* 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.
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.
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.
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.
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.
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.
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.
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.
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".
Think of it as being a indie VC. Most investment will lose, the ones that gain might make you a lot.
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.
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
> 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.
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.
>It has happened before in history
When?
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 ..
[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).
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.
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.
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.
options with asinine strike/expiries for people who don't get options
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?