Robinhood and How to Lose Money
themargins.substack.com
themargins.substack.com
* Robinhood order flow is informed and toxic like all other brokerages. Taking the opposing side of all Robinhood trades would cause a broker-dealer to lose all of their capital very quickly.
* The "bad prices" the "novices" are trading at, are in fact, the same market price that all participants trade at (at or inside the bid/offer). If the prices were obviously bad, there is free money available to the author here by simply quoting inside the spread.
* Recall that the majority of trades on lit exchanges are from professional or institutional investors. For this reason, spreads are wide because providing liquidity means you will likely get run over. Robinhood orders do not exhibit as much short term momentum, and so trading against them is safer for broker-dealers because there is less risk. This risk profile is valuable, and you might wonder what's a fair way to allocate that value. One option is to not capture it, and send all Robinhood orders directly to the market. The author implies this makes sense (a gravy-free approach), but it does not, the retail customer actually ends up worse off. Another option, the one that occurs in practice now is for the value to get split between the counterparty taking on risk (Citadel, in the form of less toxicity on orders), the customer (the Robinhood client, in the form of price improvement over the national bid/offer), and Robinhood themselves for sourcing the flow (a commission or payment).
Why? This is literally the definition of order flow purchasing and market making. Flow amidst spreads creates profits.
The non-cynical explanation for Robinhood’s flow being attractive is in the law of large numbers. Robinhood’s trades are tiny. That means buying their flow gives one lots of small, idiosyncratic exposures. Institutional flow, on the other hand, is lumpy, which can leave one with a few giant positions.
That said, there's money to be made in providing liquidity on chunky trades, as long as the price is right.
He means taking the opposite side as a principal - like many spread betting companies do. Which is dangerous because not all Robinhood clients are small and uninformed.
If you're large enough, your client base represents the market generally. That means your client base by definition doesn't outperform the market (ie has zero alpha). So that means that facilitating their trading earns you the commission and the trades you have to unwind have net zero alpha. This is not entirely true because it ignores some important effects around how commissions work etc (which end up meaning that broker/dealers are structurally long the market in general) but is not false enough to matter for the purposes of this discussion.
Imagine you had one client who knew the future (ie every trade they made would make them money). By definition taking the other side of that trade would therefore lose you money. Their orderflow would be "toxic" - by trading with them you would always lose money.
When someone says that orderflow is "informed" what they mean (usually) is that the people making the trades have more information than the rest of the market and therefore will trade when beneficial to them which is likely to be net/net not beneficial to you (if as a broker you're on the other side of the trade).
Now, whether or not robinhood order flow is on the whole informed or toxic is another question. Personally I would be surprised if that turns out to be true but I could be wrong.
In which case your client do not represent the market, either by volume, or by number.
If you can actually know in which ways your sample is different, you can play it then against the market.
Robinhood would optimize its input for small clients with less knowledge, or clients looking for highly speculative risky plays of smaller volume. These are very specific characteristics that likely differ from general market.
A "toxic" position is one that has a high chance of moving against the holder. Taking the opposite side to informed trades might be toxic, but taking the opposite side to the first buy trade in a series of a hundred by a big mutual fund company who decided they like a stock is definitely toxic because they will continue moving the price higher with each trade -- so the brokerage doesn't want to keep these short positions on their own books but source them in the market.
According to the WSJ, compared to other brokerages, Robinhood disproportionately takes that value to themselves [1]. Part of the reason why it's so lucrative for them is that they're steering their clients to options trading, where the incentive payments from the market makers are much higher. I think this quote from the WSJ tells the whole story:
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.
[1] https://www.wsj.com/articles/why-free-trading-on-robinhood-i...
That is, they clear the purchases/sales internally if they can, going to "the stock market" only if they can't fill it? Or that is a big no-no for brokers?
Payment for order flow and internal clearing are 2 ways to execute out of a ton of options that a brokerage has. The specifics are seen as moats / “the secret sauce” for these firms so you’re not going to see anyone spill the specifics of how they get price improvement. But there is a ton of legislation & complexity around it for sure.
Either way, they would have to print the trade to the tape, so it's part of "the stock market" regardless.
Bam. Nailed it here. Instant credibility.
A pity your HN account is "new" (green color), as I would love to hear much, much more from you.
Also, I think you mistook the meaning of “overtrading at bad prices.” Buying Hertz at any price in June was overtrading it, and at a bad price to boot.
The author claims that for Robinhood, "maximizing user engagement" translates into blindly optimizing for getting more and more individuals to trade more and more. Those individuals are not paying for the product; they are the product. More precisely, they are the raw material for generating as much order flow as possible for sale to Wall Street firms.
Robinhood, in other words, is in the business of MANUFACTURING as much order flow as possible from its raw material, retail investors.
This is probably Not a Good Thing™ for retail investors.
Be ready to jump ship if the benefits no longer exceed the costs (lock-in, bad business practices, sale of personal information), etc.
This could be wrong, but I think the direction of wealth transfer is worth considering - is this wealth redistribution, or is it the rich and powerful looting the middle class?
It is trading platform that combines 1.) user engagement/gamification with 2.) targeting a core userbase of young adults that are both financially unstable and inexperienced. It's disgusting and immoral.
This is the epitome of late-stage capitalism. Extract as much money as possible from gullible users. Except we're not maximizing screentime anymore to leverage ad revenue and micro transactions. We're maximizing screen time to drive trade volume while letting people make financial decisions that can literally ruin the rest of their lives.
Well, at least Robinhood's platform hasn't directly led to young adults committing suicide. Oh, it has? Nevermind...
Maybe with some of your money, but not to the extent a lot of people are doing.
People want to get rich quick I guess? Even if you do want to do that, why not pick a brokerage which doesn't take as much from you, like IBKR?
It's just a surreal situation to me.
The stock has since gone up a lot more, but my dad told me: Buy low, and Sell too soon.
(But this is more about psychology than math. For some people this would be the worst option, because if the thing would lose value, they would blame themselves for not selling everything when they had the opportunity, and if it would gain even more value, they would blame themselves for not waiting with everything. So it would be lose/lose from their perspective.)
This is a gambler’s mindset. That’s fine. I enjoy playing poker with friends, and when I do so, I reinforce those neural pathways with respect to cards.
But I’m risk limited, socially and personally, in that setting. Robinhood is different. There is no social pressure to limit how much money one puts in a trading account. So when the UX pushes one to gamble with thousands of dollars, and to reinforce gambling over investing pathways when it comes to the markets, we end up with a self-destructively trained generation.
That’s troubling. Robinhood can be used responsibly. But even taking most of the comments on HN, it seems to make that difficult.
The concept of diversified risk is not something they are familiar with at all, so they don't see the issue. Many feel comfortable trading consumer company stocks because pop culture and consumer technology are things they have opinions on. And for many it seems like the key to success in trading is finding some insight to bet on, like "everyone loves Netflix, Comcast is doomed," or finding nascent categories like bitcoin or weed. The lack awareness of the complexity of market success makes it harder to grasp why indexes are a more reliable investment strategy.
BTW: I gambled on IBKR, not RobinHood (I have RH account but don't use it).
I just don't get why RobinHood is so vilified for the crime of making a fast, usable app.
I use IBKR but their website is just bad. A security theater that makes logging in slow. Sometimes it fails to log me in. Sometimes it fails to show my portfolio. Because, you know, it's only job no 1 of an investing site.
If you're thinking of investing, apply the "strong beliefs weakly held" practice; you think you may get high returns, so look for examples to the contrary to challenge your own beliefs.
As far as short term investment goes, the market obeys certain dynamics to a first order at any rate, and by being aware of those dynamics and making statistically sound bets you can pretty much be assured of doing better than a simple buy and hold.
The people who lose their shirts don't use statistics, they buy when a stock is going up and sell when it's going down.
Regardless, even if you have a strategy that works for now, that doesn't mean it will continue to work forever. Anyone investing that isn't an expert in a particular industry in which they trade is basically just guessing. Any insight they have will almost invariably already be priced in.
The more interesting questions is "can you actually, consistently, make money if you are good and spend a lot of time analyzing the market. In other words "can you actually have an edge on the market". From what I've seen it's so but most people don't believe it.
Everyone who says that they in particular can beat the market consistently year after year, unsurprisingly won't reveal any evidence behind their claim. It's always things like: "Oh, it can be done. Trust me! There are ways! You just don't know them and we market-beaters do! You just have to analyze harder, bro."
Sure, if your sampling was unbiased. But here, it's not - so that user might well have been lucky. How many people have failed to make those returns, or any kind of return?
There's very obvious evidence that somebody can outperform the market, even to a massive degree. From what I know, there's very little evidence that a particular person can deliberately outperform the market - and daytraders, especially, cannot do so consistently.
My first year was hard; and it was emotional. I was too excitable and got hooked a little. But I steered my way through it with a very small loss. I considered it the cost of my education.
But I really started getting the hang of it my second year. I started swing trading and learning the mathematics and psychology of the market. I didn’t break the bank with profit but I did make a few % points.
I’m in my 3rd year and I’m a decent hobby trader now. I’ve been consistently beating the market in my “spare time” (I have a full time job and a side hustle). I don’t really get too excited anymore. I’m very methodical and pretty u emotional.
To be clear: my trading account is not my retirement and it’s not my savings. It’s “mad money” and I use the post-tax proceeds for vacation etc.
But yeah, I’ve had a decent experience with RH, learned a lot, made a few $$$ and had a good time.
Admittedly, there are days where it’s hard to see where things are going - especially high vol days. But when vol comes down and the market slowly heaves one way or the other, there are tickers that pretty much always go with the flow. Buy low, hold for the swing. Or short a bump and sell lower... it’s really not rocket science. Just don’t get greedy... hit your target a get out.
The real question is: is it worth my time in terms of ROI? Frankly, no not yet. I am streamlining the work, semi automating thru alerts, triggers, and buy/sell presets. But my paycheck and my side hustle still pay better. However I’m on a slow trajectory right now and I’m curious where it’s going. Will I plateau? Yes probably. But I’m enjoying the ride.
The net expected value of the dollar doesn't have to be positive. Losing $2000 over 80 years of your life is certainly worth is a non-factor for many.
Add in the fact that RH has reduced barriers to entry to investing. It's way easier to get RH and buy VOOG than to get Vanguard set up. I have enough in both to know.
This is the problem solved by ETFs. Small amounts of money buying lots of diversification.
Is this really true — from a rational perspective, and not one where someone idolizes wealth or being able to purchase "whatever they want?"
The utility of anything — including money — diminishes as you have more of it. The utility of the next hundred million dollars is less than the first hundred million.
So I don't think a rational actor would take the gamble.
So if one idolizes wealth then clearly they have assigned high utility to money in a non-diminishing returns sense. It is then rational for them to match their utility curve. Life is full of threshold systems. Given that, it would be very unusual for utility curves to not be deformed by them.
It's easy to construct a few scenarios with locally convex curves:
* You're in debt to the mafia and you will die if you don't pay them your $100k debt. You have $10k dollars. Do you spend the $10k to try a long shot of making $100k?
* You're poor and make $15/hr. If you save you will have an extra $1000 a year in savings. You will never own a home. You will never have time to study for a better job. The magic of compound interest with contributions is in the regularity, not so much in the amount. Put $1000/yr in a calculator and $998/yr in a calculator (assume it compounds 3% every year) and see the difference you get over 60 years. It is insignificant on a 60 year horizon. $2 will buy you a powerball ticket, and maybe out of this life.
* You're an immigrant. You need a few million dollars for your investor visa. Your current visa runs out next year and then you return to a slum.
I tend to agree with your point for larger sums like a billion dollars, but maybe you're really passionate about the potential for EVs to positively impact our growing climate problem and need an enormous pile of cash to get that off the ground. People are complicated.
Same motivation as gambling. You can enjoy the hope of the possibility of wealth. Steady investment will never give you that. Of course, this involves a heavy dose of self-delusion, also popular these days.
Sure it does. I've seen lower middle class people become millionaires that way. Of course, one needs the discipline to not succumb to spending it on a car/house/divorce, and the intestinal fortitude to not panic sell when the market tanks.
The empirical evidence is clear - for most people, day trading of any kind is a reliable way to lose money, and even buy-and-hold can kill you if pick the wrong asset class. (Ask Warren Buffet.)
You may be lucky, you may have an unusually effective model - but the odds are you're the noob at the poker table and the pros are laughing at you as they clean you out.
The S&P tripled in value since 2010, so you would've had to invest $333.000 at that time and cash out now to become a millionaire. But few people have that. That's a 1%, I already made my fortune / I have rich parents privilege.
Sure, ANY amount you put in there would've gotten tripled, but turning $1000 into $3000 isn't going to make that big a difference.
And if you have hundreds of thousands lying around, I'd argue that buying a house would be more beneficial for your well-being in the short term.
Disclaimer: I've invested some money in the past, both low-risk long-term stuff, index funds, and 'play money' into meme funds like Apple and Tesla. I think at most I've doubled what I put in? Didn't lose money (even with the rona), that's for sure.
I try to not go "I should've done x" too much though, like "I shouldn't have sold my handful of $250 Tesla stocks when I did".
If you'd done this 40 years ago, the million dollars you'd have today would have the equivalent purchasing power of $300,000 in 1980. Inflation is a cruel master.
Some common answers might be:
* healthcare, always expensive
* things for your kids, including education, housing, access to jobs
* random consumer spending including holidays or travel
* charity
Presuming you were able to actually afford saving $400/mo while living reasonably comfortably which is definitely not a given and not quite as common as expected by some.
And presuming you're not altogether unlucky in your strategy, which can happen.
You will have probably also accrued still useful assets to pass on or use. Or lost them.
$400/mo saved in a 0% interest bank account for 40 years = $192,000
$400 * 12/year invested at 10% (incl. inflation) for 40 years = $2.12 million
While $2.12mm in 2020 money is $440,000 in 1980 money (assuming 4% inflation), it's still much better than the alternative.
A couple of other points:
* Investing $400/mo earlier is relatively harder than $400/mo later in the 40-year timeline assuming compensation increased by the inflation rate but one keeps the invested amount ($400 here) constant. This is ignoring factors like salary increases later in one's career (not sure if that even generalizes for lower-income professions).
* I wonder if there's any study done tracking if there's actually a steady increase in spending consistent with the inflation rate for all individuals (with some stochasticity). Or, do people adjust the goods they buy and "outwit" inflation? For e.g., the biggest purchase one makes usually, a house/apartment, doesn't scale with inflation. Similarly, electronics actually get cheaper. So, apart from food, does spending actually track inflation?
VT is another good choice if you're lazy and just want to own a slice of the global stock market.
2. SP500 companies earn ~40% of revenue from outside the United States
To put it another way - it rolls off the tongue better than "buy a weighted amount of a CSRP (or comparable) US Total Market Index and FTSE (or comparable) Global All Cap ex US Index, where your weighting is probably slightly overweighted to domestic".
Often (usually?) when people say it, they aren't literally advocating to only buy S&P 500. Some people still do recommend this, but I'd wager they're closer to a minority now. Famously I'm pretty sure Warren Buffett is still advocating S&P 500 only, and it takes a long time for voices like Michael Burry to outweigh. Vanguard pushed out a whitepaper years back, and made a very public change in their own corporate 401k to get rid of the s&p500 fund choice.
Apart from the 2008 boom/crash, owning a house has been a great way for the middle class to become asset millionaires. I knew someone in London who was routinely out-earned by the asset appreciation on their own house.
Besides, inflation has rather moved the bar for "millionaire" to every middle class couple with a house and two retirement funds..
there are certainly some hot real estate markets where houses appreciate a huge amount over a short period of time. in hindsight, it looks like a no-brainer to purchase a house in these areas. on the flip side, maybe someone builds a huge apartment complex on your street right before you wanted to sell and the value plummets. if you look at the whole american housing market though, there is a ton of variance but in the long term it seems to barely outpace inflation. [0] once you factor in maintenance and property tax, it doesn't really look like a good investment vehicle. imo, buying a house is best looked at as an alternative way to pay for housing which may or may not be superior to renting.
> Besides, inflation has rather moved the bar for "millionaire" to every middle class couple with a house and two retirement funds..
for sure, a million dollars just isn't that much anymore. if you follow the 4% rule, it gives you about $40k to spend every year. which is basically what it costs me to live in a studio in a relatively nice part of town as a single twenty-something.
[0] https://static01.nyt.com/images/2006/08/26/weekinreview/27le...
It was abundantly clear when we bought that our location would not have a large apartment building built next to it - you can at least to some degree select for factors like that.
With all costs considered, we lived in a 2000 sq ft home with attached 2+ car, large shed, biggest yard on the block, etc. for a little bit less than it would've cost us to stay in our previous small 2 bedroom apartment in a equivalent enough location, assuming even that the rent remained the same for the past 10 years.
And on top of it we're walking away with $100,000 in equity. That is accounted for in the costs - but I'm not so sure that I would've actually saved that $100k if it hadn't been getting stuck away in the property value all along.
Anecdotal, of course, but it seemed like a no brainer at the time and in fact turned out to be such. It's not for no reason that home ownership is widely recommended as a good financial move.
Indeed. Hoarding cash is for fools. I'm always bemused by the claims that wealthy people hoard cash.
And some will set up a charity, but people like Bill Gates have never spent a significant portion of their wealth on that. Again though, that may be a logistical problem - they can't spend money fast enough whilst not splurging it.
Of course, the solution is simple; have the companies pay their staff better. Or give the staff stocks themselves, to be force-bought by the employer when they leave / get fired, and have it pay out dividends monthly to stipend their base income. This gives the employees representation in the board of directors as well, which is much needed in the modern capitalist system.
That is not "hoarding cash" - keeping your net worth under the mattress or in a savings account is hoarding cash. Perhaps, at the margin, a money market account.
This has been its use for a long time in any publication talking about money.
I know when you say "hoard wealth" you really mean not spend their wealth, because I'm not really sure how you "hoard wealth", as being wealthy basically means you've got stores of valuable assets... or a hoard if you will.
The two phrases are definitely not used interchangeably.
Only if you decided to sell then. If you did nothing, you'd have been fine.
I think he was referring to the adrenaline rush, not the potential to make life changing amounts of money playing the long game, which clearly doesn't yield the same 'rush' he was referring to but is none-the-less an effective strategy.
I'm an unabashed adrenaline junkie: I've been in martial arts, school sports, motorsports, I did regular public speaking engagements for my startup and in academic-based oratory before that, and spent time in high end Kitchens... but with that said, to this day I will never understand the mediocre adrenaline 'hit' you get from gambling. It's really low level stuff to me, like lower than lifting weights or running a mile, something I did regularly at the gym after getting beat up working an 11 hour shift of a busy Dinner service.
I used to play $10 buy-in tourneys of Texas-Hold'em (forced into is more like it) hosted in the living room next to my bedroom when I was in my late teens/early 20s in Motorsports and I often got so bored, even when I won, that I failed to stay in if it went longer than an hour and often asked to take a cut on my pot/payout and forfeit to just get some sleep as I had school and work in the morning.
By contrast my professional driver friends/roommates were up until 5am and one of them played online for high stakes, the other played the stock market on the side and said it felt like the same 'rush,' as a day at the track but I could never relate to either of them as a track day was way more intense for me.
Flash forward to my Bitcoin days and after the initiation you get from from a couple of years in that space with such absurd volatility and all that the drama that follows it is such that nothing really even compares to it anymore, and I wasn't even a day trader, I'm merely an early(ish) adopter so none of this makes any sense to me at all.
What I do know is that this was done for gamblers [1] after COVID and is slowly becoming the norm in legal states that have re-opened due to the demand these, quite frankly addicts, create for the Casino Industry.
I wonder if something like Neuralink could help mitigate these diseases, as it all seems to stem from a neurological/neurotransmitter stimulation/feedback loop. I'm less concerned with the Matrix-style downloading/AI integration and more focused on what it could do for people with severe Depression, Alzheimer's, Parkinson's, and ALS.
1: https://www.highstakesdb.com/10328-covid-19-friendly-blackja...
Stocks, on the other hand, have an upward bias. Of course, there could be events like losing a war where your portfolio will be vaporized, but in such cases you're going to lose anyway, so there's no point in worrying about such catastrophes.
I.e. I don't invest in ignorant fantasies.
I recall going to Lake Tahoe once. Buses would pull up to the casinos, disgorging mobs of silver-haired people rushing into the casinos to spend the day losing money.
It's sad.
Granted, I do complicate things a little by insisting that I never sell anything I buy, not even for rebalancing, until retirement (otherwise I wouldn't be buying and holding in my eyes). However, I get around that by constantly rebalancing with new money [1].
Honestly, I find it rather jarring that as someone who usually frequents /r/personalfinance and Bogleheads, I see lots of investing suggestions on HN that do not involve indexing.
Some people call it "locking in your gains". I call it "minimizing your returns".
Gambling is a word used to describe anything beyond your own acceptable risk tolerance.
gambling - where the odds are against you
investing - where the odds are in your favor
Investing in individual stocks (what you call "gambling") is more risky than investing in S&P 500 but that's the trade off. More risk leads to more reward (or more loss).
If you invest in AAPL (or AMZN or GOOG or FB or NFLX) at the right time, you will 10x your money in under 10 years.
Is investing in any of those companies "gambling"?
And sure, you can also loose money, but "data from the BLS shows that approximately 20% of new businesses fail during the first two years of being open" so you can also loose money opening a business and yet we're not name calling people who open restaurants "gamblers".
> yet we're not name calling people who open restaurants "gamblers"
In one of those situations your hard work has a significant influence on the outcome and in the other it has no effect at all.
Think of it as being a indie VC. Most investment will lose, the ones that gain might make you a lot.
The quality of life improvement varies in the income bracket. Not every % increase is equal for individual humans.
This is that for people who consider themselves "gifted".
> And let’s remember that options are far more illiquid and opaque than standard equities.
Okay, first of all the growth of the options market is AMAZING, and their utility increases the more liquid the market is.
So massive new groups of traders with a low barrier of entry make options much more liquid, and this is amazing.
There used to only be one series of options that expired once per quarter and had 5 cent ($5) bid and ask spreads, and strikes only every $5 or $10 dollars.
Now there are 20 series trading at once and pretty much all indice constituent companies, let alone the index itself, alongside strikes every $1 - $2.5 dollars, even $.50 cents sometimes.
There are so many strategies that were unviable because the spreads were too wide, the strikes were too few and far between, and the commissions structure was prohibitive.
That's all changed now, and that's the other perspective.
Robinhood is also still handicapping users, as the regulations allow for much greater amounts of leverage and margin capabilities, which Robinhood doesn't offer yet, which TD Ameritrade and others have offered all along. So all the surprise and angst directed at Robinhood is as ignorant as the speculators that you are worried about.
This is an education problem, not an access problem. They are mutually exclusive.
To the people not using options for what they were made for:
"Just avoid holding it in that way." - Steve Jobs
Are you claiming Robinhood users are responsible for a significant fraction of option market liquidity over the past year? Because that’s categorically wrong.
No, I am not quantifying Robinhood users, only elated to see one chisel helping narrow the bid and ask spreads across expiration dates.
Shouldn't bother you that much.
It's the same as Tesla making electric cars popular. They don't sell the most cars, but you'd have a hard time arguing they haven't moved electric vehicles forward.
Options don't trade as frequently as cash on most names, so you don't actually need people to buy and sell in order to make the market tighter. They just have to place orders that tighten the spread. Price discovery becomes easier even if you only have one additional order placed inside the prior NBBO, because it affects the fit of the vol surface.
(For those who aren't aware) The problem with options is that your liability with them can get bigger than your equity. You buy 10 shares of Newthing.js for $1000 ($100/share), the maximum you're losing is $1000
You shortsell NTJS because they use JS instead of Ruby, but guess what NTJS rose to $200 per share and at the time of selling you need to cover the difference.
(Edit: had conflated put options with shortselling, https://www.investopedia.com/articles/trading/092613/differe... ), as the article says "Because of its many risks, short selling should only be used by sophisticated traders familiar with the risks of shorting and the regulations involved. "
- banning short selling during a market sell off irreparably harms the options market, exacerbating market dysfunction.
- the tail wags the dog. although equities/asset prices should dictate options prices as an afterthought, options activity often can dictate equities/asset prices.
- options market should not be ignored in policy decisions and should be made more efficient to ensure better price discovery in both options and their underlying assets.
- options market hours should be extended
- big data challenges across broker dealer firms hamper the immediate rollout of all possibilities regarding improving options contracts, the solution being incremental rollout of series and smaller quotes
its not really about arbitrage between markets, it’s the varying motives within the options market and varying prices others are willing to pay. Although this can be influenced by arbitrage between markets for some people.
the formulas are based on stock prices, and at least 5 other things, but a small options market was ignorable, while a big options market shouldn’t be
Options arbitrage between equity and options via BSM variants is settled science. As is put-call parity, an arbitrage between put and call pricing. The latter is a perfect arbitrage—it is riskless. The former is not, there is risidual risk that must be continuously managed. (That management is another transmission mechanism for information between the markets.) When mismanaged, it blows you up. But it still enforced a tight, arbitrabgeable relationship between equity prices and options.
What does blow people up is thinking options models are B.S. and then going and trading options. They’re likely the reason my options-trading hedge fund stakes have been doing so well.
If I think stocks are mispriced, I will probably buy an option to maximise the profit from my edge. That will drive the equity market. How arbitrage is derived is irrelevant.
> You shortsell NTJS because they use JS instead of Ruby with a strike price of $90 but guess what NTJS rose to $200 per share and now you're down $110 per option you put (minus the call option sell price).
Regarding your edit about the trading example, you are conflating so many things to make your point. People that know how to control risk don't have this problem, or use those terms.
Your risk issue is shortselling an options contract. Not shortselling a stock, which would be the actual opposite of your buying example. The options equivalent of both your buying example, and the corrected opposite, would lower your risk substantially more than purchashing/shortselling in the shares market, instead of increasing your liability.
Let me know if you wish to have that explained. It is distressing for me to see misinformation forming a mob against a benign market, which may result in even worse regulations for managing risk.
I am aware of this and I agree that my example is a simplistic one. But it is what seems to be on the mind of most option traders.
> Your risk issue is shortselling an options contract. Not shortselling a stock, which would be the actual opposite of your buying example
You mean this right? https://www.investopedia.com/articles/trading/092613/differe...
Agreed, I think I got that mixed up. Yes, if you're covered for your put option then your liability is limited
Only if you sell them. A bought option’s maximum downside is the premium.
Does Robinhood let users sell options?
Also from a real world perspective, I have tried Robinhood and Schwab market orders and they are very close to each other (most of the times - same price down to the penny). So I am not sure why Robinhood is geting paid more for their order flow, compared to the other discount brokerages.
Also Robinhood is great for buy and hold investment.
The order flow selling is sensationalised. Everyone does it.
But Robinhood’s order flow being so much more valuable than competitors’ is interesting. And the difference cannot be explained solely by small order size. The market is betting Robinhood trades are profitable to trade against. Given how the UX encourages over-trading and complex trading, I’m inclined to agree.
I now maintain a growing but conservative portfolio of stocks thanks partly to the frictionless UX of Robinhood - but, primarily, to the addition of fractional shares.
To pay $1500 for a share of TSLA? When I could put that precious money into my savings account? Pass. But if I can buy 0.1 shares at $150? Now we’re talking. Hey, TSLA went up a bit today. I’ll buy another 0.1 shares. Etc. That, without hyperbole, is truly the beginnings of the democratization of the stock market.
You need to understand the model how low cost services like RH operate - they sell all your data to big hedge funds. Guess what happen at certain moment when smart money will decide it's time to cut pigs - massive wealth redistribution with robihooders being cut. It has happened before in history and will happen again since history doesn't really teach majority of us anything at all.
Hedge funds will get even better results knowing what's robinhooders are betting upon with much better precision.
That's because the magic is VOOG, not your platform. And if RH gets you to buy VOOG instead of storing excess dollars in your savings account, then RH is the number one option.
All the returns are in the activation energy of getting to stock one of VOOG. Whether you buy it at 198.86 today or 198.85 will not change your outcome to any significance. What it will do is put you ahead of many hedge funds ten years from now, even if they spend 200 on their portfolio where you spent 198.85.
If you're trying to out-hedge hedge funds then the only way to win is to not play.
You can (and should) use stop limit prices to guarantee a desirable price in which case there's nothing a hedge fund can do to bump you.
And if you're sensitive to 0.1% differential in price then you're trading, not investing.
This is VERY misleading - not sure if you just worded it poorly or if you believe this - but a stop limit is NOT a guarantee that your stock will be sold.
Someone has to take the other side of that trade for it to fill. If there's no one there to take the trade - which is common when the price moves quickly - it will not execute.
That may be right, but "better" order filling or any other bells and whistles will not help to beat the market or gain substantial benefits from it in the long run. I've seen traders sending orders in slow command line and making substantial returns, so the tool perhaps is not the instrument for success on the market in the long run. It's like saying that green car will drive you faster/safer/etc compared to black or white cars, while the most important contribution to speed and safety lies between steering wheel and driver's seat.
> You can (and should) use stop limit prices to guarantee a desirable price in which case there's nothing a hedge fund can do to bump you
Needless to say orders may not (and most certainly will not) be filled when market (or HF) make sharp moves.
>It has happened before in history
When?
Not to mention that big HFT uses order book data from retail to vacuum away pennies on every transaction.
Unless you are trading, tiny differences in the price at purchase and sale is unlikely going to make a big difference to your final total returns. I would just consider it cost of the transaction.
I only want to spend a couple of hundred on long term options ..
Former options market maker. And honest question. Why?
Long-term options are tricky because theta and rho, the least intuitive components of the option pricing model, become significant as tenor increases. If you want to take a leveraged bet on the market, a margin account or leveraged ETF is safer.
It has nothing to do with safe, and is about risk v reward.
[1] https://www.cnbc.com/2020/05/01/tesla-ceo-elon-musk-says-sto...
The Robinhood mobile app though is way better than vanguards. It looks like a native app and even updates prices every few seconds where as the vanguard mobile app is just a mobile website wrapper (or at least looks like it).
Read up on bid/ask spreads and market makers. It’s a pretty profitable business. Even more so than just charging “dumb commission fees”
And that $25,000 “class” limit, hahaha that’s like saying that payday loan providers are a community service.
But I've seen this exact same pattern during the dot com boom. Lots of people making a ton of money day trading. This usually culminates in a heavy crash and many people are completely wiped out.
/r/wallstreetbets is hand-in-hand with Robinhood and wsb more than RH is really making a huge game out of this, and it's crazy. I know people that have gotten sucked in by wsb and started buying crazy amounts of options just to lose all their money. If there is a big crash, I hope RH ends up IPO'ing before this, otherwise all their investors and employees will be holding onto worthless stock as trading volumes goes to zero, like it did after the dotcom-bust.
/r/wallstreetbets doesn't have any fiduciary responsibility to anyone. RH does.
What I was trying to communicate is that RH could be liable in a situation where it approves people for margin or L2 options accounts who have no business accessing those kinds of products. RH may benefit from increased order flow, but is not permitted to cultivate order flow that is clearly inappropriate for its clients.
Paying of credit cards, maximising your tax return, investing in things you 100% understand, way easier ways to make money.
People still might get lucky and make epic money, but it is in the same zip code as driving drunk and not getting into a crash.
The rest of your post notwithstanding, this is a moderately common misconception. Most drunk driving does not result in crashes, and that's part of the danger -- after dozens of successful trips you might delude yourself into thinking you're somehow able to overcome the reduced reflexes and whatnot, but as soon as anything atypical hits the road (like a family crossing) you probably won't be able to respond adequately.
Well, most of us (myself included) "invest" in a 401(k) that we don't really understand that well, but common wisdom is that this is still the best way to save for retirement.
Because the tax advantage on the account makes it so largely irregardless of how well you understand it.
Also the options available are generally quite limited so that a) even if you did understand it you wouldn't have much choice within the tax advantaged account, and b) your choices are largely constrained to relatively safe index funds.
It is a good tool, thought me a lot about stocks and options. I am not investing heavily, but overhead of my investments would be far more higher with other competitors.
The other trading companies literally asked my lifestory, bunch of scans and very long process of acceptance. Let alone their extremely cumbersome software would possibly (I am certain) lose more money because of the mistakes I would make.
If Robin Hood was positioned and sold as 'gambling' and regulated a such, nobody would have a problem with it.
But if anyone doesn't see the maximal hypocrisy in their branding (literally: Robin Hood) and the materiality of their offer, then that's the issue right there.
By 'gravy' the author means 'fish' in gambling terms.
There's just no way kids on their app, are, on the aggregate going to be able to be beating pros esp. on sophisticated things like options trading, but that's the whole point.
You try to pick companies that will grow in the future.
If you pick well, then it doesn't really matter if other people (including "pros") pick the same company or not because there's enough future growth for everybody.
And I have much less reverence towards pros than you.
The pros were saying that Amazon's valuation is so crazy that even if they sold every book in the universe, it still would be too high. In which they were right except they couldn't see that Amazon is not a book store.
The pros were writing articles about how Nokia is, and will be, the king of the world a year after iPhone debuted and people were camping overnight and lining around the block to get it.
And today an average price target on Tesla is 1/3 of the current price. The pros at predicting future price of the stock are failing spectacularly to do so, despite being paid big bucks by the most prestige financial institutions and having more access to information than anyone else.
While I'm not playing against the pros, I sure am getting better returns than 90% of them.
Ah ha!
This is the fallacy, unfortunately.
Once stocks are public, it's more akin to poker than investing.
Every time you buy a stock, there is someone on the other side, wanting to sell it to you for the same price.
Now, you have to ask yourself the question - why is that person will to part with something that you think is going to be worth more?
If everyone were doing 'value investing' I think there would be a case.
But with day trading, leveraged into option trading ... it's poker. People are 'making bets on stocks' just like they would on horses.
How much you're making right now is not relevant for anything other than your personal bank account, the same way that winning a single hand at the poker table is not relevant for anything except your daily winnings.
What is relevant for the rest of us in this context (since we have no stake in your current bank balance) is this: Will you beat the average professional, or better yet an index fund, over a period of 20 years?
In fact, your personal success over 20 years is just as irrelevant, unless a statistically significant amount of people doing the same thing, as a well defined and replicable strategy, achieves similar success.
"I did this thing and made more money than X" is just noise and not indicative of anything.
P.S. Keeping up with, or even beating, the average professional, is easy: just invest in an index fund. So it's a very low bar to achieve.
In one short sentence, you showed why people are hating on RH.
When you buy or sell a stock (or option or whatever), there is a counterparty to your trade. That person is making the trade because, essentially (in an oversimplified way), they believe the opposite of what you believe regarding the value of the underlying stock. One of you will be wrong. You are precisely "playing against other people", because without those other people, there will be no market.
> If you pick well, then it doesn't really matter if other people (including "pros") pick the same company or not because there's enough future growth for everybody.
While correct, this is shortsighted, and it is precisely why people (rightly or wrongly) suggest investing in an index fund. The issue is that the benchmark for successful investing is beating the general market, not zero. Specifically, if you aren't beating the market or some proxy thereof, you are paying an opportunity cost by investing inefficiently.
Most professional money managers do not beat the market over any reasonable time frame (although they may mitigate certain types of risk relatively effectively), and the folks who sling stocks on RH or TD Ameritrade or whatever also do not beat the market over any reasonable time frame (certainly in aggregrate, and disproportionately true on an individual basis).
> And I have much less reverence towards pros than you.
I actually think this lack of reverence towards the pros is a good thing, but probably not for the reason you think. The pros who exploit less sophisticated counterparties don't advertise this fact very much, if at all -- it is not in their financial best interest to do so.
There is terrible group-think on Wall Street, and there are niche firms that make a killing exploiting this group-think. I consider these niche firms the real "pros".
> While I'm not playing against the pros, I sure am getting better returns than 90% of them.
Your reference time frame is way too short if you actually think this is true. If you think you can scale your returns that beat the market over the long term on a relatively small eight figure fund, you stand to make many millions for yourself, and I recommend you make some friends in the financial world ASAP -- the money will find you. I will bet the don't on your ability to produce market beating results over the long term, since it seems to me that you don't even really understand the basic mechanics of how the market actually works or who the various players actually are.
That said, best of luck.
If I’m using the market to grow wealth for (example) a child’s college fund, it is largely immaterial if my counterparty then later makes more money holding what I sold to them. More power to them, I needed to be liquid and they made that possible. We both got utility out of the trade.
Similarly, I’ve written HFT algo strategies myself that would aggressively take on losers because by doing so I could get to higher rebate levels. Virtually any modern portfolio is going to be taking on expected losers to de risk the whole portfolio, thats money management 101 stuff. In both of those cases ‘professionals’ ‘lost’ to ‘dumb’ money but everyone received utility from it.
Note that you are taking a relatively sophisticated view of financial instruments, and the original poster was not. There is a difference, and that difference was exactly what I was trying to highlight in a simple way.
Crashes during periods of high volatility at a much higher rate than competitors, puts detailed views of stock market behind a paywall, actively advertises options with asinine strike/expiries for people who don't get options, no full support for spreads are on their mobile app, their general poor handling of multi leg options strategies resulted in the suicide of person wrongly shown to owe millions in their account, terrible for tracking P/L, terrible fills on orders, the asinine fake chat bot system and lacking support in general
Robinhood as a trading platform is deeply flawed, you say your commissions would outweigh your investments, but a) now zero fee trades is not a differentiator, and b) you're paying commissions on every RH trade with subpar fills, both on time taken to fill and prices, those add up over time, and are why RH could even afford commission free trades in the first place
Your portrayal of RobinHood is a caricature.
Crashes? It happened a few times. I'm not an active trader, so I don't use IBKR all the time, but even in my light usage when I couldn't log in because their security-theater activation code never arrives.
Often IBKR can't show the value of my portfolio because, apparently, they can't load the data.
The whole web app is slow, switching between different parts is slow.
They don't even bother to send you an e-mail immediately after fulfilling the order.
The way RobinHood show option pricing makes way more sense than IBKR's view.
"Terrible fills on order" - you're just making stuff up. Care to show evidence that some other brokerage can fill your order faster or at better price than RobinHood.
"IB's trading system had a defect that prevented clients from selling any WTI Futures at negative prices, which caused IB's clients over $100 million in losses." https://finance.yahoo.com/news/sadis-hired-investigate-inter...
I'm sure there were people who lost money and committed suicide and were customers of "real" brokerage platforms.
RobinHood is just a better app. Why do people think it's a bad thing is beyond me.
Let's start with the suicide because that alone should have been the end of Robinhood...
This person did NOT lose their money.
Normally to sell an option you need the underlying equity (unless you're selling naked options, but RH won't let you do that)
A spread is when you use options to get the right to buy the underlying equity on a given day, then use that to sell an option on the same day.
So your sold option is covered by your bought option
Robinhood erroneously disregarded the option the person had bought, and told them they were on the hook for millions of dollars worth of shares. They had no access to leverage that would have let them owe that much money.
They committed suicide not because they lost their money, but because they thought they owed millions on an account worth hundreds...
THIS IS STILL A BUG! Someone killed themselves over this, and this is literally still happening!
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The rest of your complaints are either off base, or just deflections unrelated to things I said
Like, no one is complaining RH having a good UI is a bad thing, come off that.
RH sends emails for orders, I'm guessing you turned it off because you felt they were "asking for your life story"
RH's fills are legendarily bad, I'm sorry I can't do a research study for you, but you're free to search this yourself
If we're just trading bug stories, are we going to ignore RH has completely broken two leap years in a row? I mean I don't want to stoop to that, that's why I specifically mentioned a scenario where it keeps happening, periods of high volatility
All platforms strain doing those, but RH keeps breaking in the same ways, and it doesn't seem to phase them
Your portfolio value example is actually my favorite...
IB gets that your portfolio value could have an effect on your trading habits and mental state... so it doesn't load a value
Robinhood every single period of increased volatility will start showing randomly wrong amounts for my portfolio value!
There've been times when I sold out of positions because RH showed portfolio wide losses only for me to realize it was literally making up a number...
Imagine what happens if it shows you owing millions of dollars
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Robinhood's option views deserve their own article.
Do you mean "Discover" where they show you those asinine positions (asinine even for a Yolo mind you, some of them have no volume or open interest, so even if the spike by some miracle, you can't even sell)
Or the normal view where the most important information, like Volume and the Greeks is buried under a sub heading?
Or the mobile app, which previously won't let you do spreads outside the discover view, and still randomly doesn't show spreads for some tickers for those using the Discover view
Not to mention the insanity that the "Discover" view exists. Because it shows strike expiry but doesn't explain that if there's no Volume that doesn't matter, doesn't explain Theta
Now before you complain "That's just sandbagging people who want to trade options!!!"
This is stuff you can literally explain in 2 sentences! "The closer to expiring this option we're showing you is, the less it's worth" and "Volume and Open Interest represent if anyone will actually buy this thing we saddled you with before expiry"
IB is showing you all this annoying stuff to sandbag you that just happens to actually be incredibly simple if you take 10 minutes to look it up.
Now if we were talking about using a new OS I'd be totally with all the people saying "wow they want you to read an instruction manual, crappy UX"
But here it's your actual money, and 10 minutes really is 10 minutes to learn stuff that exists no matter what platform you use.
options with asinine strike/expiries for people who don't get options
You usually get burned right off the bat because the bid/ask spread is huge, so to even get the order filled, you need a limit order with a really unfavorable price
That's a result of federal regulation and lawsuits. Investors have a tendency to sue brokerages when they lose money, arguing that "nobody told me stocks could go down!" Hence brokerages try to head this off by refusing to sell to you if you don't certify you are a "sophisticated" investor.
Edit: Downvote all you want. That all brokers (well, not all, depending on your account) sell your flow to Citadel et el is well discussed, and RH has an even better client base to ‘sell out’...
The point I’m making is that for some users they don’t really care it it currently ‘works well enough’ for whatever they’re doing.
Is it reasonable for the NYT journalist to use total payment order flow revenue / average dollar amount per account instead of diving by total number of accounts? The latter seems like it would be a cleaner way to say "this is, on average, how much they're making off of each person"
Whatever it is - Robinhood is cleaning up. Wish I was invested in the company instead of just using it.
Anyway, the point here is to stoke anger from RH customers by calling them stupid (making bad trades). Dividing their revenue by number of accounts would tell a different story, one that would also anger customers because, again, it paints them in a bad light. But this time their stupidity would manifest itself by allowing RH to profit so much more than other brokerages.
I believe this is true. The metric, revenue per mean dollar, is used in the industry as a measure of how productively customers’ assets are being monetised. It lets bank managers compare e.g. trading and wealth management. Given a lot of compliance costs scale with accounts and assets, not volumes, the measure makes sense.
For me, I simply delete the mobile app for my phone and use another app to set price alerts. This prevents me from overtrading and obsessing over the markets everyday.
They see the ones winning and say "oh, this MUST be luck"
Maybe I’m not understanding the language, but I thought RH and eToro and the like made money through enabling high frequency trading against their customers. My guess/intuition is that this would increase volatility but reduce the expected returns of their users when compared to trading stocks through a broker. Am I terribly lost here?
This sounds quite true.
But: it has only served me well because the person I pay is trustworthy beyond reproach, and has earned that trust from my family over decades.
This is, unfortunately, not a scalable solution.
Your manager may be lucky or exceptional but most people on average will get better returns avoiding those fees and just buying index funds.
Agreed. But cash in a day trading account at the hands of an inexperienced trader has a lower expected return than that bank account. Particularly if they’re trading options.
The net effect of Robinhood is we’re training a generation of investors with self-destructive habits. It’s possible to use Robinhood responsively. But its UX is antagonistic to that use pattern.
When they lose a lot of money for the first time, won't they unlearn this training?