Robinhood’s big gamble
newyorker.com
newyorker.com
My point is this: RH has become the media's favorite whipping boy because retail trading has seen a spike in popularity not witnessed since the .COM Bubble. A lot of this critique is aimed at RH's interface/app because it is substantially better than the existing brokerages still using websites from the 1990s (this article criticizes it for being "slick" and complains about confetti).
The reality is that you can be a risky investor and lose it all on any brokerage, including Schwab, Fidelity, or TDA. RH has made some mistakes and isn't actually a good broker in my opinion, but dog piling them is just a proxy for arguments against retail investors being allowed to invest freely in the market (e.g. I've read multiple arguments for banning options trading for accounts under $25K for one example).
https://www.independent.co.uk/news/business/robinhood-gamest...
EDIT: I get it - Schwab also had visible outages. Sorry for that. Maybe a good time to say I'm a happy Fidelity customer and have been for years :D
Yes they have. During one very red day they were down almost all morning (although StreetSmart Edge worked).
Sometimes, you have no idea if an order went through. With e-trade you get a sub-second push notification for trade confirmations, but with Schwab those push notifications come minutes or hours later. Meanwhile, if the website is down, you have no idea what exposure you have.
Taking a guess as an Engineer, they seem like load issues. Because page response times degrade from 2s, to 10s, to 30s, to timeouts.
You just need to cough up some $ and hire some ex-SF/SV folks who have done big sites -- something top-5 brokerages should be able to hire.
Point is, availability is important.
If that's not putting ones finger on the scale I don't know what is.
Because they cant operate as a real brokerage as we saw with GameStop and manipulated the market as a result. I think that is the largest reason they are (rightfully) the whipping boy. They should not be allowed to be a trading platform because of that alone.
To be fair, I don't like RH. They are irresponsible, greedy and reckless. They have turned day trading into outright gambling - and quite frankly, if a gambling company gamified their UX the way RH did theirs, the gambling company execs would be rightfully raked over hot coals. Shitting on RH because they had to obey the clearing house rules is intellectual cowardice.
Disclosure: I work for a gambling company. And yes, I deal with compliance questions on an almost daily basis.
I think if you are going to operate as a brokerage you need to be able to fulfill all types of trades which in turn means you meet the needs of the clearing house, to limit investors to sells when you have funding from someone with a clear interest/holding/shorts (whatever) is a pretty stiff conflict of interest. This is just one of the reasons why they shouldn't be a brokerage. I understand that the clearing house changed the rules, but if you want to play in the game those are the rules. It is pure (even if it was truly non-intentional) market manipulation. They should have stopped all trading if they could not meet the needs of the clearing house (this can be debated as well). And if you cant meet the needs of the clearing house you do not deserve to be a brokerage IMO (I can see how this is also up for debate).
I agree your other points about gambling and gamifying, etc.... But the 'you are allowed to only sell and not buy a stock' is so grossly wrong I don't see how anyone can look past that unless you are 1) on the losing side of the coin (the shorts) and want to stop the bleeding or are heavily invested in RH performing a successful IPO.
The odd thing about the GameStop mess is that it inadvertantly exposed a lot of internal machinery of finance.
> But the 'you are allowed to only sell and not buy a stock' is so grossly wrong I don't see how anyone can look past that
I don't fall into either category, but I find myself disagreeing. These one-sided failure modes ("can only sell") are in fact common failsafes, although the reasons behind them are more generic. It may well be I look at things very differently because I operate on the other side.
Counterparty risks are real. When things start to fail, or there is a risk that an entity can not meet their obligations, the common fail safe is to limit/reduce exposure. Actions that would increase their exposure are not allowed, while actions that decrease their exposure, are.
When RH went into a one-sided failure mode with GameStop, they did what is required of them: they restricted their ability to increase exposure to a wildly imbalanced contract, only allowing trades that reduced the said exposure. Having these types of fail safes is, funnily enough, part of requirements for operating as a broker.
In effect, they were too poor to handle the outlier scenario. In the same way banks are too cash poor to allow all their customers to empty their accounts.
But oh boy, how they communicated that... now there's a lesson for future students.
As other poster has noted, I think you have to apply on Schwab to trade options. I've never done that.
During the GME debacle I decided to close my account and migrate entirely to fidelity and the transfer half-completed like described above, then failed entirely. It seems to me Robinhood was using my money to meet other obligations during a liquidity challenge.
Wow... you really think the criticism is just because RH is better? What, is it jealousy or something?
Please. This isn't the case of someone being picked on by a schoolyard bully. RH is in the highly regulated, highly consequential consumer fintech space, and they are clearly gamifying trading.
All the subsequent criticisms follow from that fact.
If you want to make the claim RH isn't gamifying trading and therefore the criticisms are off base, please, I invite you to do so.
But to claim RH is the target of SEC investigations simply because they're good? Come on.
You make it sound like this is outlandish, but it happens nearly every time a disruptive player comes into a heavily regulated market full of old players.
It is much easier to cry foul than to deal with the fact that the competition just got hard.
I have used RobinHood just a little bit, and it's not my main brokerage. However, I take issue with your phrasing. You start with the premise that whatever it is that RobinHood is doing is bad, it's impossible to argue against this where you are standing.
I hate the app that my main brokerage provides, but it was even worse before RobinHood existed. When I bought my first set of shares on RH, I was amazed by easy it was, and how well designed the UI was. IIRC, it is also super easy to find information on the stock that you're trading, so it's not like they are making the UI dumb.
I have read criticisms like how they make buying a stock seem inconsequential, but that's frankly pretty absurd to me. Do they need to make their UI flow less smooth, or give some big warning that people are dealing with real money?
If there are any parts of their app which encourages gambling, I agree it should be removed, but the actual criticisms I read are things like "they use bright flashy lights like slot machines" which seems very unconvincing.
That's quite literally what gamifying is: providing the kind of visual rewards/stimulus, combined with an extremely low friction experience, that's specifically designed to work in concert to encourage engagement.
In the case of a slot machine, that means putting coins in the machine and pulling the lever.
In the case of Robinhood, that means executing trades.
Maybe you don't believe those features of Robinhood actually encourage trading, but frankly, the psychology around RH's design is pretty well understood both in the technology industry and the gambling industry. Hell, there's an entire booked (Hooked!) written about it.
> Do they need to make their UI flow less smooth, or give some big warning that people are dealing with real money?
Yes. Absolutely. Why would that be a problem?
Ostensibly RH's mission is to provide people with free access to the markets to "regular folks" (read: inexperienced traders).
That's not the same thing as encouraging day trading.
I don't see why features that discourage excessive trading (which is unquestionably an anti-pattern for a typical retail trader, and therefore is not in the best interest of the folks RH is supposedly trying to empower) would be a bad thing...
... except, of course, RH's revenue is specifically derived from high trading volume, so it's not in their financial interest.
>Yes. Absolutely. Why would that be a problem?
Are you proposing that this warning can't be disabled or permanently dismissed? As an adult consumer I do NOT want this.
If so, a) you should reconsider, that's generally a good way to lose money, and b) you're probably classified as a pattern day trader, anyway, and you're already subject to a (very mild) speedbump:
https://robinhood.com/us/en/support/articles/pattern-day-tra...
> Pattern Day Trade Protection alerts you when you’ve placed three day trades and you’re about to place your fourth. You’ll have the option to proceed with your trade, or cancel it to avoid being marked as a pattern day trader.
Also, note even if you turn that alert off, you get another mild warning:
> Even if you turn off Pattern Day Trade Protection, we’ll still let you know when you’ve placed your second and third day trades in the five-day window. On your third day trade in the five-day window, we’ll remind you that you’ll be marked as a pattern day trader if you place one more day trade within the five days of your first day trade.
"you should reconsider, that's generally a good way to lose money" Some people make money off of doing this, you have no right to prevent people from day trading if that's what they want to do.
" you're probably classified as a pattern day trader, anyway, and you're already subject to a (very mild) speedbump:" This only applies if you have less than $25k in assets which most HN users probably have in excess of.
It seems like you clearly have a bias against robinhood without knowing the full reasons for why it's succeeded and how it's changed the brokerage industry for the better.
I don't agree with this. It's been a while since I used RH so maybe the current UI is different, but when I used it the stock price charts literally had no numbers on them. It was just a vague line that went up and down.
The options UI was also similarly dumbed down. It gave very light descriptions of different kinds of trades when purchasing, but very little concrete information about prices or risks. Plus the functionality was awful, you couldn't even sell options you held, outside of sending RH an email.
Stock and option flows are clearly designed towards appealing to users who know very little about investing.
I think that is the issue. There is a tighter feedback loop that amounts to "gamifying" stock trading.
It's telling to me that the new investor cited in the article didn't take his dad's $1K, put it into a Vanguard index fund and call it a day. No, very much a day-trader type of customer is drawn to RH.
I'm not saying it's bad or good, but that seems to be the difference between RH and your Schwab brokerage.
If Robinhood seems like a whipping boy, it's because they've been earning negative press (like you said, they've made these mistakes) on a regular basis for the past 2.5 years.
Vanguard is even more difficult. Application for a margin account requires mailing in a notarized form.
Robinhood makes it easy in order to profit off inept traders that have no business making these types of trades.
Say what you will about "democratizing" finance, but even if you think enabling retail investors to buy options is a laudable goal, surely they should at least know what a "put" and a "call" is? (The point being options are complicated to understand, and if you don't even know their names, you probably don't understand how they work. And if you don't understand how they work, maybe you shouldn't be buying them.)
I feel like a lot of the arguments I see in favor of "democratizing finance" could be applied to a company making some incredibly harmful drug. Ok, maybe we shouldn't make it illegal for companies to produce or sell that substance, but surely we can all agree that company is actively doing harm to its customers? And we don't need to pretend that the company is "democratizing" chemical consumption.
You do learn what this is, but the "i think its going up" is just the starting UI and tbh its more approachable and faster to navigate since you don't need to memorize turns.
However, if the person you're responding to is correct about their UI it's negligent. The price of an option does not vary only with whether "you think the price will go up". Essentially it's mis-representing an option as a delta trade which it isn't.
i’m all for democratizing access to (and the returns from) equity markets, but this isn’t about building wealth through long-term investing, or even about price discovery. it’s sharks looking to part small-time gamblers from their money.
The average Robinhood user mostly like doesn’t understand what a put/call is, much less what Black Scholes is, or how to trade around their gamma.
But I don’t think that’s a reason to stop anything. Trading is naturally self correcting: bad traders stop. If anything it says more about reconsidering gambling laws. Let adults spend their money how they see fit if it’s not infringing on someone else’s rights.
When I was young and started investing in individual stocks, I would've appreciated "I think the stock is going to go up/down" (as an intro as Robinhood uses it) instead of needing to google and memorize put/call. Knowing a put vs. a call added nothing useful as a retail investor. It didn't change my hypothesis about the stock or my decision to trade.
Say what you will about Wall St, but customers of traditional brokers tend to know what the brokers are in it for: the money. Robinhood's big product innovation might be zero-commission trades and a gamified UX, but their big marketing innovation is to wrap themselves in the ever-dingier cloak of Silicon Valley "changing the world".
I can't help but think of this absolutely spot-on parody from "Silicon Valley": https://www.youtube.com/watch?v=B8C5sjjhsso.
All that other stuff is noise.
So, for {altruistic, self-interested} reasons, I want to push back on the dilution of "doing good by doing well."
To directly answer your questions on Robinhood, though: I believe (with low confidence) that the big innovation is gamification. That's it. And I have trouble feeling like that's beneficial.
If Robinhood had gamified saving for retirement in a boring 3-fund portfolio with zero commission trades, I don't think we'd be having this conversation. But PFOF on once-a-month 401k inputs wouldn't be very good for their investors.
Granted, this wasn't really a big change in accessibility if you wanted to trade stocks. One could simply goto Fidelity ore other brokers and do the same thing. However, Robinhood's app is much more approachable for someone new to finance.
Reducing the barrier to entry isn't a bad thing and will always lead to some percentage of new comers doing dumb things. That doesn't mean Robinhood is encouraging it intentionally. I think its merely a side effect of their apps approachability for someone less familiar with financial instruments.
- https://fortune.com/2020/07/08/robinhood-makes-millions-sell...
For smaller trades that's charging 99+% less than their competitors at the time..
The concern is that when market makers share that profit with brokerages they encourage brokerages to select the market maker that gives them the biggest cut rather than the one who gives the best price for the trader. Still, the trader will never get a worse price than what's available on the exchange. (That's also illegal.)
That's literally not payment for order flow works, and it's illegal under regulation NMS.
It’s similar to a casino offering free hotel rooms to people who play blackjack but who do not know how to card count. They even offer 3/2 on blackjack instead of 6/5.
I'm not a robinhood fan - I moved all the investments I had out of their years ago. But, to think they are the only one selling order flow is disingenuous
So even if "it's not really free" it's still a significant discount compared to the pricing that was standard before RH came along. Opening up investing to more people by making smaller & more frequent trades feasible seems generally good to me.
I will admit that other aspects of Robinhood's business such as the degree of gamification are still concerning, though.
Any investor can get 0 now with good brokerages or use something like IB for cheap trades on otc or foreign stocks in small amounts.
The large brokers more or less did not care when robinhood did the same thing years and years and years ago.
As far as I remember, it's just based on the gains / losses you had during the day. So depositing cash at the end of the day shouldn't affect your gain/loss.
This is news to me. As far as I can tell, everything about their app is designed for you to treat the stock market like a game. From the notification defaults down to the content layout. They also sign users up for a daily stock market newsletter that encourages "trading the news" and their unofficial user forum is essentially Wall Street Bets, which they have never tried to distance themselves from.
Making it easier to trade stocks through better UI design isn't inherently a bad thing, I agree. However, looking at the insanely disproportionate amount of their revenue that comes from "day" traders and speculative option junkies, they're extremely incentivized to keep milking this customer group over their more sane buy-and-hold users.
And we all know the data, a vast majority of these users will lose money on a risk adjusted basis compared to just buying the whole market in a passive ETF.
But there's no money to be made in passive ETFs, so Robinhood will likely never roll out automated passive ETF investing a la Wealthfront.
Robinhood has a responsibility to its investors to maximize profits, therefore its hilarious to think they won't do anything to keep encouraging their most profitable user segment to keep trading.
I guess that’s exactly what to expect when you apply that SV-type growth hacker PMs to a trading platform.
Robinhood may well be responsible for a generation gaining investment literacy decade(s) before adults have in the past. Some of these young investors might be burned early, but i'd take the long view and wager that those who start learning now come out ahead in 10-20 years.
This guy literally maxed out credit cards and bought doge on margin. https://www.nytimes.com/2021/05/14/technology/hes-a-dogecoin...
From the other perspective, isn't it the individuals risk to take? Even if it is essentially gambling, this is something that people are allowed to do. Why would a person be permitted to bet their life savings and max credit on black in a casino, but not some speculative coin?
Random fact: Terrance Watanabe may be the largest looser in the history of las vegas gambling, having lost over 220M over a 5 year period. He was also sued by Casinos for over 15M of credit they provided him to gamble with.
For anyone who paid attention to the WSB fiasco This isnt a meaningful question.
When Robinhood halted trading on a stock that had the very real potential to harm monied, cloistered elites it basically confirmed whatever definition of "finance" it claimed to represent was rigged from the start. the app is no different than facebook. You arent an empowered investor, you are their product.
But then again, Hedge funds for rich people also encourage risky behavior (leveraging up their models, as imperfect as they are from time to time is definitely risky).
A lot of debates about financial regulation basically come down to whether this is a good principle or not. Too many times, both sides are arguing at cross purposes, because one implicitly assumes this is common sense, whereas the other thinks it's classist and paternalistic.
Makeup company Coty couldn't verify Kylie Jenners companies earning and once they audited it they found out that it wasn't making nearly as much as they thought.
So it's not like its uncommon for investors to get taken for a ride. Why should we then treat them differently than lower income investors?
This is a straw man.
The real argument: someone with more money is less likely to become destitute as a result of a bad investment. Also: someone with more money is less likely to become a political problem that shuts down the market, or a drain on the public purse, when they lose money.
When it comes to private investments, someone investing e.g. $10k cannot afford to do legal diligence. They are also unlikely to unilaterally pursue someone who sued them in court. That almost guarantees they’ll be the sucker in the long run.
laughs in 2008 securities crisis
Those are now people who don’t have the HELOC they though they had, or their primary asset for retirement is now worth half of what it was, or can’t or won’t use the savings available when they need it - and also the people getting laid off because other Joe’s aren’t spending money or buying houses anymore. The banks are at the center of this.
Many big banks were nationalized for awhile, Lehman was blown up, Fannie and Freddie were taken over. Not because they had more money. Rather because they were at the center of the crisis that touched assets almost every American owned - and had more money because of it.
If this only impacted folks with > $1m net worth, it would have looked a lot different.
I would agree with this except for one huge fact that has existed for close to 100 years - poor investors can put their money into options and blow up in a day, but can't put it into private equity.
I'm not ascribing any good or bad intent to the regulators here, but this is so big of a hole that I can't believe this has anything to do with destitution.
For what it's worth, I've seen an actual person do this first hand (options trading), and destroyed their life as a result.
Cost of diligence. One can theoretically fully diligence an option and its underlying stock’s issuer with public information. One cannot do that in private investments. Private investing requires expensive legal work; it also requires the ability to enforce one’s rights in court. Investing $10 or 20k pretty much guarantees one isn’t doing the former and can’t do the latter; that’s a recipe for disaster.
As a former options market maker who is now in private equity, I (a) agree that options should be more roped off from retail investors and (b) minimally dabble in private equity and don’t touch options in my PA.
The only responsible buyers of options buy them expecting to lose money. They’re the lossy leg of the trade, the insurance. When hedge funds want to go long or short they use cash positions or leveraged swaps. Not options.
I get the point you are trying to make, but in the world of stock trading, I'm definitely poor. However, I'm not stupid. I am smart enough to know that the game is rigged for those in-the-know. Much like the poker adage "if you can't tell how the sucker is after $shortTimeInterval, you're the sucker".
>make risky investments without turning into degenerate gamblers.
It seems to me that this is exactly what they want. Does having a gambling problem equate to stupidity?
Additionally, if someone is rich enough they are a millionaire or billionaire or whatever and DOES somehow get ripped off enough to be homeless or eating dog food out of necessity, the general public is going to be cheering for whoever did the ripping off in the next Hollywood blockbuster, not calling their congresspeople angry about how that poor grandma is now destitute and the government SHOULD DO SOMETHING.
It’s a combination of having enough resources to plausibly be able to defend themselves and not lose everything, and a lack of public empathy if they screw up and get ripped off.
I tend to find "argument from reality" more compelling than arguments based on feeling, ideology, guesses about why people support a position, or reasoning from some moral axioms like one is completing mathematical proofs, personally. Possibly there were no major problems without those rules and it would be fine to remove them. Possibly a bunch of people were being significantly hurt with no recourse. Which was it?
https://money.cnn.com/2018/02/24/investing/warren-buffett-an...
Eventually the risk taking will result in you no longer making money when things go bad.
But at that point when your fund, brokerage, whatever, goes bust you will have a very nice personal bank account.
The person who didn't encourage risk will also go out of business (because everything will be dragged down) but they won't have a nice personal bank account.
Why would you choose to be the poor person?
I ask because I don't get the sense that most risk-on investors in crypto regularly convert gains back to fiat.
People who's compensation is based on bonuses... not so much.
Were you a small child in 2008 or something? The GFC and its causes (CDS and CDO blowups, among other things) were widely talked about when it was happening, you couldnt go a day without hearing about exotic derivatives and their effects on the economy/markets in the news.
"When performance is measured using before-fee model alphas and compared across the cross-sectional distribution, any active fund performance advantage is substantially less than one would conclude from benchmarking to average index fund performance. Moreover, any advantage of the top active managers over the top index funds is much less than the advantage of the worst index funds over the worst active funds. When performance accounts for residual risk, active funds no longer outperform index funds. " -https://www.cambridge.org/core/services/aop-cambridge-core/c...
JOURNAL OF FINANCIAL AND QUANTITATIVE ANALYSIS Vol. 53, No. 1, Feb. 2018, pp. 33–64 COPYRIGHT 2018, MICHAEL G. FOSTER SCHOOL OF BUSINESS, UNIVERSITY OF WASHINGTON, SEATTLE, WA 98195doi:10.1017/S0022109017000904 Passive versus Active Fund Performance: Do Index Funds Have Skill? Alan D.Crane and Kevin Crotty
I'm sure there are better sources, but I'm lazy today.
Day traders get even worse:
https://mathinvestor.org/2020/07/day-trading-in-the-age-of-c...
I don't recall the specific date, but I and x number of people put purchase orders in during the overnight that were not executed when the market opened.
Calling this an outage is disingenuous. Especially considering purchase orders for other stocks on that specific date/time were executed.
Maybe S&P is the closest to legal, free, easy, little-risk?
It’s not a stock, so maybe not. But I hadn’t even heard of such a rule and it was an eye opener. I could have gotten into a pretty deep hole and had no idea.
Not Robinhood’s fault, but a risk nonetheless.
I hate so much that this is such a typical startup path. Talk about a euphemism.
1) You open the app and the first view is the one-day graph with the bottom lopped off of the y-axis. This encourages day trading and reacting to tiny fluctuations in the market. If they want to encourage investing over gambling, they'd show you the long-term graph of your portfolio. Or maybe skip the graph and take me to the fundamentals.
2) They use the word "investments" to refer to crypto holdings. Crypto has never and can never be an investment, but calling it that subtly emboldens users to trade in it without understanding the risks.
Whether you like or dislike crypto, this seems false according to both the dictionary and common use definition
The use value of cryptocurrencies is near 0.
i have a Scottrade/td ameritrade account, it was the lowest commission at the time ($7 per trade) when i open the account and now there is no commission fee anymore.
Everything is gambling. Gambling in a casino is just a form where the expectation is always negative.
Buy a house as a rental investment? That's gambling.
Loan money to someone to start their business? Gambling.
Buy inventory of a product to resell it? Gambling.
One can make the argument that any money at risk is gambling, but this broadens the meaning of gambling so far as to make it useless.
Unlike actual gambling - where the expected return of each gambler is negative - stock market investing, like owning other assets, on average has positive expected returns.
Yes, it is possible to make bad investments. Just like it's possible to loan money to someone and have it go bad, or it's possible to buy a house and have renters stop paying. But we don't call those things gambling, so why call stock market investing gambling?
Intraday settlement may sound good on paper but it also opens up a whole bunch of extra problems that you might not like.
awesome - any more details? I saw this: https://www.cnbc.com/2021/02/24/wall-street-clearing-firm-pr...
I assume that's what you're referring to?
> Intraday settlement may sound good on paper but it also opens up a whole bunch of extra problems that you might not like.
I can imagine problems like liquidity or fraud on certain tickers, anything else? is it even possible to reverse a trade under any circumstances now?