
Robinhood Raises $13M to Democratize Stock Market with Zero-Commission Trading - juanplusjuan
http://techcrunch.com/2014/09/23/robinhood-stock-app/
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falsestprophet
This democratizes the stock market like online casinos democratize gambling.
Fees are the least of the layperson's problems in the stock market or a
casino.

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apostate
Are you suggesting that it is a bad idea for laypeople to participate equity
markets?

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timtamboy63
It's bad because the majority of people who invest their own money invest
without enough information about the company. Finance is almost deliberately
obfuscated to keep retail investors out, and unless you have the time and the
knowledge, it's going to be difficult to make decent returns unless you're
investing in mutual funds, ETF's, etc.

Disclaimer - founder of [http://capp.io](http://capp.io) and this is basically
what we found in our market research.

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Guvante
> Finance is almost deliberately obfuscated to keep retail investors out

Is it retail investors they are worried about, or is it expecting that the
market won't undo any trickery?

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timtamboy63
No idea. I think investing is advanced enough that you typically need somewhat
complex jargon and data to actually make money - over time it's basically
become an old boys club and no-one's really trying to make it accessible to
regular investor.

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mikkom
So if I understand this correctly, they assume they are going to make profit
purely based on rebates? I don't think this kind of business model has been
tested yet so this is quite interesting.

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falsestprophet
They are going to sell their uninformed customer's order flow to market makers
(edit: I assume) and internalize trades. That's a circuitous way to mark up
the prices their customers are paying for securities.

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](http://en.wikipedia.org/wiki/Payment_for_order_flow)
and
[http://www.sec.gov/answers/payordf.htm](http://www.sec.gov/answers/payordf.htm)

~~~
esMazer
I read the introduction of the wiki article, but I'm still at a lost.. the
third party pays back the broker because it "wants to influence how the broker
routes client orders" what? so if I were the broker I would deny or allow my
customers transactions based on a third party?

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.

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kasey_junk
The third party doesn't pay back the broker, they flat out pay them a fee to
send transactions through their systems. The broker doesn't allow or deny any
transactions, just in the absence of contradictory routing instructions they
send their default orders through the third party.

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.

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esMazer
ohh I get it! Basically there's a market of third party companies and the
broker has the liberty to choose to who give all its "traffic"/transactions,
but the broker is choosing the company based on the fee it gets instead of
other factors (which I'm sure there are many) in this case the choice might
not be the best for the customers just to the broker.

Definitely nothing is free!

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WalterBright
For anyone wanting to go to town with this, don't forget the IRS. All your
trades need to be tracked and reported on your income tax forms so the IRS
gets their cut.

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...](http://www.businessinsider.com/forgetful-investors-performed-
best-2014-9)

~~~
nmjohn
That's not 100% accurate - rather how you make it sound like it works isn't
quite right.

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.

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lutusp
> unless you really know what you're doing, buying and holding is the way to
> go.

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](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)."

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Sommer
I seem to recall their original model being around paid developer access to
the platform. That is fairly intriguing as the ability to create value-added
tools/techs and partner with any other discount brokerage is very difficult.
Seems like a large enough user base would enable an app-marketplace where many
of the quant/social-stream/chatter-arbitrage tools that currently [try to]
sell direct to investors could have a chance at more distribution. Couple this
with something like Quantopian ... profit!

~~~
kasey_junk
Except in the mean time they are eating all the exchange fees.

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slykat
While I applaud them for reducing fees, I don't think key problem facing
retail investors in America is $7-$10 trading commissions from brokerages. If
you think that a $7-$10 trade commission is significant barrier to investing,
you are not thinking about investing correctly.

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.

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BillFranklin
Making investment decisions from your iPhone is pretty silly. Building an app
exactly for this purpose is damn dangerous.

They also say +80% of their early adopters are under 30. I wonder how many are
underage?

~~~
grimtrigger
How about this scenario: you're sitting at lunch when you hear on the news
that Apple is issuing a recall because the iPhone 6 sometimes catches on fire.

At that moment you'd be saying "damn, I wish I an app where I could short
apple ASAP".

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pktgen
I would think the professional/algorithmic traders would have done that the
millisecond the news came out. By the time you're hearing about it at lunch,
it would be too late.

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grimtrigger
Too late to save all your money, but unless its at the bottom you still have
something to save.

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rdl
This is one company where all they need to do is add Bitcoin support and I'll
put up with any problems trusting a startup with money.

(Next on their roadmap I'd hope would be handling retirement accounts; I
generally trade within my Roth IRA because it's tax-immune)

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junto
Beats TD Waterhouse that used to charge me £17.50 per trade!

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lingben
before you can assert that you have to calculate how much worse your fill rate
will be due to the selling of your order flow

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

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yummyfajitas
Your fill rate cannot be worse. The mechanics:

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.

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kasey_junk
"Your fill rate cannot be worse"

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.

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yummyfajitas
Oh, you mean because of the added latency on the dark pool check? As I
understand the mechanics of these, it's as follows:

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).

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kasey_junk
Well latency is the easiest scenario to conjure (and I agree with you about it
not being an issue).

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.

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valdiorn
okay, so who pays for the exchange access?? Because NYSE haven't been known to
let people connect and get their data for free, ya know?

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kolev
Nice... but where's my invite? :)

