Robinhood Raises $13M to Democratize Stock Market with Zero-Commission Trading
techcrunch.com
techcrunch.com
Disclaimer - founder of http://capp.io and this is basically what we found in our market research.
Is it retail investors they are worried about, or is it expecting that the market won't undo any trickery?
Often, people end up being smarter than you think, when given the opportunity (not that I'm endorsing Robinhood... I'd be very cautious about using them, based on first impressions)
I would hope ETFs are available on this platform, since they trade like stocks.
As for efficient markets - I'm still trying to understand how social institutions that melt down every decade or so and are a consistent focus of criminal proceedings can be considered 'efficient.'
If "laypeople" just means "not financial industry insiders", then no, it's not necessarily bad.
If "laypeople" means "people who haven't bothered to spend any time at all learning how the market works (or at least, how it's supposed to work)", then yes, it's a very bad idea. For those people, the market may end up being functionally equivalent to a casino, but without the free drinks.
Mentioned in another reply, I would hope ETFs are available on a platform like this, since they trade like stocks. Hopefully that would allow more people to put small amounts of savings into index funds. That being said, Robinhood wouldn't be very innovative on that front, since many brokers offer the more popular index-based ETFs without fees anyway.
Wealthfront and others are making the stock market better for individual investors, retirement savers, and so on. This to the contrary appears like stressing the gambling aspect of it.
I would love to be wrong, but it is hard to see how this will make markets better and not lose people a lot of money. (Provided they don't 'pivot' in the future.)
The last thing these guys want is tons of articles saying, "I lost my life savings on Robinhood". Why wouldn't they do their best to give their customers access to smart context-specific investment advice?
Pay-per-trade brokers are incentivized to have you trade frequently and/or buy certain securities. RobinHood doesn't actually profit from each trade, so it could be argued that they have are likelier to care about the retail investor's long-term success (providing automated tools for monthly investments in low-fee funds, etc).
Regardless, let's give some love to the fact that people are accountable for their actions and the vast amount non-bad information on the internet. A beginning retail investor is one search away from a strategy that is a metric ton better than not investing at all (which is what most of them do): https://www.google.com/webhp?sourceid=chrome-instant&rlz=1C5...
If RobinHood causes some people to piss away their savings on crazy-risky investments, it's not because those people didn't have access to decent investment advice.
[edit] link to comment below as requested https://news.ycombinator.com/item?id=8358217
Robinhood will offer margin trading as well as API access, which will allow partnered developers to build applications in conjunction with Robinhood. Robinhood will also receive remuneration for providing trade volume in certain markets. In the future, we plan to offer premium services for active investors.
"Robinhood will offer margin trading as well as API access, which will allow partnered developers to build applications in conjunction with Robinhood. Robinhood will also receive remuneration for providing trade volume in certain markets. In the future, we plan to offer premium services for active investors.
Robinhood is venture-funded by Google, Andreessen Horowitz and many others, which affords us the freedom to focus on building a wonderful brokerage experience rather than short-term profits.
"They get paid to sell your orders to Knight Capital, Lava and Credit Suisse.."
It is structurally different from but conceptually similar to the mark up you pay when you exchange currency.
No free lunches, as they say.
edit: See http://en.wikipedia.org/wiki/Payment_for_order_flow and http://www.sec.gov/answers/payordf.htm
I don't know how they are going to make money any other way, but their vague handwaving about it sure is suspicious. If they are going to make most of their money from rebates are they going to prevent people from taking liquidity?
[edit] chollida1 confirms that they are selling order flow: https://news.ycombinator.com/item?id=8358217
I can just imagine it now, a week after some viral video knocking a company, they find out it was orchestrated by some Wall St types to make their quarterlies.
A 'no fee' app called Robinhood, something tells me it's not the banks that are getting robbed. Can't wait til they open this up to pink sheets.
I'm sure is not like this and the broker won't deny any transaction if I were the broker I would just get a commission on some transactions by third parties but I don't see what I could change in order to get a greater commission.
could you elaborate please, I'm at a lost.
The customer is usually none the wiser as they are being charged the same fee from their broker typically regardless of the routing. The only way a customer would know is if the broker discloses it to them. In the US equities markets that disclosure is a legal requirement.
Definitely nothing is free!
Are you suggesting the customer's orders will not be filled at the NBBO? Or something else? Can you state explicitly (i.e., describe the timeline) of what you think is happening?
...mark up the prices their customers are paying for securities.
It would have been much more accurate to say that the broker is benefiting from part of the spread. Of course, one expects a service provider to benefit from providing a service.
This is also true of exchanging currencies and everything else in the capitalist circle of life -- so it was very possibly not a useful comment.
[1] What is the opposite of adverse selection? Advantageous selection?
The customer will get the exact same price as if his order went to the public exchanges. The only difference is that instead of selling to anonymous person on BATS, he'll sell to anonymous HFT on the broker's internal dark pool.
I actually wrote about the selling of flow this morning here: https://news.ycombinator.com/item?id=8355210
They make it hard to find but the trail goes like this:
From here: https://www.robinhood.com/legal/
Open this document:
https://brokerage-static.s3.amazonaws.com/assets/robinhood/l...
Which links to this document, which contains the details.... http://public.s3.com/rule606/apex/APEX_2Q2014_Rule606.pdf
Note this:
> 1 Apex receives payment from Knight Capital Americas LLC. (Knight) for directing order flow. Payment varies based upon a number of factors including but not limited to: Size of the order, time of order placement, whether an order is marketable at the time of order entry, the underlying price of the security and any special handling instructions. Payments received from Knight averaged less than $0.0025 per share for the period 2Q2014.
> 2 Apex receives payment from LavaFlow ECN for orders that add liquidity to LavaFlow and are subsequently executed. The rate for adding liquidity to LavaFlow was $0.0032 per share. APEX is charged for removing liquidity from LavaFlow The rate for removing liquidity from LavaFlow was up to $0.0035 per share.
> 3 Apex receives payment from Credit Suisse for directing order flow to Credit Suisse. Payment varies based upon a number of factors including but not limited to: Size of the order, time of order placement, whether an order is marketable at the time of order entry, the underlying price of the security and any special handling instructions. Payments received from Credit Suisse averaged less than $0.0025 per share for the period 2Q2014.
Holy shit, their order flow is 70% market orders? That cant' be right. Funds must be throwing money at these guys to buy their flow.
I don't want to sound like Jim Cramer but people please don't use market orders!!!!
It happens alot, and since these guys came from the industry it wouldn't be a large logical jump to conclude they are taking money from a fund that wants to trade against their uninformed flow they generate.
Its scummy if true, but it happens. If you aren't a hedge fund then your trades are being sold:) Heck half the time if you are a fund your flow is also being sold:)
Alternatively they have some sketchy fees which you can see here:
https://brokerage-static.s3.amazonaws.com/assets/robinhood/l...
No fee to transfer money into them but a fee to get your money out is a big red flag. Hello Hotel California!
EDIT to explain scummy, its because it allows the big funds to "jump the queue" if you will. Scummy may have been a poor choice of words.
Rather than having to be active in the market with a quote on the NBBO, this allows the big funds to look at each order and say, pass, pass , take, pass, take, etc.
If there is money in filling the order they will, if not they will pass it onto the market where it will either sit or get filed by those who actually participate in the market.
In short, this is a way for HFT A to beat HFT B.
If you're doing lots of small trades under $100, what you wind up paying your tax preparer to add up the nickels and dimes will overwhelm the value of the trades.
Of course, part of this app must be automation of preparing the tax paperwork and liability.
The more pragmatic (and ultimately more successful) way to trade is to buy and hold - and hold, and hold, and hold. Statistically, dead people are more successful investors because they don't actively trade.
http://www.businessinsider.com/forgetful-investors-performed...
Yes, all your trades are tracked and you will pay taxes on short term gains and can offset tax liabilities with losses.
But that isn't something you - or your accountant does - your brokerage firm (any of them) will issue you a tax document (I can't think of the name at the moment) which summarizes everything for you - it gets inputed on your tax return, and you are done.
However your last point - tends to be very true - unless you really know what you're doing, buying and holding is the way to go.
Buy and hold is literally the only plausible strategy for an individual investor. If you want to invest with a specific trading strategy, find a fund that employs that strategy and buy that fund. I guarantee you that your trading strategy is not novel; if it works, someone has already done it.
The Wall Street Journal dartboard contest, which ran for several years, shows that, statistically speaking, even if you do think you know what you're doing, a buy & hold index fund is still a better choice than an active portfolio.
http://www.investorhome.com/darts.htm
Quote: "The pros barely edged the DJIA by a margin of 51 to 49 contests. In other words, simply investing passively in the Dow, an investor would have beaten the picks of the pros in roughly half the contests (that is, without even considering transactions costs or taxes for taxable investors)."
http://www.irs.gov/instructions/i1099b/ar02.html
edit: Expanding a bit: brokers are required to track and report the cost basis of most securities purchased after 2010.
(For example, Etrade "forgets" what I paid for stocks and when I bought them after a few years, even if I bought them through Etrade.)
Good for you for posting this truth about investing. It's something that brokerage houses wish people wouldn't find out.
Warren Buffet has recently revealed his estate plans for his inheritors after his passing: He has set them all up with index funds.
More here: http://arachnoid.com/equities_myths
The IRS isn't going to be beating down anyone's door for $100 in unclaimed cap gains.
The key problem I see with the investing world is that 1) most Americans lack a basic understanding of how financial instruments works 2) the media & investing culture encourages a speculative investing mindset that makes most people act like gamblers rather than rational thinkers 3) the incentives are misaligned - financial institutions are not incentivized or built to encourage people to invest smartly.
None of these problems are solved from zero trading commission structure. To be honest, this seems like a feature that day & algorithmic traders would care about rather than a normal investor. You could even argue that zero commission trades will exacerbate the issue by pushing the investing mindset to be even more short term focused; this mindset is what causes most investors to lose performance.
This seems more like a clever PR angle for Robinhood ("we are helping real Americans") rather than something impactful. I doubt their aim & monetization strategy is geared towards the everyday investor.
They also say +80% of their early adopters are under 30. I wonder how many are underage?
At that moment you'd be saying "damn, I wish I an app where I could short apple ASAP".
"Ditching fees has led to 80 percent of beta users being under the age of 30."
And " Engagement looks promising. Fifty percent of customers who’ve made a trade come back every day, and 90% come back every week."
But both of these are rendered meaningless by: "Robinhood is still in friends and family private beta"
That aside, if "coming back" means making additional trades... that lends support to the idea that that this kind of super-simplified trading encourages hasty trades that aren't thought out.
And of course, that's the choice of people making those trades - but it seems to me that it's going to lead to some bad publicity for robinhood not too far down the road.
(Next on their roadmap I'd hope would be handling retirement accounts; I generally trade within my Roth IRA because it's tax-immune)
smart traders know that fills are what counts. great brokers can get consistently better fill rates while terrible brokers will not only charge you a commission and get you bad fills or in this case, not even try to get that for you because their business model is based on it
1) Place a trade. 2) Trade goes to internal dark pool. Maybe someone who paid for order flow fills it, maybe not. 3) In the absence of a fill on the internal dark pool, the trade is routed to the markets at large.
The only difference is who your anonymized counterparty is.
I don't think that is true, conceptually. Lets say that by going to the dark pool and being processed through to the exchange you lose priority on your order. Then your fill rate could be worse.
Not that I think this is a reason to chose to use robinhood or not.
1) Place an order. 2) Broker checks the darkpool - if a match is found, trade internally. 3) Route to the public market.
Step 2 can add latency, reducing your fill rate. So can playing music on youtube while doing step 1 probably adds more latency. And the latency in both cases is vastly lower than the latency you get from trading over 3g (robinhood is a mobile app, which to me seems moronic).
Another way you could see worse fill rates would be a customer places a limit order that puts them somewhere back in the book. This limit order happens to trigger some threshold for the order flow trading algorithm that causes it to back off of it's own orders (lets say it cancels some orders on the back of the other side of the book). This in turn causes a price shift that moves away from the customers limit order making it fill later.
Clearly we are in the realm of pure speculation and probably not something that is important to the customers of robinhood. I was just pointing out that conceptually, by selling their order flow, robinhood could impact fill rates.
My guess is that this is more than offset by the lack of fees.