Robinhood has lured young traders, sometimes with devastating results
nytimes.com
nytimes.com
I would hope that most people left their platform after they had those major outages during volatile trading days a few months ago. Any place that has outages lasting that long without properly explaining what happened shouldn't be licensed to deal in securities.
Now they're just preying on people that aren't knowledgeable in the financial markets by showing them how "easy" it is to trade. I have studied and worked in finance, and I'll be the first person to tell you, trading isn't the least bit "easy" and shouldn't be portrayed as such.
A conversation I had with a person yesterday. Him: My older coworkers asked me if I use all the new apps like Tik-Tok and Robinhood. Me: With everybody being free now, theres no real reason to start with robinhood. Him: "But is it as easy. If not, dont care."
My counterargument was customer service, but was not persuasive. He has no intention of ever picking up a phone or asking for help. He wants a toy to play with, while he and his friends cant be at the casino. The majority of his money is at Vanguard, hes not moving it to robinhood. It's just something to look at everyday for some entertainment value. Its the same mindset where "I made x today (or at the casino)" but ignore the losses or how much they put in. This is the same group of friends that are excited their $75 in dogecoin is up 50% today, or who are playing with options against Draftkings for the thrill of it. Gambling on gambling. Fun. Games. Thrill.
I can't say with a straight face that the Schwab or Fidelity have mobile apps that are as simple to pick up or navigate. They involve more clicks, and buried options. Free gave robinhood publicity and got people to give it a try. UX keeps them around. If Schwab, Fidelity, Merril, Goldman Sachs/Marcus want to compete in this space, they need lite versions of their platforms that are true mobile first apps AND some kind of value add above Robinhood to lure people to try it and convert. Maybe these arent the customers they are looking for, some of them at least.
I tried placing an option trade on Fidelity web version on desktop. It took me forever to figure out how, and even if I memorized the flow, it would still be much much slower and annoying than on RH. And that's on web, I don't even want to mention how bad it is on their mobile app.
I get that Fidelity operates on "if it ain't broken, don't fix it" principle, but sorry, UX matters a lot to users. And when a vastly superior in UX alternative appears, you cannot just sit and do nothing.
Due to all of that, Fidelity has been designated to be used solely for 401k management for me (which is almost automatic anyway).
After the outages, I don't see why a sophisticated trader who's doing option trading would trust Robinhood. I trade at IB and am very happy there. Just my 2 cents.
Why do you like IB? Genuine question, because that's the one I've never tried, but now I am curious to try it out, so I want to know what the major things that drew you to it are.
0. https://www.barrons.com/articles/robinhood-trading-app-has-o...
This stock market upheaval some other brokers are trying to have competitive margin rates, but in the past downturn when I was broker shopping, IB was blowing others away with ~2% rates while everyone was at ~7%.
IB is very much targeting advanced consumers all the way up to small funds and trading shops, so you can do a lot on their platform if you're interested.
I really appreciate this perspective. I am way more into options trading, while keeping my savings in regular stocks, so I don't manually trade stocks much. But it is still good info to know, in case I change my mind on it later.
I don't know that good UX is a positive for society in this scenario.
I should be the only person to decide that, already there are strict regulations about day trading, volume of trades on a mobile platform, access to margins and access to after hours trading.
Robinhood adheres to all these regulations and doesn't easily dole out features to anyone.
You losing all your money impacts you. You and millions of other people losing all their money at the same time impacts society; they can't pay bills to their creditors, then those creditors can't pay, and soon enough we're talking bank runs and financial collapse.
If I want to gamble away a windfall $200K inheritance, I can easily and legally go to Vegas and have my loss "impact society." Why shouldn't I instead be allowed to invest that in a startup?
The entire country is in the stock market (401k and pensions, etc.) so gambling with valuations has real impact on things that aren't just you, and the blast radius of harm is so much larger. We already saw this happen in the Great Depression; bank runs, sudden, massive tightening of liquidity that screwed over creditors and suppliers in a cascading fashion, etc.
The real fundamental issue is that QE as the overwhelming response to 2007 mostly just massively inflated stocks and other rich people assets without meaningfully improving the financial prospects of middle and working class people, so now everyone is clamoring at the gates to be let in at the stock market. Look at how quickly BTC became a numbers game rather than the actual useful intrinsic value, with people who couldn't give two shits about the blockchain.
I am not against regulations, I think all existing regulations are perfectly adequate to protect inexperienced investors from themselves.
If I lose ALL my investments, it doesn't change my way of life or status in society. I have no dependents or collateral.
On the other hand, if my investments pay off, I have a real shot of upward social mobility within 5 years, instead of 5 decades.
https://www.wsj.com/articles/why-free-trading-on-robinhood-i...
After that come back and see how the WSJ article is just a poorly written hit piece on RH.
So I read Patrick's article and now I'm back. You're wrong.
Both articles are saying that Robinhood makes much more money from order flow than other brokerages. The WSJ is saying that this is because Robinhood takes the market makers' price improvements to itself instead of passing it on to their clients. Patrick is saying that Robinhood makes more money off of order flow because options trading (which Robinhood does a lot of) is much more profitable for the market makers. Now both hypotheses might be true. Robinhood could be offering their clients worse prices and at the same time get paid more by the market makers because of lots of options trading. I don't see anything in Patrick's article that contradicts the WSJ's explanation.
And given the following quote, I think the WSJ's analysis is pretty convincing:
One executive with a high-speed trading firm that executes orders for Robinhood said its price improvement is much worse than that of competing brokers.
tl;dr you're not getting screwed by Robinhood selling your order flow, you're getting a benefit.
It gives people a similar experience to buying a Total Stock Market ETF, but still lets them have some runway to be foolish. The 30% nanny state of investing software.
I have plenty of experience in this, both my own behavior and that of many people I know.
This doesnt make sense, either you have more money and can retire earlier, or you dont.
1. I prefer passive investing. I already have one job.
2. More risk = more reward. I've purposely chosen this as my risk level.
3. Regardless of whether I'm smart or not, I'm not going to consistently beat the guy who eats-sleeps-and-drinks investing. Oh, and there are millions of him.
4. I believe it WILL allow me to retire earlier (given the power of compound interest and time).
If you like picking stocks and are demonstrably good at it, why are you messing around with doing it on your own instead of starting a hedge fund and having other people pay you for the privilege?
Active investors, who are professionals, that manage less than 50 million see extremely high returns. Commonly over 100%. When you get into the billions, you cannot make the same trades, and your clients DO NOT want you to loose their money. It is more so about simple wealth preservation.
Raising capital to start your own fund is extremely difficult, expensive, has extensive legal bookkeeping, and requires an immaculate pedigree. I work for FAANG and aggressively invest my money, will be retired before 40.
Source is I used to work at a hedge fund
Active investors, who are professionals, that manage less than 50 million see extremely high returns. When you get into the billions, you cannot make the same trades, and your clients DO NOT want you to loose their money. It is more so about simple wealth preservation.
I could go on and on. But I'm busy.
Source is I used to work at a hedge fund
Robinhood actually sent me an email and follow-up on outages, even though it didn't affect me one bit.
Robinhood actually gives tools and resources to explore and learn about investing, instead of it being "experts" only.
Every software platform has bugs and user issues but that risk is far outweighed by the services provided.
(None of this makes Robinhood good; it's just that PFOF doesn't explain why they're bad).
> the cost basis of trading with you is lower than with trading with the broader market
But this is exactly why Robinhood is bad. Trading with you (a retail investor) has a lower cost basis because retail investors are reliably less sophisticated than institutional investors. Therefore: an institution will pay to take the other side of a series of trades with you because it knows you aren't sophisticated, so it's likely to win in the long run.
From there, follow the incentives: Robinhood is incentivized to sell more order flow; which it does by increasing its trading volume; which it does by making trades easier. Robinhood is also incentivized to increase its net revenue per trade; which it does by increasing the price at which it can sell a given volume of order flow to institutions; which it does by making its average trade less sophisticated.
In summary: The most obvious way for Robinhood to optimize its revenue is to get its investors to make lots of bad trades.
It's not about winning or losing, it's about getting "run over" by massive momentum. Retail investors move less volume and randomly take both sides of trades, so it's much less risky to trade with them. Conversely, large players can dump so much volume that they move the price against a market maker and decimate their revenue from whatever very small spread they usually collect.
> The most obvious way for Robinhood to optimize its revenue is to get its investors to make lots of bad trades.
Robinhood doesn't care whether trades are good or bad. A discount brokerage is a moving business, not a storage business (unless you count interest on cash balances, which Robinhood doesn't make much from). They make money from retail investors doing a lot of trades. Arguably that's against the interest of the investors because retail investors tend to make bad trades, but there's no malice on the part of Robinhood there. If all their clients made a lot of money presumably they'd use it to make more trades and make Robinhood more money.
The money they're making is just the spread. They can safely quote better spreads to retail investors than they can to execution firms trading for giant funds.
That concern might exist because I'm selling a big position and my order is the tip of that iceberg, as you say; but it could also exist because I'm trading on news that hasn't yet been incorporated into the share price, and my order will be followed by many other people selling once they learn that news themselves.
So, let's say you are trading 1000 shares. Normally, you might pay around $10 for that with a real broker. Now you execute that same trade at RH (or some other zero-commission broker), and let's say your average price is just 2c worse than what the other broker would get you. Well, now you just paid $20 for your "free" trade. And this gets worse for odd-lot orders (those that are not multiples of 100 shares). Because with those the MM is not bound to the NBBO, and can give you an even worse fill. Given that a lot of these RH accounts are presumably rather small, that likely applies to a decent amount of orders executed.
> the cost basis of trading with you is lower than with trading with the broader market
These are market makers; they don't take directional bets, hence this is irrelevant, as they only trade in a reactive way while trying to maintain a neutral book. What you are presumably talking about is toxic (i.e. informed) vs non-toxic order flow. Having a big player, who knows more than the MM, is what they are afraid off, because they can lose a lot of money by being on the wrong side of the market. They know that retail traders are unlikely to be informed traders, hence their order flow is less risky. However, the volume retail traders are moving is a drop in the bucket compared to what instis do.
I'd love to know how that split gets decided. I guess it's "as much as possible to the brokerage without looking so lopsided that someone writes an article about it", except at brokerages like IB that publish data on execution quality and try to market based on that? Do the contracts between the brokerages and the market makers specify the quality of execution in any detail, or is that just a long-term reputational thing?
HFTs like retail orders because they don’t move the market, so you can collect some of the spread without worrying about getting run over by an informed institutional player.
https://www.bloomberg.com/opinion/articles/2018-10-16/carl-i...
Is this actually true? If so it blows me away this this is not illegal, or that the press hasn't destroyed them for it.
RobinHood is has one of the most ridiculous branding efforts ever: 'borne of the Occupy Wall Street' movement, the idea was to empower Millennials to 'break the system' ... by 'buying into the system'??? It's like the perfect script written by a NY agency for a bank to re-position the exact same financial products under the banner of a ridiculous 'empowerment branding', like Exxon creating a hipster brand to sell 'clean oil'.
"Robinhood Raises $323M to Democratize Finance For All" [1].
"Trading app tries to fix a 'rigged' financial system" [2] from CNN.
How does a startup get major news agencies to consistently promote their narratives unchallenged, especially when they're so ridiculous? We saw this a lot with WeWork as well.
I can't figure out is how the press, particularly CNN bought into hook-line and sinker especially early on. They've been consistently promoting Robin Hood and their 'empowering message' with fluff stories, not remotely critical of the materiality of the business. Have a look [3]
Recently, they've started to question some things, and perhaps the press will fall out of love with them and it'll be narrative in the other direction.
There is absolutely something amiss here, if anyone with deep relationships in the PR and story placement care to comment, it would be enlightening as I think that's a big part of the underlying story.
Edit: another great example of the press point-blank driving RH's branding, in this case 'intergenerational' [4]. What kind of agency can get this kind of coverage?
[1] https://blog.robinhood.com/news/2019/7/21/robinhood-raises-3...
[2] https://www.cnn.com/videos/business/2018/09/21/robinhood-fou...
[3] https://money.cnn.com/2017/09/08/investing/robinhood-baiju-b...
[4] https://www.trtworld.com/magazine/robinhood-and-merry-millen...
"Schwab earned 1.4% of revenue from payment for order flow, TD Ameritrade about 8.4%, and E*TRADE about 6.1%. Interactive Brokers has historically been quite reticent about participating in internalization, because it doesn’t play well with their sophisticated clients; they earn about 1.1% from it."
Scroll down to "payment for order flow" https://www.kalzumeus.com/2019/6/26/how-brokerages-make-mone...
Schwab sells theirs as a feature/benefit. https://www.schwab.com/public/schwab/active_trader/trading_t...
"Why Robinhood earns more than the discount brokerages for order flow is readily apparent: their product encourages options trading. This is bad for customers, principally because the supermajority of Robinhood customers do not understand options trading and the risk/reward calculus for them is even more borked than it is for the vast majority of people who engage in it. The options trades they engage in are also less liquid, and so have higher spreads, and so are more lucrative for marketmakers, "
[1] https://en.wikipedia.org/wiki/National_best_bid_and_offer
[2] https://www.investopedia.com/robinhood-hit-with-usd1-25-mill...
"After funding his account with $15,000 in credit card advances, he began spending more time on the app."
"As he repeatedly lost money, Mr. Dobatse took out two $30,000 home equity loans so he could buy and sell more speculative stocks and options, hoping to pay off his debts. "
"with whom he has three children"
Nothing Robinhood (or anything else) has will cure financial stupidity. Furthermore, anyone who -still- uses robinhood after their various crashes is asking for trouble. I've had zero issues with TD Ameritrade.
It's plain unethical and ridiculous that 20 year olds with no steady income get access to highly leveraged financial instruments that can ruin them for life.
Many options trades have an expected loss of nearly 100% - the same cant be said of holding stocks. Society has decided its OK to own houses, which certainly can decline in value, but outlaw ponzi schemes that for a substantial number of people are virtually guaranteed to wipe out their investment.
I don't think an age restriction is appropriate, other than 18/21/25, or some other reasonable definition of adult. But, I think it would be sensible to only allow options trades up to a certain percent of one's provable net worth - lets say 10% below $100k, 100% over $1M, or something like that.
None of these instruments can ruin a 20 year old for life. Worst case is 7 years of trashed credit from a bankruptcy.
And I have no defense for the "something else"s -- casino gambling exploits people in exactly the same way: https://www.theatlantic.com/magazine/archive/2016/12/losing-...
You could even cash advance on a credit card, buy a car, and wreck it and be in the same financial situation as you would if you gambled it away on robinhood.
Which is kind of terrifying for a country with democratic input. If people can't be trusted with their own money, why should they be trusted to decide who controls the American nuclear arsenal?
Ultimately, I'm not sure a free society, a welfare state, and universal suffrage can all co-exist in the long term.
I think any two could survive, but all three seem like a longshot.
I'm actually having trouble figuring out which two I'm rooting for.
In a democracy, the people (and their legitimately elected representatives) are also allowed to structure markets and decide on what business practices are and are not allowed
With this analogy, I think you inadvertently supported the opposite argument: the nuclear arsenal itself is not democratically controlled. Rather, we elect someone who controls it (with several layers of checks and balances).
Is it just the willingness for military officials to follow the order? I'm pretty sure the president doesn't have to consult with congress or the supreme court before doing this.
Makes you wonder about the risk management practices and incentives of that particular credit card company.
Famous example: https://www.investopedia.com/articles/investing/121515/how-s...
I have both RobinHood account and IBKR and I don't see how I could do an unhedged short.
As a retail investor, the only way I see to short is via options and there you can only loose 100%.
It also bears mentioning that an average result in Vegas is: you loose.
Benchmark returns for stock market is S&P 500 which is 8-15% yearly return (over multiple years, depending on how good the economy is during those years).
And the chances of doing better are higher than chances of loosing money.
It looks like the person in your example was selling a call, which has potentially unlimited losses - that was a rather poor decision on his part. There are much safer methods of making "the same bet".
Gambling is a random game designed to extract money from people. The stock market is a math game that doesn't care if you gain or lose.
So many of these stories involve highly-leveraged options stuff, reminiscent of stuff that even my schoolbook US history summation of the Great Depression described as super-dangerous.
Do people not just gamble on credit? I highly doubt casinos care about the average person's financials, as long as the money ends in their pockets.
I see no difference between the stock market and gambling, sure there's "smart strategies" to the stock market but at the end of the day it's the same result for anyone with a gambling addiction to either.
In stock market, you win on average.
Not to mention that stock market is much more a game of skill than game of chance (as is most of casino games).
I did very well in stock market and I don't feel like I'm gambling. I recognize there is risk and I lost money on some investments but I can usually pin point the reason I lost. It's not random.
And most people who buy insurance, have a good reason to make that gamble. But many people who trade, certainly through RobinHood, have no reason to trade beyond gambling.
Robinhood's crime is that they make it easier (and some claim addictive) to gamble.
Those are both highly gamified apps.
So maybe let's not play loose with meaning of words.
Gambling means 1 of 2:
"play games of chance for money; bet."
Investing is not a game of chance. I'm not making investing decisions randomly.
"take risky action in the hope of a desired result."
Investing could be gambling according to this definition (there are risky investment strategies) but on average investing in U.S. stock market is not risky.
If you abstain from doing risky things, you can have 8-15% yearly return by putting all your money in S&P 500 tracking stock.
And if you want to blame someone for people's risky investing, blame https://www.reddit.com/r/wallstreetbets/ (1.3 million people reading stories like "$35k -> $1.25 in 4 months") not Robinhood for making an easy to use stock trading app.
Just because TDAmeritrade has a very spartan UX doesn't mean people haven't made very stupid trades on it.
Robinhood is more agressive when it comes to margin calls, that actually protects inexperienced investors.
and in the financial markets, the federal government already has classist gatekeeping regulations because "poor people are dumb, rich people are smart", which should all be abolished
the finger pointing at Robinhood is based on ignorance of the entire sector.
and of course, the observation that not-rich people have plenty of ways to lose their money in systems with negative expected value, so why apply that to financial systems with positive expected value.
>“They make it so easy for people that don’t know anything about stocks,” he said. “Then you go there and you start to lose money.”
What a ridiculous appeal to emotion. "They" don't do anything. The guy made a bunch of shitty trades and lost some money. It's no ones fault but his own. I also think Robinhood tends to cop a disproportionate amount of crap for their down time. Maintaining 100% uptime is very difficult to provide. Even with the amazing code-as-infrastructure we have now its just not realistic to assume there will never be downtime.
Their track record might not be perfect but if you compare it to the average crypto exchange they are practically exemplary...
You really consider most early 20s to be grown-ass adults?
I sure don't.
As a society we decided that there is an age at which you become an adult, fully responsible for your actions.
At 16 you can start driving cars (aka very effective killing machines).
At 17 you can enlist in an army.
At 18 you can become a cop.
At 21 you can start drinking.
So yes, by definition of our society, at 20 years of age you're considered an adult. At that point if you act stupid, don't expect sympathy.
Just because you are legally considered an adult doesn't mean you are one.
First, do a quick google search on how long the brain keeps developing. Quick excerpt https://www.ncbi.nlm.nih.gov/pmc/articles/PMC2892678/
>Longitudinal neuroimaging studies demonstrate that the adolescent brain continues to mature well into the 20s.
Second, do you remember when you were late teens/early 20s? Do you remember how everyone was around you? I'm late 30s. I remember my early 20s while in university and basically everyone around me. I was still a kid and so were they.
Sure everyone develops differently but to act as if a 20 year old should have the same sense as a 30 year old is stupid and you know it.
However for a society to function we have seen the need to come together and decide on some objective metric where you are allowed to perform certain actions that have the potential to cause yourself harm if misused.
You giving your personal opinion that X years of age is not "adult" has no real bearing in this discussion.
It would be more fruitful if you suggested some clear objective measure on how to validate if someone is legible for trading options because this seems to be an action were irresponsible acts can lead to huge demise.
People can drive cars at 16, potentially leading to loss of own life, and others, if misused. Do you have an issue with that as well?
Unfortunately, they often haven't grown up yet.
It reminds me of the stories of children spending hundreds of dollars on apps like "Clash of Clans" and "Smurfs' Village" only for their parents to find out when they see the bill. Only now it's the parents that are getting taken advantage of.
As social media and TikTok-like products shorten our attention spans and continue providing instant gratification, it will become easier and easier to take advantage of people. These aspects, coupled with making the user feel smart (think "I'm a Wall Street trader"), and giving them the potential to make lots of money, may start getting applied to other spaces and could have drastic effects.
Investing is scary for most people. I think a positive spin is that Robinhood makes it so groups of people underrepresented in stock trading can participate. The stock market already is a game, and it's being played by rich people making themselves richer. Isn't it cool that a 22 year old with $100 can get involved, and it's not just old rich people who benefit from the system?
The stock market is soaring, despite millions being out of work in the US. The US has two different economies, and I'm all for anything that gives the latter group the same tools the former group has.
Do you really think that 22-year-old is going to buy $100 worth of SPY and watch excitedly for their quarterly fifty-cent dividend? Or will they make a bunch of emotional trades, each one transferring some fraction of their hard-earned money (not every time, but in an expected value sense) to a professional's algorithm? Robinhood's marketing and user interface are designed to encourage the latter, and I believe that's net harmful to their clients. I'd rather know nothing about the stock market than believe falsely that uninformed trading of single stocks was a good idea.
Of course nothing stops you from using Robinhood to buy and hold an index fund; but to the extent their app is designed to encourage you not to, anyone who tries to use it that way is stealing cheese from mousetraps. New investors would be far better off going to Vanguard or similar, even if they have to save up a bit longer to meet the minimums.
Whether trading/stock markets should have friction, and how much? I honestly don't know. There's obvious questions about nanny states, and giving people freedom to take risks, but there's also large actors taking advantage of the fact that they understand risk more than individuals and exploiting them.
It's very hard to get ahead financially without understanding the power of compound interest or the importance of putting your money to work for you.
The stock market is soaring, despite millions being out of work in the US. The US has two different economies, and I'm all for anything that gives the latter group the same tools the former group has.
Why should only rich people who know how to navigate beige clunky 1990s websites, or whose parents give them the number to their investment guy, be the only ones who get to trade?
And the frustrating part of this article is that they aren't saying trading is inherently risky, but rather that a certain group shouldn't be allowed to? It's a cliche that stock traders were jumping out of windows in 1929, but nobody said "we should shut down the stock market".
Everything can be overdone... gambling, sugar, video games. Why focus on the few people who take it too far, rather than the millions who now have the same access to wealth building that rich old people do?
Robinhood encourages active trading, which is almost always a bad bet for small traders.
Robinhood also provides access to much riskier things like trading on margin.
Except, you know, easier and faster than via vanguard.com
Literally every brokerage allows trading on margin because they all make more money that way (via interest fees).
Banks flood people with credit card offers (instant, unsecured $10k loan) and allow you to irresponsibly borrow against your mortgage.
How are those other companies any different than Robinhood?
Robinhood did not do this. Vanguard, Fidelity, Schwab have all existed for a long time now.
It sounds dumb, but... when you go to those, a lower income 20-something feels like they don’t belong and would leave. "Charles Schwab" feels like it's for people who look like Charles Schwab.
If you want to be mad about people losing money, be mad about the ones where it's rigged against them -- lotto/casinos. Not the ones where they average positive. Hard for me to take this even remotely seriously.
This whole article suggests one thing: Adults can't be trusted with their own money. That's more than a little insulting, and while it's tragic that gamblers have clearly used Robinhood as a substitute for other forms of their addiction, it's no different to the many documentaries I've seen of people doing the same thing at Poker tables or slot machines. It's just "bad" because it's in an app.
Meanwhile, I've been very happy with the things I learned using Robinhood. Not all of my investments have been successful. I've lost money on some. I've made money on others. I'm not particularly interested in shorting, and I follow the best advice: Don't invest what you can't afford to lose. Maybe they should make that their slogan, since that's really all anyone can complain about.
You get push notifications for stocks making big moves up or down. They show you popular lists which curates stocks in various ways (100 Most Popular, Upcoming Earnings, Top Movers), which makes it find stocks you might want to trade. They show you what analysts are staying about a stock (X% say Buy, Y% say Sell). They integrate news articles and autoplaying playing videos with finance news. The graph of you investing performance is animated the same as a game's high score screen. They also give you a free stock when you sign up or for inviting friends.
These are all mechanics pulled from social media and games to drive engagement. Vanguard is definitely not doing any of these things. If I'm more engaged with the app, I feel like I have a better understanding of the market. If I have a better understanding of the market, I feel more confident day trading.
At first glance its easy to view Robinhood as just a better UX for a finance app, but it's clear they've gone beyond just making it easy to buy stocks/options and are actively seeking to drive engagement.
This combined with the rise of things like r/WallStreetBets has definitely inspired a new type of investor/trader.
Most of that stuff is something I want to know. I don't want to make blind investments so research into stocks is a thing. And sentiment of others is additional information that has effect on stock price, just like wall street's analysts price target.
Really the only "sin" of Robinhood is that their app and website are fast and well designed.
This has nothing to do with the app, but the risk tolerance of those involved.
There are different levels of options trading for a reason. Giving level 3 options trading out to anyone is reckless; in the hands of many people these are tools that are pretty much being used for making leveraged speculative bets, not careful hedges of risk.
Decades of historical data is helpful in figuring out that if you just spend time in the market (with decent ETFs or stocks), you'll gain money. Timing the market is way worse than just spending time in the market.
The examples cited in this article are people who are at the extremes and very tragic but I hope it serves as a warning to other young investors that Robinhood is not a game and the money is real, so tread lightly.
Disclaimer: I've put in around $10k into Robinhood and it's not my primary savings/long term investment brokerage.
One really can't make an armchair diagnosis based off one observation, but this seems like a telltale sign of gambling addiction. The cycle of thinking that to make up for losses you need to dig the hole just a bit deeper to strike oil and float back out.
You could replace "trading stocks" with "playing poker" and it's basically the same story. In other words, someone played way outside of their bankroll and got crushed.
For example if you have $200 and want to get better at poker, you don't sit down at a table and put $100 or $200 in chips. You'd likely want to sit down where the maximum buy-in is maybe $2 or $5 so you can actually get experience and ride a bunch of variance without losing everything immediately.
Sure, you won't be getting rich any time soon but if your goal is to improve, you will slowly be able to move up as you get better.
When in doubt, follow the Rounders quote of "you can't lose what you don't put in the middle".
Investing isn't gambling, and Robinhood's conflation of the two is exactly the reason to criticize them. It's very likely that a share of SPY will be worth more in real terms thirty years from now than it is today, and that makes it a useful vehicle to save for retirement. What it does in the next day, month, year, or even decade is much harder to predict. By encouraging naive users to trade frequently, Robinhood is encouraging users to expose themselves to that short-term volatility, with no benefit except fulfillment of an urge to gamble.
1. Unless you're playing online against some guy with a bunch of fake identities and a bot. Is that still a thing?
The analogy I was going for was this person took what sounds like his entire savings and then took loaned money against his house and put it all into trading super high variance options.
I'm not an experienced trader but I occasionally talk to some. They all say options trading like that is a massive gamble. There's a big difference between long term investing into an ETF and doing what this person did.
He could have chosen to put $500 into his account and hand picked some stocks or ETFs and then watched it grow or shrink over time as he learns how to trade but instead he chose to use 15k+ and then 2 big loans on high variance moves to either hit it big or go bust in a very short time frame. It just happened in this case he busted.
I think he would have had the same outcome on another platform if Robinhood didn't exist.
I'd re-emphasize my point as to your opponent's skill. Poker (or most other games of combined chance and skill) gives you an opportunity to practice both at lower stakes and against less skilled opponents. In the public markets, you can risk as little as you want, but you're always playing against the world's best counterparties, unless you can find some instrument that's both too small to be worth the professionals' specific attention and too distinctive for their existing algorithms to generalize.
Isn't there some element of personal responsibility here? Is Robinhood responsible for the disastrous financial decisions of an individual?
One needs to look at the net sum. In my opinion, the net of the democratizing of stock trading, like other forms of democracies was a positive.
The issue, as I understand it, it's that Robinhood's UX has crossed the line from "easy, functional and usable" over to one that employs similar psychological tactics that social media, casinos, and lootboxes employ to keep users engaged with their product.
I'm not passing judgement on their implementation, instead likening it to similar pleasure cycles that lead to addiction like behavior in the aforementioned products above.
Is it really your opinion that the guy wouldn't fund his investments via credit card debt and then followed it up by borrowing $30k against his mortgage if only he used ETrade and not Robinhod?
Somehow, I really don't think so.
Mechanically, ETrade does not allow you to fund your account via Credit Card. You could request a check from your credit card company I guess...
But yes, most brokerage apps are focused on data, and less about engagement.
What exactly does this mean? I'm pretty sure you've been able to purchase stock as a retail investor for a long time now. I'm also pretty sure that the friction that used to exist to direct stock trading was a net positive for the average retail investor.
Any good tutorials on “intro to investing” purely from an educational perspective? But not just theory. Actual practical instructions.
If using an actual account just don’t use options and don’t apply for margin when you open the brokerage. It will be a cash only account and you won’t be able to lose more than you put in (assuming we’re talking stocks and bonds here, not Futures).
I cannot understate how important is that people first get to know what they are dealing with when they start investing in anything. Whether you are investing in housing, collectibles or exotic financial products you absolutely have to understand how the thing works.
Everybody knows you need to pay close attention when you buy a house because a small detail can make your entire investment a flop. Everybody knows to get expert advice to estimate value of collectibles or spot fakes when you buy for investment.
For some unknown to me reason people think the only thing they need to do is to look at nice graphs and try to figure out if the line goes up or down without actually understanding what the product is, how every single option works exactly, and the in-depth situation of the product and its market environment.
For you, people, who want to invest your money, please, do not invest in stuff you do not understand.
Financial markets are very complex these days and it is unlikely you are going to get valuable insight without treating it as your full time job and even then it is pretty difficult.
You are competing with huge corporations employing thousands of bright individuals trying to do the same but without risking their own money.
Your fallible mind will get you hooked because it is likely you will get some early wins and it will likely cause you to stop being rational about your market decisions. It is very difficult to be rational when significant portion of your own capital is at stake.
Having said that, I do believe there are lot of novice traders out there trading options without really understanding what they are getting into. Also, margin trading is another recipe for disaster if you dont know what you're doing. But none of these can be directly attributed to RH.
My only major callout here is, they very easily got away for being down during Market hours. For any brokerage, this should not be allowed without any consequences.
So it's hard for me to have too much sympathy for people who have lost money on this.
(I don't trade stocks very often. Every few months I rebalance things. This has worked well for 35+ years. I'm 57 now.)
They also don’t understand that Robinhood’s fractional shares and cryptocurrency are a degree more abstracted than traditional online brokerages and wallets.
About 90% of retail traders lose money, so buyer beware. It's hard to trade and beat the market.
Save most of your money and trade a small percent if you really enjoy it.
STILL A WORK IN PROGRESS
I wanted to hopefully arm people with some more knowledge about options before they started trading, and to try to protect them from themselves.
I know people who retired into daytrading, grad students who invested their living stipends In daytrading. Things calmed down during the 2002 recession.
I don't have access to the full article but if they are laying the case for having Robinhood regulated (as I suspect) then I'd say what's even more unfair is preventing responsible people from having nice things because irresponsible people can't be trusted not to hurt themselves, or understand the risks they're taking.
Granted, that bit about gamefication does concern me, it's sort of dopamine abuse - I'd argue to an extent it's a dark pattern, just like frequent unsolicited attention grabbing notifications from other apps to encourage use.
What does a trading app do with $1.5 bn? Isn't trading a commodity technology?
The rapid consumption RH has of younger retail market seems to imply the answer is firmly "no". The backend of sending orders to exchanges without caring much about latency is surely simple, but the UI and UX clearly had plenty of room for improvement.
Leveraged exposure to the stock market and the obsession with leveraged property are symptomatic of the fact that doing wealth creating jobs no longer pays enough to lead a decent life.
It's given us Trump, it's also totally brought the UK to its knees.
The rentier culture of wealth appropriation over wealth creation has destroyed the West.
To me, this just sounds like gatekeeping as usual. The boomer investors don't like the young blood coming in and ruining their game, and realizing how much money can be made by essentially shuffling money around on the stock market while doing nothing concretely valuable to society.