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.
This isn't a good comparison. Casinos are incentivized to have you fail/lose (but enjoy the process).
Pay-per-trade brokers are incentivized to have you trade frequently and/or buy certain securities. RobinHood doesn't actually profit from each trade, so it could be argued that they have are likelier to care about the retail investor's long-term success (providing automated tools for monthly investments in low-fee funds, etc).
Regardless, let's give some love to the fact that people are accountable for their actions and the vast amount non-bad information on the internet. A beginning retail investor is one search away from a strategy that is a metric ton better than not investing at all (which is what most of them do): https://www.google.com/webhp?sourceid=chrome-instant&rlz=1C5...
If RobinHood causes some people to piss away their savings on crazy-risky investments, it's not because those people didn't have access to decent investment advice.
Do you have a link for that? From their FAQ, here's their (admittedly not super clear) answer to "How does Robin Hood Make Money?":
Robinhood will offer margin trading as well as API access, which will allow partnered developers to build applications in conjunction with Robinhood. Robinhood will also receive remuneration for providing trade volume in certain markets. In the future, we plan to offer premium services for active investors.
"Robinhood will offer margin trading as well as API access, which will allow partnered developers to build applications in conjunction with Robinhood. Robinhood will also receive remuneration for providing trade volume in certain markets. In the future, we plan to offer premium services for active investors.
Robinhood is venture-funded by Google, Andreessen Horowitz and many others, which affords us the freedom to focus on building a wonderful brokerage experience rather than short-term profits.
I've never worked on an order flow based trade but the ways that seem most obvious to me are:
1) decreased fees with the exchanges due to higher rebate levels.
2) updated knowledge of the depth and nature of price levels making pricing algorithms more intelligent.
3) capturing the spreads on market orders.
Precisely. As a small, personal investor the last thing you is to make frequent trades thinking that you can beat the market- unless it is your toy money.
Wealthfront and others are making the stock market better for individual investors, retirement savers, and so on. This to the contrary appears like stressing the gambling aspect of it.
I would love to be wrong, but it is hard to see how this will make markets better and not lose people a lot of money. (Provided they don't 'pivot' in the future.)
Frequent low dollar trades != risky day trading of penny stocks. It very well could mean an automated $50/week in low-fee mutual funds. Or talking half of your lawn mowing money and putting it into a college account and investing intelligently with it.
The last thing these guys want is tons of articles saying, "I lost my life savings on Robinhood". Why wouldn't they do their best to give their customers access to smart context-specific investment advice?
The reason the stock market is generally referred to as "investing" instead of "gambling" is because the expected return is positive instead of negative. While I would not recommend randomly investing, it's not such a terrible thing.
I wouldn't rule out the possibility of the market crashing. I would rule out the possibility of us being near any kind of fundamental maximum amount of value in the economy.
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 and this is basically what we found in our market research.
Depends on the size of the company, IME. Small to mid-caps can be very transparent. To add extra protection, buy at the lower end of the market cycle or when the sector of the stock is out of favor.
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.
I'm sure falseprophet's response would be something along the lines of "index funds bla bla bla professional investors bla bla bla efficient market hypothesis bla bla bla" which isn't necessarily wrong (I agree with this line of thinking myself, mostly) The problem is when people complain about new opportunities for average folk and use an argument that amounts to "we need to protect dumb people from themselves" which is too simplistic an answer for complicated problems, in my view.
Often, people end up being smarter than you think, when given the opportunity (not that I'm endorsing Robinhood... I'd be very cautious about using them, based on first impressions)
If we stopped protecting dumb banks from themselves and everyone else, we wouldn't need to worry so much about protecting dumb people from themselves.
As for efficient markets - I'm still trying to understand how social institutions that melt down every decade or so and are a consistent focus of criminal proceedings can be considered 'efficient.'
We are probably in the same camp; I just wasn't sure if GP was comparing casinos with 'stock trading' or the equity asset class in general, which, if one subscribes to the 'boring' methods of index fund investing, are hard to beat over a 5+ year time window.
I would hope ETFs are available on this platform, since they trade like stocks.
He's probably suggesting that it's risky, because it is. Laypeople should know what they're getting into. I've had the opportunity to invest a sizable chunk of change into the US equity market twice in my life: once in 1999, and again in 2006. I lost my shirt both times. The stock market is not for everyone. It is not always a magical money-increasing machine, although it might "statistically" and "historically" produce positive returns over a long enough term.
If "laypeople" just means "not financial industry insiders", then no, it's not necessarily bad.
If "laypeople" means "people who haven't bothered to spend any time at all learning how the market works (or at least, how it's supposed to work)", then yes, it's a very bad idea. For those people, the market may end up being functionally equivalent to a casino, but without the free drinks.
I think if an ignorant person wishes to trade stocks, the lack of a platform like this won't stop them. Retail brokers like Etrade and Scottrade got the pennystock crowds long ago.
Mentioned in another reply, I would hope ETFs are available on a platform like this, since they trade like stocks. Hopefully that would allow more people to put small amounts of savings into index funds. That being said, Robinhood wouldn't be very innovative on that front, since many brokers offer the more popular index-based ETFs without fees anyway.
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.
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.
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.
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?
I read the introduction of the wiki article, but I'm still at a lost.. the third party pays back the broker because it "wants to influence how the broker routes client orders" what? so if I were the broker I would deny or allow my customers transactions based on a third party?
I'm sure is not like this and the broker won't deny any transaction if I were the broker I would just get a commission on some transactions by third parties but I don't see what I could change in order to get a greater commission.
The third party doesn't pay back the broker, they flat out pay them a fee to send transactions through their systems. The broker doesn't allow or deny any transactions, just in the absence of contradictory routing instructions they send their default orders through the third party.
The customer is usually none the wiser as they are being charged the same fee from their broker typically regardless of the routing. The only way a customer would know is if the broker discloses it to them. In the US equities markets that disclosure is a legal requirement.
ohh I get it! Basically there's a market of third party companies and the broker has the liberty to choose to who give all its "traffic"/transactions, but the broker is choosing the company based on the fee it gets instead of other factors (which I'm sure there are many) in this case the choice might not be the best for the customers just to the broker.
...mark up the prices their customers are paying for securities.
Are you suggesting the customer's orders will not be filled at the NBBO? Or something else? Can you state explicitly (i.e., describe the timeline) of what you think is happening?
There is a quantifiable value to retail order flow [1], which is realized either by selling the order flow or internalizing trades (or by other means unfamiliar to me).
...mark up the prices their customers are paying for securities.
It would have been much more accurate to say that the broker is benefiting from part of the spread. Of course, one expects a service provider to benefit from providing a service.
This is also true of exchanging currencies and everything else in the capitalist circle of life -- so it was very possibly not a useful comment.
[1] What is the opposite of adverse selection? Advantageous selection?
The broker is benefiting - in the case of Robinhood he is sharing that benefit with the customer.
The customer will get the exact same price as if his order went to the public exchanges. The only difference is that instead of selling to anonymous person on BATS, he'll sell to anonymous HFT on the broker's internal dark pool.
> 1 Apex receives payment from Knight Capital Americas LLC. (Knight) for directing order flow. Payment varies based upon
a number of factors including but not limited to: Size of the order, time of order placement, whether an order is
marketable at the time of order entry, the underlying price of the security and any special handling instructions.
Payments received from Knight averaged less than $0.0025 per share for the period 2Q2014.
> 2 Apex receives payment from LavaFlow ECN for orders that add liquidity to LavaFlow and are subsequently executed. The
rate for adding liquidity to LavaFlow was $0.0032 per share. APEX is charged for removing liquidity from LavaFlow The
rate for removing liquidity from LavaFlow was up to $0.0035 per share.
> 3 Apex receives payment from Credit Suisse for directing order flow to Credit Suisse. Payment varies based upon a
number of factors including but not limited to: Size of the order, time of order placement, whether an order is marketable
at the time of order entry, the underlying price of the security and any special handling instructions. Payments received
from Credit Suisse averaged less than $0.0025 per share for the period 2Q2014.
Holy shit, their order flow is 70% market orders? That cant' be right. Funds must be throwing money at these guys to buy their flow.
I don't want to sound like Jim Cramer but people please don't use market orders!!!!
It happens alot, and since these guys came from the industry it wouldn't be a large logical jump to conclude they are taking money from a fund that wants to trade against their uninformed flow they generate.
Its scummy if true, but it happens. If you aren't a hedge fund then your trades are being sold:) Heck half the time if you are a fund your flow is also being sold:)
Alternatively they have some sketchy fees which you can see here:
No fee to transfer money into them but a fee to get your money out is a big red flag. Hello Hotel California!
EDIT to explain scummy, its because it allows the big funds to "jump the queue" if you will. Scummy may have been a poor choice of words.
Rather than having to be active in the market with a quote on the NBBO, this allows the big funds to look at each order and say, pass, pass , take, pass, take, etc.
If there is money in filling the order they will, if not they will pass it onto the market where it will either sit or get filed by those who actually participate in the market.
Why is it "scummy"? They are obligated to fill your orders at the NBBO. Your fills happen at the same price as if they routed you directly to the exchange.
I'm not seeing the retail investor with their zero-commission trades at the NBBO suffering here, but isn't the routing (and other paid-for-routings) marginally reducing liquidity for other participants in the market?
Most retail investors will be taking liquidity, not providing it. However, the market makers buying order flow are indeed gaining an advantage over the others.
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.
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.
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.)
> 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.
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)."
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.
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.
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.
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.
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.
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
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!
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.
"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.
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".
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.
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
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.
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.
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).
Well latency is the easiest scenario to conjure (and I agree with you about it not being an issue).
Another way you could see worse fill rates would be a customer places a limit order that puts them somewhere back in the book. This limit order happens to trigger some threshold for the order flow trading algorithm that causes it to back off of it's own orders (lets say it cancels some orders on the back of the other side of the book). This in turn causes a price shift that moves away from the customers limit order making it fill later.
Clearly we are in the realm of pure speculation and probably not something that is important to the customers of robinhood. I was just pointing out that conceptually, by selling their order flow, robinhood could impact fill rates.
My guess is that this is more than offset by the lack of fees.
