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Comment by Ghjklov | Hacker News Reader

On the flip side, if this trader instead made 700k on options, he'd be celebrated as a hero who beat the market at such a young age and Robinhood would be an empowering role in elevating the young and disenfranchised. That is just the reality of the market. I hope this is not setting up so that the powers that be, and the market makers can demonize trading and then regulate away all the new blood who wants to get in on their game.

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There is not an equal probability of a day trader making 700k and losing 700k trading options.

Market makers won’t demonize day trading—the “new blood” are their best marks.

The efficient market hypothesis says otherwise. If it was easier to lose money (ignoring trading costs and spreads) than it was to make money, I could easily beat the market by doing the opposite of the average joe loser.

That could also be problematic: you mighth need to know what the average joe loser does instantly, or maybe even before the fact, to turn an actual profit.

Though doing the contrarian move is sort of common wisdom: "sell when everyone is buying, buy when everyone is selling", of course if you understand what to sell/buy in either case.

I think you're right. By the time you know what everyone is buying/selling with any certainty, the boat has already sailed.

I mean, if you just want to be contrarian, watch your holdings for what's going up over whatever period, and sell that --- that's what everyone is buying.

Look over the whole market for whst is going down, and buy that, that's what everyone is selling. Every finance information outlet ever tells you the day/month/year's biggest winners and losers, and most people aren't watching that and taking the contrarian position, or the winners and losers would be pretty boring.

> you mighth need to know what the average joe loser does instantly, or maybe even before the fact, to turn an actual profit.

As in, run a day trading service and analyze anonymized trading data?

There was an SEC enforcement action a few years ago where they went against a platform trading company that catered to especially unsophisticated and risk taking clientele. They never actually put on any of the trades their clients were "making." They just pocketed the money and when the clients inevitably lost it all, the outcome was the same for the client.

> They never actually put on any of the trades their clients were "making." They just pocketed the money and when the clients inevitably lost it all, the outcome was the same for the client.

Whoa. That is so elegant in it's simplicity. Evil, certainly, but elegant.

And now I'm imagining more elaborate versions that incorporate the Baltimore Stockbroker scam to convince the clients to invest (and lose) even more money...

You can't even take the short side of a spx put with less than a US Lifetime income of capital.

No one makes money on symmetrical markets, and they therefore are unpopular.

This was interesting to think about. I think the efficient market hypothesis implies only that a random selection of stocks is equally likely to be market beating rather than market performing. $5 of imaginary internet money says this poor dude was on a Telegram group telling him what to buy and sell

There are firms that do exactly this. Robinhood's business model is to sell the order-flow data of its users to HFT hedge funds, who then take the opposite side of the trade. It's proven very profitable both for Robinhood and for funds that do this.

Why is that okay for them to do that? Genuinely curious.

It's a dark pattern, but there's nothing illegal about it. Their privacy policy states "We may also share information with others in an aggregated or otherwise anonymized form that does not reasonably identify you directly as an individual." Knowing that there exists someone who is about to buy TSLA does not identify that person, and yet is still incredibly useful to a market-maker. Selling data you've collected (without identities attached) is legal and largely unregulated. And the actual transaction is an ordinary B2B customer relationship.

Amazingly, a significant number of Robinhood customers are aware that they do this and don't care.

If I am a Robinhood customer who is investing for the long term instead of day trading - should I care?

not investment advice: no, you shouldn't. the spreads you get can be tighter (good when you want to buy and sell), and any hypothetical front running of your order would lead to miniscule slippage over the long-run. buying SPY and TLT is more or less the same experience in robinhood as it is in schwab, TDA, etc.

even as a day trader i wonder if it matters. i would be more annoyed that RH doesn't allow options on indices or futures, which leads to RH traders loading up on similar-but-not-identical products (eg USO as a substitute for oil futures or whatever VIX etf's remain standing)

No for a few reasons.

All the other major retail brokerages do this, unless they allow you to provide specific routing instructions (which usually comes at a cost, but I haven't checked lately). Everybody's doing it doesn't make it right, but it makes it unavoidable.

It's actually usually good for you --- your brokerage has a duty of 'best execution', so they can only route your trades to the HFT when the quotes are the same or better and they expect the HFT trade to complete as well as if they routed it to the other market. Often that means you'll get a better price, or more likelyhood of a complete trade, but some tradea might have executed better at another venue.

There's much bigger things to care about, like your brokerage's track record of availability or lack thereof during the trading day, how confusing their UI is for the things you want to do, if their means of access work with you (some people want local offices, which excludes some brokerages), fees and charges for services, including hidden fees like below market interest on deposits or above market interests on margin loans (but please don't have margin loans, cause it's usually a bad idea), etc.

Why is it a dark pattern? Brokers get the best price for their clients this way.

It gives the retailers a better price. The HFTs can quote more tightly (offer smaller spreads) in their dark pools, because they know some large, well-informed hedge fund isn't going to come along and roll them over.

Adding on, this can be of benefit to all three parties of the trade.

The brokerage gets paid for order flow.

The retail investor will often get a price better than the quoted market price, and the brokerage has a duty of best execution per SEC regulations, so the prices can't be worse very often; the duty is examined in aggregate, so some trades may execute poorly. Order flow payments are a part of how brokerage expenses are funded, one of the factors in the reducing and eventually eliminating of comission charges.

The HFT benefits, as you said, because they're trading against retail investors, and can use techniques appropriate for trading against random trading, rather than trading against sophisticated traders (or other HFT).

The downsides, I guess, are for the traders whose orders are on the other exchanges --- they didn't get your trade, so they will wait longer, and may not get as good a price as if you traded with them. Also, these dark pools may have less timely public reporting on trades, leading to an information gap? But, my understanding is there's already a lot of retail trading with less timely reporting as odd lots (not a multiple of 100 shares) may not have real time reporting.

Its quite competitive citadel makes money. But Citi bought a company and then sold it. KCG went bust ...

The big money is trading options, etfs, equities,cme futures against each other and against swaps. But for swaps you need an otc desk.

patio11's "How Discount Brokerages Make Money" is worth a read: https://www.kalzumeus.com/2019/6/26/how-brokerages-make-mone... for those who are interested.

The efficient market hypothesis says nothing of the sort. Upside and downside with options aren't symmetrical.

Unlike when purchasing long positions in stocks, when trading options it's possible to lose many times more money than you initially put in. You also really can't ignore the spreads. Market makers win pretty consistently and everyone else is playing a worse than zero-sum game.

They are symmetric in the sense that you can both buy and sell options, so whatever payoff curve you get e.g., by buying an option (say unlimited downside and fixed upside) you can sell the same option to get the mirrored outcome (unlimited upside, fixed downside).

Adjusted for probability, upside and downside are theoretically the same with options.

> Unlike when purchasing long positions in stocks, when trading options it's possible to lose many times more money than you initially put in.

The converse is also true. It’s entirely possible to almost guarantee yourself a tiny profit and almost no downside risk as it is to create infinite risk.

So EMH definitely maps to the options market.

The market is (mostly) efficient but that doesn't mean that the same number of people end up ahead a certain number of dollars as behind.

In a zero-sum game, it's entirely possible and common to have a small number of comparatively large winners and a large number of losers.

It's the other way around. With stocks, you can take loans and trade on margin. If something happens, like very large gap down in the morning, and they can't unwind your position quickly, you could end up in debt. It's a very rare situation in practice. With options, you can only lose what you have invested. Unless you write naked options, which I am almost sure is not allowed on Robinhood.

With options your gains are infinite but your loss is limited to the premium. I don't think you can loose more than you put in, only exactly however much you've put in.

Someone needs to pay out the "infinite gains", that's the option trader on the other side of the contract.

Most brokers aren't allowing regular people to sell tons naked of puts or calls. For almost all retail option traders, their losses are fixed.

Something something Robinhood box spread something

aka the legend of 1r0nyMan

It's trivial to lose money by trading outside of the efficient frontier.

The warren buffets and medallion funds of the world have much better information and resources that Joe Loser. EMH just says that all the publicly known information is priced in almost instantaneously... It doesn't say much about how that profit from those price changes are distributed. It also says nothing about non public information. Unfortunately you're competing with a bunch of motivated people who have access and analysis techniques that you simply do not have, and this data gets priced in by them exploiting their information and analysis to make trades which alter the price of the market to represent the true value.

In a very roundabout way, EMH says, people with access to information will perform arbitrage trades based on that information as soon as it is available. If you are not those people, you will just have to ride the rising market.

You occasionally hear of people making money by trading the inverse of what's popular on reddit's /r/wallstreetbets community. So I'd believe it.

You can easily beat the market using the wheel at a minimum but the time investment/return aren't ideal.

There are posts below that will decry listen to Buffet and others however their accounts are so large listening to them is a disservice to yourself. Also the larger players have larger trades so their strategies are much different from a regular trader and there are lots of places for small accounts (under $5m) to make money.

But the possibility exists. That you can make money by simply trading stocks, without actually putting much in too much work and time (outside of research and education).

I have a hunch, just a feeling, that the powers that be prefer that we normal people not know about how they make money by simply trading around stocks with excess money they have laying around.

Nonsense, they advertise lotteries everywhere.

Lotteries aren't really the same thing as holding shares in a company.

>he'd be celebrated as a hero who beat the market at such a young age

He'd be a lucky fool in my book.

This sort of trading is gambling, pure and simple. Winning doesn't retroactively make it a good decision to play.

The entire financial market is gambling, it's just a matter of degree of risk, and the higher the risk the higher possible return. People need to stop fooling themselves otherwise.

investing in a business (buying stocks) is not the same as speculating. Options trading is speculative in nature, because for someone to "win", someone else has to lose.

That is not the case for stock purchases - the stock appreciates in value because the business it represents appreciated in value.

Just because something has risk, doesn't automatically make it gambling.

>for someone to "win", someone else has to lose

Not necessarily: farmers use options as a kind of "price insurance" to insulate themselves from changes in the price of their crop between now and when they are ready to sell it.

Yes, for one party in an options trade to gain X dollars the other party must lose X dollars, but both parties can gain in what the economists and decision theorists call expected utility.

We have all heard the saying that after a person's income reaches $80,000 or so per year, further increases in income don't improve happiness as much as the previous increases. In other words, a person's utility function is not a linear function of income, but rather the curve flattens out a little after about $80,000 a year.

Similarly, just because an options trade is zero-sum in dollars doesn't mean it is zero-sum in the utility conferred on the two parties to the trade.

Same with airlines, hedging oil prices via futures and options is incredibly important for them to be able to price out flights a year in advance.

But that doesn't explain why a 20 year old with no income should have access to these instruments. There's a reason most banks wouldn't allow that, in the end the platform probably has to cough up the money.

Income doesn't matter. As long as your account has funds, you trade with those until they're depleted.

You don't get access to options by default, and even then there are levels of approvals before you can do advanced trades. If they require margin, your broker will keep watch and instantly liquidate if you go negative. That's the whole point of a "margin call".

It's very rare that a broker will lose money because of a retail trader.

> That is not the case for stock purchases - the stock appreciates in value because the business it represents appreciated in value.

There is absolutely no guarantee that this is the case. It's still a gamble. It's just that by the time something IPO's it's much less likely to fail, but it's still possible. Private shares the same. Hence, my original point, it's just a matter of degree of risk.

He wasn't a professional trader or anything like that.

He was a kid with no income. Was they did they allow him access to so much leverage?

Guessing it's related to a bug on the platform from last year.

https://www.bloomberg.com/news/articles/2019-11-05/robinhood...

It's now coming out that he didn't have access to that kind of leverage.

Robinhood will show one leg of a multi-leg options strategy as your balance in certain cases.

So you have theoretically sold 700k in calls, but it's covered by a near equal amount of options being bought, there is no scenario in which you could actually owe 700k

Yet Robinhood's engineers didn't properly implement the feature, so their account balance showed the calls as if they had been sold naked, resulting in -700k as a balance.

There's nothing to implement differently, this is how all brokers show it because one leg might be exercised anytime, and if it happens before the broker executes the other side you will see a big discrepancy in your account. It's up to you to understand your trades.

People "made" 700k for him to lose it, less fees.

Because speculative trading is a zero sum game, it creates no wealth. And no, this isn't wheat farmers hedging bad weather.

I agree

Yeah, I think fees and externalities mean that speculation is a negative-sum game. I used to work for financial traders, but I quit that industry because I decided it was, however lucrative, a net societal negative.

that plus the industry pulling in a lot of smart people who could have spent their time elsewhere

speculating is not a net societal negative - it allows one party to trade the risk away.

But of course, the same instrument can be abused by gamblers. But it's not the instrument itself that's the problem - it's that there are people gambling with money they can't lose.

Market-makers are sufficient to allow one party to trade the risk away.

I agree gamblers are also a problem, although I'm not sure it's really a distinct group from speculators. But if you look at the amount of resources spent to in effect lower insurance premiums, I think you'll find it's much larger. So yes, the lowered insurance premiums are good, but the costs are so high that on net it's negative for society.

>Because speculative trading is a zero sum game, it creates no wealth.

Speculative trading is a key component of markets. People speculate that X is undervalued, so they invest in X, this gives X more resources, so resources are allocated based on what people think has most potential for growth. People who continuously make bad predictions get filtered out of the market, so "what people think has most potential for growth" comes to approximate "what has most potential for growth", and we get efficient resource allocation.

It's the secondary market. Companies get nothing on a bet they win or lose. People betting on a soccer game have zero effect on the future of soccer.

Secondary markets can definitely influence the price of the underlying asset, especially if they're more liquid.

Derivatives? Do Barcelona change their tactics because I keep winning big on the first goal scorer?

This is a socially useless activity. Stop trying to force it.

> Because speculative trading is a zero sum game, it creates no wealth. And no, this isn't wheat farmers hedging bad weather.

Even farmers hedging bad weather isn't what it used to be:

http://nategabriel.com/egblog/wp-content/uploads/2019/01/6-2...

> On the flip side, if this trader instead made 700k on options, he'd be celebrated as a hero ...

Wait, what, why would I celebrate someone who basically went to a casino and hit a jackpot, and what the hell does that have to do with empowering anyone other than casino owners.

Robinhood is such an ironic name for the app.

The elephant in the room is, the people who Robinhood is supposedly letting buy into a vast money fountain that is the stock market already had a way to get in.

The fees that other brokorages were charging shouldn't have mattered if these people were investing in the only responsible way for someone who doesn't know what they're doing... and that's buying into an index fund and leaving it for several years.

By it's very nature, the people who end up in Robinhood, who wouldn't be able to get "into" other brokrages, are the kinds of people who get eaten up whole by the rest of the market.

It's the rich stealing even more from the poor, while giving them the illusion they're all sitting at the same table eating the same meal. -

If Robinhood was really about doing what it claims to do, the app would have 3 tickers, QQQ, SPY, and DIA.

And when you put money in, it'd warn you that you should be ready to leave that money there for at least 5 years.

It sure as hell wouldn't have options trading.

>If Robinhood was really about doing what it claims to do, the app would have 3 tickers, QQQ, SPY, and DIA.

Is that what robinhood is supposed to be? A conservative retirement savings portfolio? Sure, the app store tagline says "Invest. Save. Earn.", but the listing also mentions highly speculative instruments like cryptocurrency and derivatives. It also promises access to "real-time market data" and "relevant news articles" which is only needed when you're taking on an active management style. Clearly the app isn't designed as something you chuck money into now, and withdraw a few decades later.

>By it's very nature, the people who end up in Robinhood, who wouldn't be able to get "into" other brokrages

The reason why they wouldn't "get into" the other brokerages is because they transact in such small amounts that they'll lose most of their capital on trading fees. I don't see anything wrong with letting people make small trades that they wouldn't have otherwise been able to make.

>And when you put money in, it'd warn you that you should be ready to leave that money there for at least 5 years.

How about we let the users take personal responsibility? I like Matt Levine's idea of "Certificate of Dumb Investment". Disclose the risks to them, and let them do whatever they want. https://www.bloomberg.com/opinion/articles/2018-09-24/earnin...

>Is that what robinhood is supposed to be?

Their idea is that they give everyone access to the financial markets, and that allows them access to wealth. My point is their name is playing on... Robin Hood who "took from the rich and gave to the needy".

But in reality it's just become another way for the rich to milk people who don't have that much money to lose anyways.

It completes the stated part of the mission, but completely forsakes the implied part of it.

> The reason why they wouldn't "get into" the other brokerages is because they transact in such small amounts that they'll lose most of their capital on trading fees. I don't see anything wrong with letting people make small trades that they wouldn't have otherwise been able to make.

My point is, they won't lose most of their capital unless they're day trading, or at least trading very aggressively. And that's wholly at odds with actually making money if you don't know what you're doing. If their goal was to create a gambling app, we already have Draft Kings...

I mean, take their options trading for example. First off, the mobile app has a guided view for people who don't really get options to trade options. Ignoring the... strangeness there. It will actively recommend options that are just pure fucking insanity. So far out of the money, with such insane expiry dates, that your odds are literally worse than the lottery. And to top it off, half of them don't even have volume! So even if you do somehow start to approach any semblance of profit, you can't sell!

They're so far OTM and with such low volume that they don't even make sense as "YOLO"s, they are literally recommending losing money for no reason. And it'll characterize them as "short term, high risk" when there are OTM options that are short term high risk, for marginally more money, with infinitely higher chances of profit! Why would you take someone who literally needs to be explained that puts are bearish, and show them this as the first option?!

These people are told options are risky, see these incredibly stupid positions, get no mention of the Greeks, no mention of volume (it won't even show any of this unless you drill down into another view!), and take Robinhood's suggestion "I came here for risky, it says this is risky, must be what I'm looking for".

> How about we let the users take personal responsibility?

How on earth is that at odds with warning users they should be ready to leave their money in the stock market for long periods of time, are you daft?

I suspect part of why this comment is apparently ruffling some feathers is this idea that there's just this magical market that all the old money is guarding people away from with PDT restrictions and "accredited investor" status.

I don't buy it. I believe the reason we still have accredited investors is because Uncle Sam wants to make sure you at least have 1 million dollars of assets to have liquidated if you go bust.

I have never seen a truly lucrative market that consistently beats just sticking your money in an index fund that's locked away behind being Rule 501 qualified unless you literally just have millions of dollars sitting around and don't mind throwing away half a million on some high risk venture knowing it can blow up at any time.

Also Robinhood is disgusting, I explain more in my other comment, but people are now coming out and saying this kid didn't even owe the money that he was shown, there's a known issue with Robinhood's handling of multi-leg options that might have bit him:

https://www.reddit.com/r/wallstreetbets/comments/h97l9z/how_...

This kind of bullshit is why Robinhood is such a ridiculous proposition. It's giving someone access to a flaming ring of death, then giving them a rusted out bicycle to ride through it, and acting like you did them some great favor by letting them access the flaming ring of death because some other people in full gear on motorcycles do it all the time.

Robinhood as a broker has serious flaws (I wonder if they patched the bug that let literally anyone get infinite amounts of leverage through their app?), constantly breaking during periods of high volatility, misrepresenting risk, having terrible fills for options and stocks, not showing extremely important information on options up front just to make it "easier" for people. You add all this up with who it's targeting and it's sickening.

This won't be the last time this happens.

The market doesn't care about your age or identity.

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