217
- fleitz 12y ago
  Yup, in the market, you're either screwing the other guy, or you're the one getting screwed. This app is like throwing buckets of chum in the water. I bet the market is salivating for the day people start making protest sales based on whatever the rage is on Twitter. I can just imagine it now, a week after some viral video knocking a company, they find out it was orchestrated by some Wall St types to make their quarterlies. A 'no fee' app called Robinhood, something tells me it's not the banks that are getting robbed. Can't wait til they open this up to pink sheets.
- deleted 12y ago

kolev 12y ago

Nice... but where's my invite? :)

rdl 12y ago

This is one company where all they need to do is add Bitcoin support and I'll put up with any problems trusting a startup with money. (Next on their roadmap I'd hope would be handling retirement accounts; I generally trade within my Roth IRA because it's tax-immune)

falsestprophet 12y ago

This democratizes the stock market like online casinos democratize gambling. Fees are the least of the layperson's problems in the stock market or a casino.

apostate 12y ago
Are you suggesting that it is a bad idea for laypeople to participate equity markets?
- timtamboy63 12y ago
  It's bad because the majority of people who invest their own money invest without enough information about the company. Finance is almost deliberately obfuscated to keep retail investors out, and unless you have the time and the knowledge, it's going to be difficult to make decent returns unless you're investing in mutual funds, ETF's, etc. Disclaimer - founder of http://capp.io http://capp.io and this is basically what we found in our market research.
  - Guvante 12y ago
    > Finance is almost deliberately obfuscated to keep retail investors out Is it retail investors they are worried about, or is it expecting that the market won't undo any trickery?
    - timtamboy63 12y ago
      No idea. I think investing is advanced enough that you typically need somewhat complex jargon and data to actually make money - over time it's basically become an old boys club and no-one's really trying to make it accessible to regular investor.
  - apostate 12y ago
    Your use of disclaimers shows that you are well versed in compliance matters when it comes to dispensing investment advice ;)

Sommer 12y ago

I seem to recall their original model being around paid developer access to the platform. That is fairly intriguing as the ability to create value-added tools/techs and partner with any other discount brokerage is very difficult. Seems like a large enough user base would enable an app-marketplace where many of the quant/social-stream/chatter-arbitrage tools that currently [try to] sell direct to investors could have a chance at more distribution. Couple this with something like Quantopian ... profit!

kasey_junk 12y ago
Except in the mean time they are eating all the exchange fees.

BillFranklin 12y ago

Making investment decisions from your iPhone is pretty silly. Building an app exactly for this purpose is damn dangerous. They also say +80% of their early adopters are under 30. I wonder how many are underage?

grimtrigger 12y ago
How about this scenario: you're sitting at lunch when you hear on the news that Apple is issuing a recall because the iPhone 6 sometimes catches on fire. At that moment you'd be saying "damn, I wish I an app where I could short apple ASAP".
- pktgen 12y ago
  I would think the professional/algorithmic traders would have done that the millisecond the news came out. By the time you're hearing about it at lunch, it would be too late.
  - grimtrigger 12y ago
    Too late to save all your money, but unless its at the bottom you still have something to save.
GrinningFool 12y ago
Well, reading the TC article, we come away with: "Ditching fees has led to 80 percent of beta users being under the age of 30." And " Engagement looks promising. Fifty percent of customers who’ve made a trade come back every day, and 90% come back every week." But both of these are rendered meaningless by: "Robinhood is still in friends and family private beta" That aside, if "coming back" means making additional trades... that lends support to the idea that that this kind of super-simplified trading encourages hasty trades that aren't thought out. And of course, that's the choice of people making those trades - but it seems to me that it's going to lead to some bad publicity for robinhood not too far down the road.

slykat 12y ago

While I applaud them for reducing fees, I don't think key problem facing retail investors in America is $7-$10 trading commissions from brokerages. If you think that a $7-$10 trade commission is significant barrier to investing, you are not thinking about investing correctly. The key problem I see with the investing world is that 1) most Americans lack a basic understanding of how financial instruments works 2) the media & investing culture encourages a speculative investing mindset that makes most people act like gamblers rather than rational thinkers 3) the incentives are misaligned - financial institutions are not incentivized or built to encourage people to invest smartly. None of these problems are solved from zero trading commission structure. To be honest, this seems like a feature that day & algorithmic traders would care about rather than a normal investor. You could even argue that zero commission trades will exacerbate the issue by pushing the investing mindset to be even more short term focused; this mindset is what causes most investors to lose performance. This seems more like a clever PR angle for Robinhood ("we are helping real Americans") rather than something impactful. I doubt their aim & monetization strategy is geared towards the everyday investor.

valdiorn 12y ago

okay, so who pays for the exchange access?? Because NYSE haven't been known to let people connect and get their data for free, ya know?