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Comment by cameronperot | Hacker News Reader

The only thing Robinhood did good was pushing other brokerages to get rid of commissions.

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.

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Robinhood is "easy" and mobile first. It wins because of UX.

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.

RobinHood is NOT free:

https://www.wsj.com/articles/why-free-trading-on-robinhood-i...

Commission free. Every broker takes something for order flow, some more than others.

Companies pay for retail order flow because retail is dumb; and, on average, is not going to have trades better than random noise. This is ideal for market makers so market makers pay for it and even offer better spreads to retail. Market makers don't want to be on the other side of "smart money" trades.

tl;dr you're not getting screwed by Robinhood selling your order flow, you're getting a benefit.

I recommend ignoring this misinformed WSJ article and reading this: https://www.kalzumeus.com/2019/6/26/how-brokerages-make-mone...

After that come back and see how the WSJ article is just a poorly written hit piece on RH.

> 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.

Is there a way to monetize your order flow?

That's a tough one. On one hand it should be easy because who wants to perform more clicks to get the same end result. On the other hand it shouldn't because it attracts people without proper knowledge who could possibly end up making a life altering mistake. I'm not really sure what a good compromise is here.

To expand on this, Robinhood offers instant gratification as well without requiring a wire transfer. They have "instant deposit" limits that allow you to start an ACH xfer and use the money to buy options/stock within a few seconds. Most brokerages require the multi-day ACH settling period before you can trade.

I tried using other platforms, but it is just annoying to use in one aspect or another. Not even talking about mobile apps (which are pretty important these days).

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).

I don't option trade, but I don't think Fidelity is really that fair of a comparison for option trading, they don't market themselves as an active trading platform the way Ameritrade, Etrade or IB do.

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.

I don't have the exact numbers for outages for every platform, but it seems like during the most recent RH outage in March, Ameritrade and Vanguard were down as well[0]. Which only fuels my initial suspicion that the rest aren't any better when it comes to outages.

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...

Their margin rates. I'm not interested in derivatives (don't trust myself not to flub it), I prefer old fashioned margin. I understand it better and it works for me. IB prices their rates with a spread based on the fed funds rate (I think), rather than just grabbing some random number out of the sky.

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.

Ah, I see, makes sense. Thanks for providing this explanation.

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.

UX is good in some ways, but bad in others. Once you learn more about investing, you realize how much power robin hood just omits for the sake of a clean interface. I don't mind having things hidden out of the way, if you let me put things back. Their UX has also been prone to lag, can have problems with clearing funds, among other issues in recent months/years, which is exactly what you don't want from a brokerage.

A good deal of post-Depression financial regulation was about making it harder for laypeople to invest, because the layperson is not really a "rational" investor and because there was a decade of real economic harm from letting people treat the stock market as a casino. People in the '20s were going in debt to buy stocks and then when the bubble finally popped it was ugly.

I don't know that good UX is a positive for society in this scenario.

Who decides that I am too stupid to invest?

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.

This is a perfectly sane position if your actions only affect yourself. The issue is that your actions affect others.

How? In your world there is no concept of personal responsibilty?

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.

The reason this regulation exists is because enough people doing it is systemic risk.

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.

You want only millionaires investing in securities? I don't have any right to invest because I am poor?

I am not against regulations, I think all existing regulations are perfectly adequate to protect inexperienced investors from themselves.

Regardless of the intention behind the rules, the actual effect of so-called accredited investor rules is simply that the most potentially lucrative investments are only available to the already-rich class. The general public gets the dog investments.

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 country is generally not all at the slots at the same time, and if you do dumb things in Vegas that basically impacts you and the casino and any immediate creditors.

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.

Many of the regulations are meant not to protect irrational actors but rather to protect rational actors from swindlers. For example, brokerages that push clients with zero investing experience to trade options.

It's easy to end up ahead if you buy diversified index funds and hold them for a long period of time. Stock investing should be boring. The bigger issue is people want results now and not in 10 years, and that's when the speculative investments begin. People need understand that's not what the stock market is, and that strategy is very likely to end with having the rug pulled under you.

M1 deserves some credit for designing something in the same space, but for a different market, and encouraging different behavior. They built the app around setting it and forgetting it, making day trading impossible, and auto balancing. You set percentages, and when you deposit or autodeposit, it buys whatever proportion is the shortest. You can active pick stocks or index etfs, but the only proper way to use the tool is buy and hold. More firms would be wise to offer that kind of simplicity, without having to manage WHICH shares to buy.

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.

That's the sort of knowledge that only comes with experience. Inexperienced people need to get burned a few times before they are ready to listen.

I have plenty of experience in this, both my own behavior and that of many people I know.

Good luck when the ETF's see issues from poor underlying liquidity.

Honestly, putting your money in an ETF so you have a bit more money when you retire is stupid. You cant retire any earlier investing that way, and you are subsidizing all of the terrible sectors included in the etfs. Its brainwashing to do it.

Maybe. There are leveraged ETFs that do even better than the index, and most retail investors fail to beat the index anyway. Look at all the people on reddit talking about how they are coming back from a 90% loss or something crazy.

Leveraged ETFs are too risky. The better return is to just buy the top 30 tech companies by market cap

> so you have a bit more money when you retire is stupid. You cant retire any earlier investing that way

This doesnt make sense, either you have more money and can retire earlier, or you dont.

What I meant was, the returns will not have a material impact on your retirement. You may retire a year or five early. But if you just targeted your investments a bit more, you actually have a chance at making real money. Why are people working their whole lives? Pumping all their hard earned money into a security that wont do any better than their peers and thus gets them no further ahead? Its brainwashing sold to the masses.

Picking stocks is work. It's just another part-time job you can do, so you have to consider what it pays (usually negative), and how much you like the job.

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?

Investing advice that is ingested by the public from professional investors is the advice that applies to managing billions of dollars of capital. Its an insane situation that the public listens to people whos objectives, risk tolerances, benchmarks, and professional goals are completely different.

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

So what advice should we listen to?

Can you point to one example of an active investor who earns more that 100% per year over say 5 years?

Because the data shows that those who invest in that boring ETF outperform their active investor peers?

Both of you guys are missing something. Investing advice that is ingested by the public from professional investors is the advice that applies to managing billions of dollars of capital. Its an insane situation that the public listens to people whos objectives, risk tolerances, benchmarks, and professional goals are completely different.

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

So, basically, the usual answer from active investor proponents: There's a secret system! I can produce outsized returns, trust me, it's possible! I'm just don't have time to tell you what it is, but pinky swear there's totally a way!

> But if you just targeted your investments a bit more, you actually have a chance at making real money

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).

What? I put on orders to buy two funds in Fidelity IRA and they still haven't closed my position and no explanation of what's going on.

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.

They also have a surprisingly low margin interest rate for low net worth individuals. As far as I know only Interactive brokers beats them (and they beat everyone at every level). We like to take the piss with lol wsb and so on, but I know for a fact their clearing partners have a lot of respect for their operation. I see them as a Tesla tier operation: lots of haters, but they do more right than they do wrong.

Exactly, It is ridiculously hard for poor people to invest in securities without Robinhood.

Tesla is innovative but has shoddy quality. They rank the lowest in quality even if you check insurance companies. But boy was the innovation needed in the car industry. I’m just happy it got enough in government subsidies to stay in the market.

https://amp.usatoday.com/amp/3249943001

Robinhood has terrible fills in my experience vs ToS or IB.

IB has a terrible UI but excellent order routing.

Did you try the IB mobile app? It has quite a nice UI compared to the desktop trading software. For example the option chain builder is very easy to use on the app. Obviously if you need all the advanced features then the app will not be good enough.

Agreed the option chain & strategy builder is both better and seemingly more complete on mobile. For instance, there are far more expirations available for futures options on mobile than on TWS.

The IBKR API would likely list them, and I assume that's how people get the most value from using it as their broker.

I'm actually in the process of building a low-frequency trading bot on top of the IBKR API haha.

It’s fine if you do a limit order.

Limit orders are not guaranteed execution.

What's ToS and IB?

Thinkorswim (TD Ameritrade's trading platform) and Interactive Broker.

I've read a few articles that have suggested it's like a mobile game for the millennial. They look at it as something to play and have fun with. Perhaps this trading platform is a form of entertainment for them, like a slot machine or roulette wheel........

Well they sell your trade data to HFT firms before a trade is executed to let them arbitrage on you so you are probably net losing money vs fees from other brokerages.

No. The opposite thing is true: HFTs want your retail trades because the cost basis of trading with you is lower than with trading with the broader market, and they can split the difference in savings with the brokerage. If anything, you're likely getting price improvement from the HFT.

(None of this makes Robinhood good; it's just that PFOF doesn't explain why they're bad).

Ok now I’m re-heartened, it comes up every time but it gets good rebuttals now xD

Yes, this is exactly right. The truth about HFT is that it has materially reduced the effective trading fees for retail investors across the board.

> 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.

That's not the sense in which market makers "win" on these trades. The information market makers are capitalizing on is "your tiny retail trade isn't followed by a giant block of additional trades unloading a huge position held by a pension fund", not "you are too dumb to know what this stock costs".

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.

The market makers win on both factors. Their concern is that my sell order will be followed by many other orders to sell, because that would leave them with a large inventory of stock that they can't unload except at a loss (because the market impact of that selling probably drove the price down).

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.

> Trading with you (a retail investor) has a lower cost basis because retail investors are reliably less sophisticated than institutional investors

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.

That is not true. The market makers buying the order flow are bound by the National Best Bid and Offer (NBBO) according to Reg NMS. Which means they cannot fill you at a worse price than the NBBO. However, there is a lot of liquidity on venues that are not part of the National Market System. A good, real broker will find you that price improvement, and pass it through. The MM buying your order flow will not, and will pocket the difference.

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.

Out of curiousity, what happens with a 123 share order? Are 100 subject to those rules and 23 are not or?

yeah - if you place two market orders with two different brokers, you will get two different results. so what? use a limit order. with all the electronic routing that markets have nowadays, I would be surprised if retail brokerages differed that much in their ability to execute a limit order in the same set of market conditions.

Why did this get downvoted? Price improvement is strictly better than no price improvement, but there's no reason to expect that every brokerage will divide the economic benefit of their uninformed order flow between themselves (as payment for order flow) and their customers (as price improvement) in the same ratio.

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?

Interesting, is there anywhere I can read more about this? Having a bit of trouble wrapping my head around it.

https://www.kalzumeus.com/2019/6/26/how-brokerages-make-mone...

Matt Levine has written about how that's not exactly an accurate portrayal (second section of the newsletter below)

https://www.bloomberg.com/opinion/articles/2018-10-16/carl-i...

It's called frontrunning. I would believe it if they'd do it themselves,as there isn't enough time to pass on the trading data to someone else.

There is when you've got a microwave link.

"Well they sell your trade data to HFT firms before a trade is executed "

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...

Everybody does it.

"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...

Thanks for that, from your reference:

"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, "

PFOF doesn't exempt a brokerage from NBBO rules [1], that's the thing that actually matters. Now, Robinhood isn't always very good about that [2] but that's a different issue.

[1] https://en.wikipedia.org/wiki/National_best_bid_and_offer

[2] https://www.investopedia.com/robinhood-hit-with-usd1-25-mill...

Man this comes up every time. Pretty much everyone does payment for order flow now, and some brokerages cut you in on it, all reflected in the price of the buy/sell. You should look at overall order quality and not just PFOF because places that do PFOF are trading better than national best average and places that do PFOF are doing worse, it’s a variable.

The hfts HAVE to give you at least as good execution as is available on the market, and if they trade while they are holding your order your order can’t execute at a worse price than their trades (Manning rule).

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.

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