Robinhood stock trading app confirms $110M raise at $1.3B valuation
techcrunch.com
techcrunch.com
Wow, so that's effectively opening up new easy to get credit vehicles for unsophisticated investors. How could that go wrong?
Even if you are a professional trader you'll take a bath on margin over the long run. They are incentivizing what is effectively borrowing for gambling and that is their long term revenue strategy? Might be a great money maker but it certainly is playing with some really big barrels of fire.
"Three things ruin people: drugs, liquor, and leverage - Charlie Munger"
edit: The point here is not that Margin is a new service, yes every brokerage has it, it's that it is irresponsible to use Margin if you are not a sophisticated investor. Its even more irresponsible to push leverage onto unsophisticated investors.
Not everyone is going to understand the risks of leverage and if Robinhood makes it as easy as candy crush to trade on leverage, enough gamified users are "playing" stock market with real money and a margin call happens during a huge downturn, it will be exceptionally nasty.
From the casino POV.. why limit their wins to what is in your pocket? Limit their win to what is in your pocket + what the risk model predicts they can make you pay back over time.
When they lend you money, they know exactly how much of that will go back to their hands soon (and they have a ton of cash flow to cover).
Robinhood is effectively lending money with little guarantee to take anything back and no source of income.
They do receive payments for order flow.
If you don't pay back your margin they'll come after you like any other debt collector. There's nothing special about it.
The actual risk to the broker is minimal -- they just have to make sure to trigger the sale at a point where the value of all of your holdings (not just what you purchased on margin) is still greater than what you owe them.
i have not looked into robinhood's margin offering, so maybe it's very different, but in my other brokerage accounts, margin works something like this:
i buy $10k of SPY. after the trade closes, the broker says "ok, you own $10k of SPY, and that's good for another $5k of margin." so then i can go buy another $5k of whatever i want. i pay 9% interest or so on that $5k. if SPY drops in value "enough", the broker can on a moment's notice, sell as much of the SPY as they want to cover my debts.
so... they've got a great guarantee they can take it all back.
And what of the case where the value of your SPY position falls below your $5k+interest debt to them?
Edit: derp. A margin call would cover this.
That's completely false. Casinos are huge money lenders.
Pretty common.
So for example, if I was using an 100k account to trade, I had another 100k of leverage no?
I note that Etrade at least implements it less as "margin approval" and more as "advanced mode"; to do any sort of options trades, even the ones that don't require margin themselves, requires you to activate the "margin feature" on your account.
It also is not a straight 1:1 ratio. You generally can't go absolutely nuclear with leverage unless you have portfolio margin. Typically, brokerages will require collateral in the account equal to the risk (for defined risk strategies) and you will need a higher trading clearance on your account for unlimited risk.
Your buying power is a function of how long the trade will be held as well as the risk profile.
The problem with margin trading as a retail investor is that they interest rate on the loan is ridiculous, between 6-9%. Making it almost worthless.
But hey, at least we're making debt available to more people.
I agree with the quote.
But sometimes I want to take a bit of money to make some stupid bet. Yes, to gamble. And for that purpose, often having the leverage is a good thing.
The way I see it, the bets are much more entertaining than those at casinos and with better odds. Maybe it's just me, but I find casinos incredibly boring, but gambling on the market can be quite interesting.
So I'm willing to bet you view this app very differently than someone who finds it on the App Store in a spur of the moment enticed-by-Wall-Street feeling, where it can be mistakenly thought as a get-rich-quick scheme. There's no education component to Robinhood
(This conflation between speculator/investor has been happening for a while, see "The Intelligent Investor" by Benjamin Graham.)
https://support.robinhood.com/hc/en-us/articles/213262686-Ro...
Note that I am a robinhood user and do not use gold or any margin investing. I use it for speculation for long term stuff and have the rest in boring index ETFs / funds primarily. I think the entire idea of investing on margin as playing with fire when you lack fireproof gloves.
I don't think you can be a consistent good stock picker, HOWEVER, there are certain companies you just know will do well because they're closely aligned to the industry you work in, for example. "Doubling down" using margin (borrowed at 1-2% per year, not 8-10%) can (maybe, sometimes, not always) be a good strategy.
But I'm not sure where to go to find information about the returns.
> John C. (Jack) Bogle, after whom the Bogleheads® are named, is founder of the Vanguard Group and creator of the world's first retail index mutual fund.
Depending on the index you track, it can fall 80%. Consider the Asia ETFs in 2008, brutal.
Huh? It would be difficult to find a professional trader that doesn't trade equities on margin. They pretty much have to due to the way the settlement process works.
The returns of a professional trader depend on many factors, including available capital and the capacity or manner in which the trader operates. That said, they're enough that the employment of margin and the leverage it affords is simply mundane and considered a cost of doing business.
In theory, sure. But most do not "far exceed 5%", and instead have the fees of their employing funds to subsidize their strategies.
For traders who are working independently, or in prop shops, I suppose it might be true by definition (if they last in the market they are either re-upping and gambling, or at least profitable). But that's still not the rule.
More importantly, retail investors are not professionals, and Robinhood is basically catering to /r/wallstreetbets with this sort of product offered to them.
I agree with this and never asserted anything to the contrary. The scope of my reply was addressing a single point concerning margin in context of professional traders.
Also, the statment that most returns "far exceed 5%" probably wasn't the best choice of words. I've edited my original post accordingly.
Uh, IB is not a professionally-focused brokerage. It's the most professional retail brokerage though.
On what basis are you calling it most expensive though? It's much cheaper than any other brokerage I know when you look at fees holistically.
It's sort of in the middle. They have plenty of retail customers for sure, but they also have hedge fund and proprietary trader accounts. I doubt you would find a single hedge fund among Etrade customers.
> On what basis are you calling it most expensive though? It's much cheaper than any other brokerage I know when you look at fees holistically.
It's much cheaper than most retail brokerages. It's more expensive than firms that cater to professionals; for the most part those firms don't put their pricing on their website because they're individually negotiated with each customer. Some example firms: all the big banks, Apex Clearing, eRoom Securities, TJM Institutional Services. For the banks you're probably looking at a minimum $20 million account size just for them to accept you as a customer. The smaller players require $1-$5 million for decent rates, but might accept smaller account sizes.
Ah, I see what you meant now. Yeah, I was just comparing it to most retail brokerages since I see the others (Apex, etc.) as in a different category. IB is something which the average HN user could actually use.
To some extent they want to make Robinhood a game, rather than an investment platform.
As for the investors, the percentage rate is very reasonable; given standard market conditions you'd make good money using robinhood gold and putting it in SPY. It's a pretty smart move to charge for it IMO.
What part of it is hard on eTrade or ThinkOrSwim? It's almost literally the same process.
The only difference is RobinHood is scooping up all of the people who are new to stock trading and the others aren't. Those same people would be offered the same margin on any other platform.
The only difference is that Robinhood is charging a subscription for access to margin whereas other brokerages do it for free.
Atleast in india every broker provides that.
This is the hallmark of modern day capitalism. By issuing loans knowing full well they will never pay back, you can collude with banks to threaten to kill the economy when the government hesitates about cutting them a cheque.
I think Robinhood is doing a great service -- I just wish they would expose a better API.
I was lucky enough to have a father who ran a small business, so I got an early education in these matters. But that's the exception to the rule.
I can see the benefit in making it easier for people to get access to things that are often hidden behind layer of complexity and "need an in", but I can also see the perversity of building a business where your money making system is "put debt on people who don't quite know what they're getting into". The point is not that they allow it, it's that they have a direct incentive to make it happen as much as possible.
If my Robinhood trades of 100 lots or more execute at a few pennies higher than the price when I place the order, I think that is entirely fine. Why? Because it costs 5-10 to trade from Etrade or most other normal brokerage accounts. From what I've seen thusfar (I've got maybe 20k invested with RH), all of the trades have executed at the price I expected them to, or 1 cent higher on very volatile stocks (TSLA in specific). I'm still paying massively less than if I used a traditional broker and RH is making a bit of money by selling my order flow.
Win/win really.
They're not really allowed to do that and I don't think they are doing that. Robinhood (or whatever wholesaler they route your order too) is required to execute your order within the nbbo. They can't just e.g. fill your buy orders a few cents above the national best offer because they want to make some extra money. The regulations don't work that way...
[1] https://en.wikipedia.org/wiki/THOR_(trading_platform)
[2] http://www.nanex.net/aqck2/HowSlowIsTheNBBO_%20A_Comparison_...
I've written a fair bit of code (python) to parse my statements and make sure things true up with what personal capital says. The app thing is annoying, but RH just closed 110M and they'll get more functionality in the future. You're not the first person to ask that and I figure eventually they'll have to open things up or they'll lose customers (like me). Right now, I'm ok with using it for a year or two provided they allow me to continue no-fee trades.
Are the tools actually good? Several low-cost robos (Wealthfront and Betterment) now have fairly good retirement planning interfaces which take your outside accounts into consideration and Mint has investment tracking now as well.
Who said it has no consequences? People make bad decisions with money their all the time. In fact, many of the working class get their fix in real casinos, where there's no real chance of winning, even if you know what you're doing. But the parent argument is going in the direction of "people shouldn't have the freedom to use this type of product." Instead of allowing normal people (some of whom know what they are doing) to freely engage in leveraged -- or just free -- trading, would you rather people with small portfolios get their already modest earning potential chewed away by large trading fees that make short term investing impractical? The difference is that I don't think we should be protecting people from themselves.
No, my comment was in the direction of: "It's bad if your core business is getting unsophisticated people making trades (bets) with credit."
It's the same reason we all know it's a bad idea to give someone a 400k mortgage on an ARM when we don't know if they can pay it back or not. Great way to find yourself in a recession.
I would agree, if there were evidence to support that primarily unsophisticated people are buying premium. However, I doubt this is the case (I'm sure someone will put together numbers on this eventually). I'm a competent trader who avoids leverage, simply because I don't want to pay for a membership (it's not just a loan; you need a gold membership, too, which is an added barrier to entry).
Based on what the stated publicly, it's in Robinhood's interest as a company to push everyone into Margin deals. Their core stated benefit of using Robinhood over other brokers is opening trading up to everyone, through ease and low carry to make it easy.
Ipso Facto that means their goal will be pushing new unsophisticated traders into leveraged deals. That is 100% implicit in this whole thing.
I'm not arguing that there is evidence that "primarily unsophisticated people are buying premium." I'm arguing that this is their plan going forward and it could be really really harmful to markets if they get to the scale they want to.
Best case, Robinhood can cover every margin call themselves, in which case they are effectively doing what Uber does which is unsustainably subsidizing investing on credit.
Worst case, they can't cover margin calls and neither can their users and they roll up.
I'm just waiting for them to allow leveraged shorts...
The gigantic risk to Robin Hood isn't that they'll have problems collecting occasionally. They can make up for that by fiddling with their fees to come ahead in the average case.
It's that some big market move busts everyone at once and they go bankrupt overnight.
Of course, should Robinhood go under, don't expect easy access to your assets, until some other brokerage takes it over.
The problem is when people make a bet that doesn't work out. There are a lot of exotic trades that can clean you out completely in an instant if you bet wrong.
I wonder how Robinhood will handle it when it happens.
From http://www.investopedia.com/terms/m/minimummargin.asp:
"When you buy on margin, there are key levels - as governed by the Federal Reserve Board's Regulation T - that must be maintained throughout the life of a trade. The minimum margin, which states that a broker can't extend any credit to accounts with less than $2,000 in cash (or securities) is the first requirement. Second, an initial margin of 50% is required for a trade to be entered. Third, the maintenance margin says that you must maintain equity of at least 25% or be hit with a margin call."
As a blanket statement? No, we don't. Two reasons why:
1. "Make their own decision" is an extremely inaccurate phrasing. Unsophisticated investors do not have enough information to properly evaluate a decision, and are therefore unduly influenced by companies wanting to take advantage of them.
2. There's a cost to society from people who take risks that have negative expected value and then expect society to help them. Of course, society could just refuse to help them, but find that society works better when certain support structures (e.g., the ability to discharge debts in bankruptcy) exist, and it's very hard to distinguish people who "really" need the support structure and those whose petard is their own. If social pressure or regulation can deter people from taking these risks, that's slightly unfortunate for the person who would have won the gamble, but very advantageous to the health of society as a whole.
Both reasons are also why outright gambling is regulated, why publicly-traded companies are subject to financial regulation, why we don't let people "make their own decisions" about raw milk, untested drugs, aircraft, etc. - there are strong incentives for the people selling you that product to lie to you by omission in the hope of influencing your decision to be profitable to them.
Wow this is an ignorant thing to say in this context.
I think you're missing what the criticism here is.
Let's say you, right now, have $10,000. I say "Hey, lend me that money so I can play the stock market with it." Would you give me the money? You know literally nothing about me. You don't know if I've ever traded a stock before. You don't know if I can ever pay you back. There's a higher than normal probability that I will never pay you that money back.
Robinhood is taking on a lot of risk and using that as proof that they're a profitable company.
Margin positions are typically liquidated when they go negative. At worst, the customer owes Robinhood some leftover slippage after their margin gets called. And typically, margins are called before your account goes negative.
Isn't a credit check required to open an account?
If your trade starts going bad they'll be aggressively unwound. They're a very well-understood model offered by tons of (profitable) brokerages out there. Robinhood is not doing anything new by offering them.
That's not how margin trading works. It is a loan, but it's collateralized against your existing holdings. Most institutions will only loan you a percentage of your existing holdings (somewhere between 30% and 50%). Additionally, if the market value of your existing holdings dips such that the total loan amount is greater than the maximum percentage loan, those assets can (in most cases) be immediately sold to pay back the loan. This is called a "margin call".
To use your example, if you were using margin from an institution that allows for a 50% rate, in order to get that $10k loan, you'd have to already have $20k available in a relatively liquid assets (stocks, bonds, ETFs, mutual funds). If the value of your holdings ever dipped such that you held less than $20k, thus making your loan greater than the institutions 50% limit, some of those assets would be sold to pay down the loan.
There are additional safety measures built into margin accounts by brokers that offer them such as ensuring that the collateral assets aren't 100% allocated a single risk prone stock for example. Margin is a very well understood and safe business model for many brokers.
My understanding of the criticism of the GGP is not that Robinhood's business model is unsafe for Robinhood, it's that it's unsafe for their target market (casual stock traders). The idea is that casual trading is, for most of the population, gambling. Depending on your moral stance on gambling, using "free trades" as a marketing funnel for loans designed to be used for gambling falls somewhere between grey and repugnant.
I just looked up margin interest rates, for loans of 10 000 or less (which is what we are likely talking about with robin hood) the interest rate is Base Rate + 1.25% which is 8.50% interest. I don't know many stocks you can buy even in the best of circumstances that will get you a guaranteed return of more than 8.5%. Moral of the story - robin hoods retail investors should not engage in margin trading.
https://www.scottrade.com/investment-products/interest-margi...
https://www.fidelity.com/trading/advanced-trading-tools/marg...
Also, it should be noted that Gold is a flat fee based on account value brackets and margin brackets not a percent fee of your margin like every other brokerage. That means your effective margin rate can be much higher. e.g. if you borrow $100 for a $2000 account, you're looking at an effective margin rate of 72%.
[1] https://d2ue93q3u507c2.cloudfront.net/assets/robinhood/legal... (linked to from their FAQ[2], sorry for the sketch URL)
[2] https://support.robinhood.com/hc/en-us/articles/214681823-In...
Is that from Robin Hood? If so it's a travesty specific to them. You can borrow from Interactive Brokers for 2.4%, which is a lot easier to overcome even with straight broad-market ETFs. [0]
[0] https://www.interactivebrokers.com/en/index.php?f=interest&p...
>IB accrues interest on a daily basis and posts actual interest monthly on the third business day of the following month.
from investopedia
>Interest accrues on loans, such as a mortgage, or on savings accounts and investments. Daily accrual means interest amounts are added to the account balance every day. Interest can accrue on any time schedule; common periods include daily, monthly and annually
it would be different if the rates were annual percentage rates, but your site doesn't specify that.
no I don't know anything about finance but I got google.
You found the right terms but totally missed the meaning. Daily accrual means that your interest for that day is calculated daily. It doesn't mean the interest rate is 2.4% a day.
Did you even think about this logically? 2.4% a day would be 876% a year. That's obviously insane.
This makes it easier to compare loans even if they have different terms. The fine print will usually provide the daily interest rate, for example 2.00% APR is 2/365 = 0.005479% per day interest.
Often interest is compounded continuously in which case calculus can be used to compute the exact interest, but it ends up as a famous formula in investing, FV = PV * e^(R*T). In practice, it ends up being very close to daily compounding, but it allows banks to advertise an ever-so-slightly higher APY (annual percentage yield) which is why everybody does it this way for interest paid on deposit accounts.
While we're on that subject, Pattern Day Trading restrictions[0] are a fine example of how arbitrary regulations created with good intentions can lead to negative outcomes.
How it works is that margin accounts must maintain an equity balance of at least $25,000 in order to day trade freely. Otherwise, you're allotted three round-trip day trades within a 5-day period before there's serious consequences. Cash accounts are subject to long settlement periods, so the restrictions are moot in that case.
What this means is that you can't trade equities with any sort of frequency on an account that has a cash balance below $25k—at least not if you want anywhere near full utilization of your capital. That also rules out algorithmic trading on anything but medium or long timescales.
The "protection" afforded to the uninformed retail customers it was designed to protect is questionable at best. For example: it would be perfectly acceptable to allocate 100% of your portfolio plus leverage to a single stock just before market close, become subject to after-hours and pre-market price movement, then sell the next morning. Repeat by buying a different stock that same day.
Yet, round-trip trades during market hours are heavily discouraged to the point of prohibition beyond any number that isn't trivial.
In fact, I would argue that PDT restrictions create a perverse incentive that holds people to bad trades which they would otherwise prefer to exit, subjecting them to dangerous after-hours price movement in the process.
It also creates incentive for novices to abandon equities entirely in favor of forex markets. Not exactly risk reduction.
In the end margin is irrelevant if you only trade with money that is actually available. Robinhood is for traders that know even less than the twits on StockTwits. I'm sure it's fine for investing but I'd bet that the vast majority of the people that use the app don't know what the difference is, just like StockTwits.
IIRC Robinhood just uses another service's API to transact a trade (can't remember the name), so you'd be leaving pennies on the table when you could just go straight to the source.
Not really different than what's currently available and which by the way, is heavily regulated as is the service that Robinhood appears to be offering.
From their FAQ https://support.robinhood.com/hc/en-us/articles/213262686-Ro... :
You can use your full Gold buying power when buying stocks, though sometimes you can’t invest it all in one, single stock. Let’s explain. This is because US federal laws require all brokerages, including Robinhood, to have common-sense safeguards to prevent customers from losing too much money on a single, high-risk investment. Some examples where you can’t use your full Gold buying power on a single stock include leveraged ETFs (which are already leveraged) and newly-IPOed stocks (which can go up and down in price very quickly), stocks priced at less than $3.00 per share (these securities are at greater risk of getting de-listed), and others.
[1] https://duckduckgo.com/?q=always+invest+what+you+can%27t+aff...
Is this a typo?
I believe that is far and away the primary use case for Gold.
http://www.finra.org/investors/day-trading-margin-requiremen...
Surprise! Robinhood is going to make revenues like a normal broker, who at this point already have mobile apps that are just as intuitive and more fully featured.
straight out of the onion folks.
Robinhood's gold account is still 100% less margin than other brokers and the regulations themselves allow! Yet they are getting people to pay for it! Have a laugh because it is hilarious, paying for the privilege to pay interest is the bigger article here.
Having understood that, the effective yearly simple interest rate on my particular Robinhood margin (extra buying power) is only 5%/year so all I have to do is earn higher than a 6% return each year. This last year, my return rate was 14%, so that margin was worthwhile.
If new to investing and you aren't sure what to invest in, I suggest investing in: VTI, VYM, or QYLD depending on your risk tolerance. I'm invested in all three.
VTI is an ETF that is basically representative of the entire US market. It is somewhat like holding a little bit of everything in the US market.
If you have a bunch of cash sitting in a savings account, and instead want that cash tethered to the swings of equities market, VTI is a reasonable choice.
QYLD is even more exotic. It seeks to track the CBOE NASDAQ-100 BuyWrite Index. That index in turn seeks to track the performance of a theoretical portfolio of the 100 largest NASDAQ stocks on which covered calls are written with a certain formula. Covered calls are a type of options strategy.
I'm just another rando on the internet, but I would recommend neither VYM nor QYLD to people new to investing who aren't sure what to buy. VTI is a far more appropriate suggestion. As would be VT (like VTI but looking at all stock markets), BND (index fund for US investment grade bonds), and maybe BNDX (ex-US investment-grade bonds with currency hedges)
If you are planning to use margin, I dearly hope you don't use Robin Hood. You can get much cheaper margin loan from other brokerages like Interactive Brokers (less than half as much).
- Robinhood Gold is not just about margin trading. It is also about instant money transfers. What truly prevents me otherwise from frequent investing is this long delay (upto 2 days) where I sell something and wait for money to be available for next purchase.
- I will happily pay Robinhood say $10 per month anyways for the kind of service they provide. Getting $2K credit for that is not really a big deal.
Id say not. Say your borrowing at 7%, markets tend to average around 10-14% return a year. So if you were doing some passive investing on margin you'd be likely to increase earning. The issue is it heightens risk and the speed of losses for those that invest badly, but being margin it should largely avoid losses greater than the principle invested which is better than other speculative investments so not all that bad.
You have it right.
The same principle can be applied as well to stock investments. Obviously a 9x leverage would be too risky for stocks, but a 1x leverage is reasonable and can easily lead to win-win outcomes for both lenders and investors.
If you're worried that unsophisticated investors can misuse this feature - there's nothing stopping such investors from putting all their money into a single penny stock either.
99% of users on the platform will ulimately end up participating in a direct transfer of their own wealth to a more sophisticated trader or algo (i.e. The banks and hedge funds who aren't just doing this for "fun" and have the financial and political backing of the world's elite). Side note: even those hedge funds can't consistently beat the market.
If you are reading this, for your own finacial future I beg of you, please take your money to Vanguard instead and buy some index funds. Scratch your "trading" itch by trying to game your asset allocation instead. Future you will thank present you.
If you don't believe me, please look into any of the academic research that has been conducted around efficient markets.
I totally agree with your investment strategy, and you can do that on Robinhood, by the way.
Use the advisor (robo or human) services of any of the top online brokers and they will recommend you put your money in index funds.
Also, putting together a "long term" portfolio of indexes at Robinhood assumes that Robinhood will be around offering free trades for the next 40 years. Otherwise you're looking at hefty capital gains taxes to transfer when they pivot or go belly up.
There once was a company called Zecco...
you should be able to account transfer out without causing a taxable sale.
how well that will go in the event they pivot or fail and have to transfer your assets over to some backup service is of course unknown.
"Because of daily rebalancing and the compounding of each day’s return over time, the return of the Fund for periods longer than a single day will be the result of each day’s returns compounded over the period, which will very likely differ from 300% of the return of the Index over the same period. The Fund will lose money if the Index performance is flat over time, and as a result of daily rebalancing, the Index’s volatility and the effects of compounding, it is even possible that the Fund will lose money over time while the Index's performance increases."
Vanguard, however, is owned by it's investors if that's important to you.
Last I checked you can also trade some Vanguard ETFs on Robinhood as well. I just checked, you can buy VOO, among others, on Robinhood as well as iShares ETFs, which are also low cost index funds.
Basically, if you want low cost index funds you have a lot of options, including Robinhood
(1)https://www.fidelity.com/mutual-funds/investing-ideas/index-...
(2)https://www.schwab.com/public/schwab/nn/m/indexfunds.html
But I use Merrill Edge as a commission-free brokerage (30 trades per month with $50k assets, 100 trades per month with $100k assets). The upside (apart from not being limited to iShares at Fidelity and Schwab at Schwab) is in the credit card, which beats Fidelity.
Bank of America Travel Rewards rates:
* $50k+ Merrill Edge Balance: 2.25% travel rewards cash back
* $100k+ Merrill Edge Balance: 2.625% travel rewards cash back
Bank of America Cash Rewards:
* $100k+ Merrill Edge Balance: 3.5% groceries, 5.25% gas cash back.
Great deal. Oh, and they'll often pay you about 0.5% (up to $1000) of assets to transfer your equities in. Holding Vanguard/Schwab/iShares ETFs there is a dream for a personal finance geek. The credit card deal alone makes it all worthwhile.
My point was, while Vanguard is certainly a great option, there's plenty of other great options out there as well.
'Given that active managers’ performance can vary based on market cycles, the newly available 15-year data tells a more stable narrative. Over the 15-year period ending Dec. 2016, 92.15% of large-cap, 95.4% of mid-cap, and 93.21% of small-cap managers trailed their respective benchmarks.' [1]
The question folks need to ask is this - Will my stock trading strategy + low (zero with Robinhood?) trading fees outperform 90%+ of the top fund managers who are using the most sophisticated investment tools available? If not, just buy index funds and spend as little as a few hours / year managing your investments :)
[1] http://us.spindices.com/documents/spiva/spiva-us-year-end-20...
Would you know if Robinhood supports pre-authorized purchase plans? For example the ability to buy x shares of VOO on the first day of each month automatically? I didn't see anything on the FAQ but maybe I missed it. Pre-authorized purchase plans + no commissions could be interesting.
There is an unofficial api[1] you could use to cron-buy, though it's unofficial-ness means I don't officially endorse :)
[0] https://support.robinhood.com/hc/en-us/articles/206445496-Tr... [1] https://github.com/sanko/Robinhood
I'll try to do a blog post when I get the chance.
"Top fund managers" are working with billions in AUM. If you have found meaningful alpha on a portfolio of $100k - $10M (or a section of capital within that range), you will have an easier time capitalizing on that strategy than a fund manager who needs to figure out how to scale a profitable strategy to billions in assets.
Difficulty in getting orders filled on one end and literally moving the price on the other are two big reasons it's far easier to find profitable strategies on relatively smaller portfolios. It's not just a comparison of the tools and skills used in institutional funds. The amount of money they are working with is an obstacle in of itself.
This is also why, incidentally, the most successful hedge funds in the world typically close their doors to outside capital and cap it at, say $10B or so.
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Yes, you need somebody to listen to the news, crunch numbers, and then actively trade stocks in order to set an accurate price. But what matters here isn't the percentage, it's the absolute number of active traders, and their analysis "skill". Let's say you start with 50k professional bankers and 50k totally passive etf investors like you and me. Let's say that the passive investors buy/sell based on events that are totally uncorrelated with the market; they buy small orders of VTI every once in a while when they have a bit of extra cash, and they sell large blocks when they experience major life events like buying a house or having a kid. In other words, their effect on prices is random. Also let's assume that new passive investors are introduced into this system gradually, and that we're taking a "long term" view of everything. In this case, having another 100k, or 500k, new passive investors riding the wave of market growth doesn't change anything.
On the other hand, going back to our 50k/50k split, if you add another 100k poorly-performing analysts into the mix, e.g. uneducated consumers day-trading on emotion instead of news, they'll distort prices and create a bit of market inefficiency. Distorted prices are actually good for the above-average analysts, since they'll capture those extra pennies on their trades by more-accurately pricing stocks, but obviously bad for the below-average traders themselves--who will underperform the market--and the passive investors--who just buy/sell at market prices. You can kind of think of this situation as the etf investors paying an additional "management fee" to the good traders for their trading expertise.
So to summarize, the percentage of passive traders to total traders doesn't matter as long as the absolute number of active traders doesn't decrease, which won't happen because of the large incentives created whenever the system moves away from equilibrium.
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Now, in practice you'll never have completely passive investors. People will panic if they lose 10% of their investments overnight. Also, merely making a decision to invest in a particular index, like the S&P 500, is making an active choice to invest in Apple and McDonalds but not Tesla or thousands of other companies. So in practice a horde of passive investors buying Vanguard ETFs won't be completely neutral to the maket, but nonetheless the effect will be minor and--according to some people--perhaps even positive: http://www.businessinsider.com/passive-investing-makes-marke...
Good question - this is an on-going topic in the market actually. The correct answer, like a lot of financial economic theory goes, is that no one actually really knows.
- VFINX is up 72% in 10 years. AMZN for example is up 1220% in the same 10 years.
- VFINX is up 72% in 5 years. XIV is up 530% in the same 5 years.
So I assume based on your strategy you put all of your money in AMZN 10 years ago, sold it right before each drop, re-bought right before each rise, and are now filthy rich. Oh you're not? I wonder why.
Also, XIV is an inverse volatility trading vehicle. It's not meant for long term investors and frequently goes through 90% drops. This kind of extreme volatility is corrosive for long term returns. The last 5 years have had abnormally low volatility due to extremely low interest rates, hence why that ETF has done so well over that time period. Of course it's effortless to cherry pick winners when looking backwards instead of forwards.
No, that's just a buy-and-hold... just the same as an index fund. I didn't cherry pick anything. Plenty of high profile stocks went up more than 72% in the last 10 years. They're not even hard to find.
The problem is how do you pick the ones that will beat the market beforehand, when everybody has access to the same information about the prospects for future growth & earnings?
It's been proven by hundreds of studies to be a statistical near-impossibility over long periods of time. Any outperformance over the short term can be mathematically reframed as random luck (which a retail investor like you and I will incorrectly attribute to being the result of our own abilities).
That's like looking up last night's lottery numbers and picking them for tonight's ticket because they won last time.
It's not hard to find stocks that have done well.
It's hard to find stocks that will do well, and do better than the market as a whole, and to never make a mistake and pick one that goes bankrupt.
Listen, I understand that this is widespread, so I'm not targeting you specifically. But could we try not to use generalizations like "millenial", especially when they refer to vaguely defined generational boundaries?
Your point is very strong, and stands on its own without making what I interpret as an implicitly ageist assumption about a large swath of the population. Millenials are adults. Young adults, sure, but they have agency. It is no more predatory or clearly unethical to lend to them versus lending to baby boomers or gen X.
I take issue with this because you have implicitly robbed them of their agency as a group by phrasing your criticism as "Enticing millenials...". There's no reason to single them out. They may have less money as a group, yes, but there's nothing about trading on margin that makes it inherently more dangerous for millenials over any other generation.
You didn't mean to intentionally portray them this way, but you singled out a particular group because, like I said, it's ubiquitous. We should really try to curb that, in my opinion.
Any negative assumptions being read into the phrase "enticing millennials" are created by the reader's own bias. I think because so many articles are published complaining about "those damn millennials" we automatically assume anyone using the word is doing so in a negative way. I wasn't (I am a millennial myself).
Robinhood's strategy would be predatory in the context of any target market. If they were going after boomers, I would have said "enticing boomers."
Are you sure about that? I'm the only person I know in my age group using Robinhood. But it's gotten popular with my parents and their friends for example. My mom tried to sign up for Gold before I stopped her.
I don't think they're enticing millennials, just anyone who doesn't understand finance or trading very well, which it seems is most people.
FYI, in the context of traditional brokerage houses (and in most places outside the valley) a 37-yr old is still a "young" customer.
Yup, even Warren Buffet tells his rich friends to do so too:
http://www.berkshirehathaway.com/letters/2016ltr.pdf
Over the years, I’ve often been asked for investment advice, and in the process of answering I’ve learned a good deal about human behavior. My regular recommendation has been a low-cost S&P 500 index fund. To their credit, my friends who possess only modest means have usually followed my suggestion.
I believe, however, that none of the mega-rich individuals, institutions or pension funds has followed that same advice when I’ve given it to them. Instead, these investors politely thank me for my thoughts and depart to listen to the siren song of a high-fee manager or, in the case of many institutions, to seek out another breed of hyper-helper called a consultant.
That professional, however, faces a problem. Can you imagine an investment consultant telling clients, year after year, to keep adding to an index fund replicating the S&P 500? That would be career suicide. Large fees flow to these hyper-helpers, however, if they recommend small managerial shifts every year or so. That advice is often delivered in esoteric gibberish that explains why fashionable investment “styles” or current economic trends make the shift appropriate.
The wealthy are accustomed to feeling that it is their lot in life to get the best food, schooling, entertainment, housing, plastic surgery, sports ticket, you name it. Their money, they feel, should buy them something superior compared to what the masses receive.
Why Vanguard? Why not buy SPY through Robinhood? Same index fund, except no commission.
"Sophisticated investors" aren't doing any better.
Just recently I had to email them first to find out that they have an issue with my account and "any sell, dividend, etc. will have 28% removed and sent to the IRS." And I "will need to reach out to IRS regarding those funds." They did not tell me anything when they apparently started doing this. I was paying for Robinhood Gold too at the time.
I'm sure most people will have OK experiences with Robinhood, but I'm closing my account and moving to another broker with better support and communication.
>A Gold subscription lets users borrow up to double the money in their account to trade on margin with leverage
Users pay money to be loaned money? How is this different than a microloan service?
>Robinhood also earns money from rebates its gets for directing its order flow to broker dealers
That means, presumably, the dealers are profiting in some way by handling trades from investors less informed than themselves.
At the end of the day, Robinhood may not have trading fees, but the underlying brokers it works with do. I don't see how a microloans service and some kickbacks are enough to compensate. Presumably they are hemorrhaging money right now and the VC money is subsidizing novice investor's trading fees.
Despite the name "Robinhood" like this is giving money to the poor, this service seems extremely predatory to its users, offering them cheap loans to gamble with on the stock market and taking kickbacks from the exact type of people Robin Hood was stealing from.
As for "micro loans" - how is this any more predatory than a margin account at any other brokerage?
https://support.robinhood.com/hc/en-us/articles/214681823-In...
https://d2ue93q3u507c2.cloudfront.net/assets/robinhood/legal...
Just so everyone knows, order flow from unsophisticated investors is considered a valuable resource because, when filling it, you know that you're more informed than the person trading against you.
Doesn't this also enable front-running? Regardless, this is useful info for HFT funds, right?
> Robinhood also earns money from rebates its gets for directing its order flow to broker dealers, though Bhatt insists “We do not sell data to anyone. We have never sold data to anyone. We just do not do that.” There have been misconceptions that Robinhood sells high-frequency traders its data to help them trade against the startup’s customers. But Bhatt says “The rules around this stuff as so tight. We’re not a social media company. If we even step slightly out of line with anything we all go to jail.”
Basically all they're claiming is that they're following the rules - i.e. if the rules allow selling "data" (or something that we won't call "data" but "order flow" or something) to HTFs or banks' dark pools, they're not saying they don't do it!
So they're selling some data (as opposed to running directly on an exchange, without any intermediaries). Or maybe not "selling" in the strict sense (I give you data, you give me money), but in an indirect way (I give you data, and you give me discount on your other services).
That's not what rebate means in this context. It is, in fact, actual money.
Robinhood also isn't just giving someone data. They're sending order flow to various market makers. Not data about the orders but the actual flow in need of execution.
This flow is a source of customers for market makers. Those customers get charged a fee. A % of that fee is rebated back to Robin Hood (or other retail brokers) for being originators of the customers.
I buy the stock myself a few days later, but at $40 each for a grand total of $4,000, and I just made $1,000. You get your 100 shares, I make $1,000 plus fees. Now imagine doing this hundreds or thousands of times a day. Or I simply sell my own existing supply conveniently to my own buyer and I dictate the fees, which has value in itself. Sure I'm only making $5 per head per month with these low-end customers, but now I have 100,000 customers instead of 1,000.
A savvy investor wouldn't ask to buy these shares. He'd know that he's better off shorting himself. Unsavvy investors are all over the place and if you can get them to come to you, you can make a lot of money off them with minimal investment or risk.
On top of that you can offer them predatory loans for investing. This app offers loans, no idea on terms, but I can't imagine them being very nice. They put up collateral like their car or home, so you have no risk. They fuck up, or not, it doesn't matter, you're at least getting fees and probably screwing them in other ways. Oh and you're getting interest on that loan as well.
edit: Front Loading absolutely happens, it can be done in a way that's difficult or impossible to detect and has a lot of loopholes as well.
Reality is more like "I know an order for NVIDIA is going to hit at $50, but I see it for sale for 49.9998 all over the place, I can go scoop some up at 49.9998 and put for sale at 49.9999 and make some money.
But then real reality is a step more complicated about when it is legal to do this vs not (front running is not legal, but things that are similar can be), and dark pool vs not, and you are way past what I know ;)
In buying order flow, you are usually going in the opposite direction, selling out of you own inventory against a buy.
The firm isn't buying days later after a price craters. They are usually buying or selling out of their own inventory. Sometimes this is speculative trades, more often it is more mundane like saving transaction fees (and a higher certainty of transacting) from going to the market.
Order book data is valuable because it helps you figure out who everyone thinks is pretty, and retail investors make these decisions on much different factors than traders (I.e. Brand over financials)
So let's calculate the fees. For a given stock, FCKD, the bid offer is $4.50, the lowest offer is $4.60. Transaction costs for this are $0.10 at the brokerage.
Investor A wants to buy a share, B wants to sell one, on the same brokerage. Okay let's see.
Brokerage does nothing (because the amount of shares they hold on the exchange for their clients doesn't change at all). So they don't pay anything for that either. No transaction fees, nothing.
A gets to buy the share, and has to pay the lowest offer + transaction costs for the share, or $4.70.
B wants to sell the share, and he gets to sell if for the highest bid, or $4.50, and in some cases another $0.10 in transaction costs.
So the brokerage "captures the spread", and of course the transaction costs. In this case they made $0.40 for doing ... nothing, no share was sold or bought.
This is the official story. Now in practice, this means that a rather large amount of value is "stored" at the brokerage. It is a long accepted practice in banking that only a percentage of the stored value is kept. So while you might think that as a result of this transaction the bank/brokerage makes $0.40 in profit, but it doesn't. Assuming 10% reserve ratio (which is on the high end, usually either 2 or 4%). It makes (100% - 10%) * 2 * $4.55 + $0.40, and pays that out to it's shareholders/managers/... (twice, because once in cash, one in a share)
Now you might think that's where it stops. Well, not quite. They then go to another bank, and they say "we are holding an asset worth $X on behalf of our customers, can we borrow against that ?", and the next bank say "sure ! if we can do the same". So bank A gets a 2 * $4.55 debt at bank B, and bank B gets a 2 * $4.55 debt at bank A. Since this also counts as reserves, they then only keep 10% of that money actually available, and pay 90% out to their shareholders.
So now the bank has paid out (100% - 10%) * 6 * $4.55 + $0.40 to it's shareholders.
Needless to say, keeping this whole situation stable if the market were to gasp drop even slightly is more than a little tricky. Hence, "too big to fail".
That's why you want to be a bank. This is the reserve currency system we currently work with.
>(100% - 10%) * 2 * $4.55 + $0.40, and pays that out to it's shareholders/managers
>(twice, because once in cash, one in a share)
>can we borrow against that ?", and the next bank say "sure ! if we can do the same
> Since this also counts as reserves
> pay 90% out to their shareholders.
> if the market were to gasp drop even slightly
> Assuming 10% reserve ratio (which is on the high end, usually either 2 or 4%)
Instead you are likely buying from a market maker. For pretty much any stock there are many market makers who are offering to both buy stock and sell it at the same time. The trick is they'll buy for, say, a penny less than they are willing to sell for. So if they can keep their buys/sells even they make a penny for every share they move. They're middle men.
Make sense so far?
OK, but there is a problem. Say that REALLY BIG HEDGE FUND has proprietary knowledge that some company is probably going to go up in value soon. So they go out and buy a lot of stock from a market maker. And then the stock goes up. Uh oh. The market maker sold a bunch of stock at PRICE and now instead of buying an equal amount at (PRICE - 1 penny) and making money the market maker has to buy an equal amount at (PRICE + the_stock_went_up_amt) and loses money.
Basically market makers would prefer not to trade with sophisticated investors making big trades with proprietary knowledge. When that happens and they lose it's called getting picked off. They want to trade with people like you and me who aren't trading because of any special knowledge but because we're just putting our regular $1,000 in our 401k for the month.
Retail brokerages like Robinhood are a good source of these types of trades.
(As with a lot of topics, there is a lot of nuance and detail underneath this relatively short description, but this is the gist of it.)
Retail flow is driven by things like needing money for purchases or having excess cash lying around.
Also retail flow is less execution cost sensitive.
That's what people mean when they say less sophisticated.
I'd say its more correct to say orders from retail investors are valuable because:
1) They tend to be a relatively equal number of buys and sells. This is figurative manna from heaven for market makers
2) They don't mind crossing the spread, also a gift for market makers.
3) They can't really move the spread
and probably least importantly......
4) they aren't trading based on some sort of knowledge most of the time, ie they are typically just buying because they buy a bit each month or selling because they need money or selling to re-balance,
ie they aren't trading due to market signals, but rather due to their own personal situations.
Good idea for Robinhood to target millennials, who definitely aren't old enough to remember.
Some measures suggest the current bubble is even bigger than the one in 1999. Or at least more broadly carried, in the sense that in 1999 the bubble was limited to a fairly narrow range of tech stocks.
This time it's all over the place. It's not limited to a few stocks. It's not even limited to the broader stock market or to subprime credit. Today even government bonds are in a very special place.
PS: it's also very interesting that so many people here in these comments think that shaving a penny off on order flow is all there is to say about HFT.
And the comments also make me wonder about the staggering popularity of ETFs. ETFs are much bigger than in 2007. In themselves a sound idea, I do wonder how things like the 3x Inverse Synthetic Foobar ETF consisting of 99% bond meat with 1% mystery spices will fare during a real panic.
And it's not just in US history, we may be talking about all of history. And not just on the short end. In 2016, a country like Belgium, where the government has huge unfunded liabilities, was able to borrow on 10yrs for around 0.2%. Japan is even worse.
The price of all credit ultimately relates back to these bonds. That's why the entire financial market is setting new records, for the 3rd time in 20 years. That's why in some sectors being profitable is once again not being considered as important as various metrics of "growth potential". And, to get back to Robinhood, that's why they can offer margin trading rather cheaply to the masses.
It's a massive bubble, and some comments here reflect that. The only thing we can't know is when it finally pops and where the epicentre will be this time.
(My guess would be somewhere in the nexus between ETFs and the bond market. Throw in bipolar, on/off liquidity and high volatility-of-volatility caused by modern versions of program trading-style hedging and HFT and you can have a panic with a whole new look and feel.)
I started in March of 2016. I was naïve and I made a lot of silly mistakes early on, but I was able to learn a lot of fundamentals when the stakes were low.
I view it more as a gaming app than investing — it's a supplement, not a replacement for investing and asset management.
No way I could trade the way I do and still make money if I was paying 7$ or more per trade. Crazy the industry can charge that much.
How does Robinhood make money? By selling order flow to market makers. Why do market makers want Robinhood's order flow? Because Robinhood's customers are, collectively, unsophisticated investor with no particular knowledge about the future performance of a stock making them the perfect customers for purchasing liquidity a penny at a time.
Worth keeping in mind as you trade stocks every day.
Not trying to be argumentative, just want to make sure I understand the conversation here.
The only way you know more than analysts is:
A. be a full time analyst B. work at the company you're trading
If you're on Robinhood, you're not A. And if you're B, you're in touchy legal waters.
The average unsophisticated trader loses money vs those ETFs in even small time frames.
is to flip a coin: https://finance.yahoo.com/news/coin-flip-beats-listening-wal...
Now you could argue that diversification is key and that the best way to diversify is to choose an index vs picking your own asset mix. But deifying analysts is absurd
But my go-to resource on understanding market making at least a little bit is this Matt Levine column: https://www.bloomberg.com/view/articles/2015-10-08/why-do-hi...
All the discount brokers do this.
For comparison - and I have no vested interest here - Interactive brokers currently charges 0 - 100,000 2.41% (BM + 1.5%) and 100,000.01 - 1,000,000 1.91% (BM + 1%) on USD margin loans.
If you think you will be an active user of margin I would go elsewhere unless you can justify savings on the commission side against paying 0.005/shr elsewhere.
As to IB, again my point was there is a trade off between paying nothing for commissions and overpaying for margin vs paying a low commission and getting a market margin rate that only kicks in when in use.
Creating beta-neutral systems with Robinhood would then be possible.
Well,
The way I approach betting against the market is inverse leveraged ETFs. If you want to bet against S&P 500, ProShares has a 2X inverse offering, and you can probably balance it with 3x leveraged gold JNUG / JDST as they track the market.
We've got quite a few things on the roadmap that exceed Robinhood's offering.
Or LEH...
Or...
https://m.signalvnoise.com/press-release-basecamp-valuation-...
I wonder if selling (or using) data from their customer is more profitable than the Gold plan.
Anyone here in the space who can quantify the "hidden" cost you incur because of more sophisticated traders trading against you?
It feels like working with a broker who's explicitly charging you might actually be cheaper if you take this "cost" into account?
They get a good deal on the commission and they get enough money from the gold subscribers to cover the commissions across all users.
A fix subscription package is user friendly and easy to understand. It can be "better" for business than a variable commission on trades.
Plus, I bet they are banking on the existing brokerages not responding until things are too late for them. Most brokerages offer free trades and other perks, but limited to "high-value" customers. They won't drop trading fees until they absolutely have to, but by that time, their low-value customers will all be gone.
Although that article reads like an ad for Interactive Brokers, it offers a bit of insight on the subject.
Namely how aggressive limit orders in an order flow situation will be less likely to fill in the face of desirable price movement, thus incurring an opportunity cost.
For example, Lets say you put in a Market Order for 1 share of GOOG. Currently the price per share is about $900. It could fill immediately at $900, or it could fill immediately at $930 with that $30 premium. If instead, you place a Limit Order for 1 share of GOOG for $900.02, you will only buy 1 share of GOOG for $900.02 or less which effectively cuts out any "hidden" costs. Limit orders are almost always better.
Fun fact: All Robinhood market orders are actually placed as limit orders 5% above the market price. This is to limit investor risk.
Edit: Now only market buy orders are converted into limit orders. Market sell orders remain as market sell orders. They must have changed their policy in this last year.
"Now when one user refers someone else who signs up, both get one share of a randomly selected company from a set that includes Facebook, Apple, RiteAid, Ford, and General Electric."
A Gold subscription lets users borrow up to double the money in their account to trade on margin with leverage
Gamble alright.
It's really just good, from the customer perspective. It's the brokerage that needed to exist.
My uncle, who lives off of trading, gave me his transaction list and I saw that like 12% of his profits were eaten up by trading fees. Ouch.
I think more sophisticated individual investors don't jump on because you can't trade options. For me, that's a good thing, I'm not tempted to speculate.
sigh
I'm not saying Robinhood is bad or anything but the business model and the valuation built on top of it is very questionable.
It's almost like gravity does not exist anymore. It's all about making it across the IPO finish line and then it's like fuck what happens to everyone else because I've already got Monssack Fonseca shuffling my untaxable money.
You buy $1000 of stock with your cash. They say cool your account can now "borrow" $1000 from us to buy more stock. If your stocks start crashing, they margin call and get their money back. The assets are always in their account, no risk to them.
The only real risk is probably fraud. Sign up with stolen account A, cash out to mule account B. This happens a ton and for small amounts no one is gonna follow up on it, so it's up to Robinhood to detect and prevent this ahead of time.
Last I checked, Lending club still had strong returns, even after their fees, for investors (though somewhat less attractive then the figures would suggest since it is taxable as personal income rather than capital gains), and a sub-5% default rate. This characterization seems to be pure fantasy.