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Stock-trading app Robinhood was rejected by 75 investors (businessinsider.com)
143 points by jaoued on May 13, 2018 | hide | past | favorite | 139 comments



They haven’t “won” anything yet...a high private unicorn valuation doesn’t mean success.

I would really caution connecting your bank account through Plaid on RH. It’s really unclear what data they are collecting but their privacy policy suggests they are collecting your bank account transaction history using Plaid’s API. 100% a dealbreaker for me.


>They haven’t “won” anything yet...a high private unicorn valuation doesn’t mean success.

We could debate what "success" means endlessly, but if you're a VC, your job is to put money in companies with low valuations that will eventually end up with high valuations.


I think the idea is that, since RH hasn't been acquired or gone public, they haven't yet "ended up" with a high valuation. It could all go away before the investors can get liquid (e.g., Theranos for a pathological example).


There are deep secondary markets around late-stage venture-backed companies. Robinhood investors seeking to exit around this valuation have options.


Just to clarify, we're debating whether Robinhood is a success and the measure of success being used is "can early investors cash out for a gain?"

What if every company checked that box and couldn't provide lasting value beyond that? Do we still consider this a success because we're posting on a forum run by a VC?


> What if every company checked that box and couldn't provide lasting value beyond that?

How long do you think that would be a sustainable situation? A high mid to late-private stage valuation is only supported by the promise of subsequent valuations.

If every company stopped achieving those subsequent valuations, it would feed back into the private valuations.


> What if every company checked that box and couldn't provide lasting value beyond that?

That would mean an overheated late-stage market. (Which recent IPO data haven’t yet made obvious is a thing.)


Ignoring any one specific company for a moment, an investor consistently able to invest early and time their exits near the peak of each company's valuation would be a roaring success.


That's my point. We're saying that Robinhood is a success as a company because an early investor would have had a nice exit? Thats our "success" barometer?

I'm going to call BS on that one.


Success generally means a future liquidity event...an IPO with a sustained share price well above what you bought in for or a sale.


* Your job is to put money in companies with low valuations, that you will eventually be able to exit at a high valuation.

It's all rainbows and unicorns, until someone hands you cash and you manage to exit your private, illiquid investment.


A valuation is defined as an estimation of value. It's not a guarantee, it's not a sale contract, but does that make it rainbows and unicorns? Well, about as much as any other estimation around a highly complex and mostly unique construct, I would say.

It's certainly the first step towards a possible sale.


The dimensions of preferences and signalling contort the actual valuation.

Remember that 409A valuations are generally drastically below preferred price. I'd be much more inclined to discuss startup valuations in the terms of 409A valuations.


I think your job is to put money in companies with low valuations that EXIT with high valuations. Your investors won't give a crap if you do a good job of finding unicorns that eventually fissle out.


Hey dawhizkid - co-founder of Plaid here. I can't give the rationale on why RH wrote the privacy policy the way they did, but I can guarantee you that they are not pulling transactional data. They're only using Plaid for the ACH authentication. If you'd like more insight feel free to shoot me a note at william at plaid dot com.


Plaid provides account aggregation features so it definitely do access your transaction history. Is your issue with Robinhood collecting this data or Plaid.. or is the issue with sharing your transaction history.

What do other people think about sharing this type of information?


I think it's really obvious what people think, the question is whether people know or not. I think it's pretty obvious this should be considered criminal theft. This is like if you hire guys to sweep and dust the shelfs in your bank vault and you walk in on them taking pictures and writing down every single item on a ledger. All across the country. Not that you should hire people to clean your bank vault. This should be extremely illegal. We just really need more congressmen who know what an email address is.


I'm talking about giving consent and actively sharing the data. Look up PSD2 in Europe.


No, you can't have my bank account transaction history. I am speaking on behalf of every human being on the planet not employed at Plaid. Why is this a question?

I looked it up - I'm sure the regulation is massive so not going to read through it entirely, but that looks terrifying. Great time to buy a plot of land somewhere not covered by google maps and start burying gold. I can't really imagine a product that would I would use on top of that and I'm kind of curious who exactly lobbied for that legislation.


When you go for a mortgage you have to share your transaction history with the bank you apply to. You may apply to multiple banks and you may use a broker who you would also have to share that information with.

I think people would share that information if they could get some benefit from it.


Mortgages are not a remotely valid analogy here unless, in the case of Robinhood, you try to compare it with margin accounts, which I think is actually a fair analogy but is not the case here. And even then, the bank does not steal your transaction history without your awareness or consent, as is the case here.

When I open up a checking account, all I need is my license and my SSN and $1000. They don't need the transaction history from every other checking account I have because they are not assuming any liability or risk. Such is the case with the average Robinhood customer, ergo, they should not steal the customer's transaction history from their bank. This should honestly be prosecuted.

I don't mean to be rude, but I think you have to be either high, really dumb, or a robinhood stakeholder to think that people would want this or that it would be a good idea. I would suggest moving to China if you think it's a good idea - I'm sure you will be able to get great discounts on a lot of things if your transaction history is conducive to the greater good in the near future.


except they already took a large secondary offering they keep if the company fizzles out

"Yesterday we discussed how Robinhood had raised $363 million in new funding at a $5.6 billion post-money valuation. All of that was primary capital, but we've since learned from multiple sources that there also was a secondary transaction whereby Robinhood's co-founders and some early employees cashed out just north of $100 million."

https://www.axios.com/newsletters/axios-pro-rata-9833c302-36...


Venmo also uses Plaid for bank connection, though I doubt their user base really cares


I did not know about Plaid until today.

https://plaid.com/solutions/transaction-data/

> Our high-functioning platform pulls up to 24 months of data directly from users’ bank accounts.

Whoa. I never agreed to anything like that. How is this legal/why would banks let a startup have this much information?


You authenticate to Plaid with your bank credentials, so it's not much different than the data you can get directly from the bank through OFX (like Quicken and other things do). Plaid just simplified it and put a better API on it.


They do? I had no idea about that.


Exactly.


You can use ACH trial deposit verification with Robinhoodas alternative to Plaid.


Missing the point. That option is hidden. Most are connecting through Plaid. Even techies on here have no clue Robindhood collects this information when you link a bank account.


I've been holding off adding a bank account till I open a new one specifically for robinhood


Create a checking account that you use only for Robinhood. You can open a free checking account online in about 5 minutes.


Thank you. Disconnecting my bank acct ASAP!


Well, secondary markets.


considering how popular it is, i think the high valuation is here to stay . Regular online brokers have, for years, been charging clients too much, with arbitrary fees, almost as a form of collusion .Robinhood breaks this cartel up, much like Uber broke up the taxi cartel.


$4.95 per trade on Schwab is “too much”? I’ll stick with my Schwab brokerage + free investor checking with unlimited international atm fee rebates over giving up my entire bank account transaction history.

What data are you citing that suggests RH is actually popular given they have released no data about trade volume? This BI story suggests they have a lot of catching up to do to justify their valuation http://www.businessinsider.com/robinhoods-new-web-platforms-...


Where do you need to give your transaction history? I have both Schwab and RH and don’t recall it ever asking for such permissions. I only have a linked checking account for ACH deposits and transfers.


You don't have to provide your transaction history, you can use an ACH trial deposit as an alternative to verification.


That’s not the point. Even techie types commenting on here (who should know better about trusting a free Fintech product) didn’t think twice about it. Most commenting on here are surprised to learn Robinhood even collects this info when you do use Plaid.


Actually, it is the point. You don't have to connect via plaid, so if you are concerned about whatever plaid collects, you can solve this concern and avoid paying 4.95 a trade and be strictly better off


No, it's not. Robinhood hides non-Plaid linking options behind a "don't see your bank?" button at the very bottom of a long list of banks that few people are even aware is an option. The point is that even smart people on here seem to have no clue that Robinhood is collecting this information when they link a bank account through Plaid because the permissions you grant are that opaque.


The point is to compare RH with other brokerages. Right? If everyone is using Plaid, then you are still better off not paying 4.95. Or, are you claiming nobody else is doing it but them ?


Nonetheless, the option exists. Meaning the data on the statement is really of no use to RH & isn't part of their business model.


There's also an option on FB not to share your wall posts with anyone. Yet you'd not infer from that that people sharing crap about their lifes on the wall is not integral to the FB's business model.

Something's wrong with your logic.


FB serves ads. Robinhood doesn't. So, it's not clear how in the world people's history would be integral to their business model. I suppose we could imagine them using it down the road to offer credit or something. But as of right now, it is a mere insinuation without a shred of evidence.


Regular online brokerages don't use Plaid to enable funding if that's what you're asking. Funding via traditional ACH methods or wires does not grant a sender or receiver access to all your transaction history.


Robinhood supports ACH


If you connected your bank account via Plaid (online banking creds), then you’ve agreed to hand over your transaction data.


Yes, the same on my end. I didnt have to authorize any of this mumbo jumbo


Did you connect via Plaid (online bank creds)? Then you’ve agreed to give RH your transaction data.


To be fair, that price used to be $18.95 per trade before the Robinhood came in and shook them a little bit.


I tried them and it is the most amateurish stock broker I have ever touched in my life. There are no metrics for any of the stocks. The graphs are not annotated, the spread seems to be inflated (as they probably make money with it).

Also as said higher in the comments, if you are not paying you are most probably the product. And I don't want my private investment informations to be sold as data to BigCo. Paying x$ per transaction is a small price to pay to not have your data all over.

They might be a good answer for newbies that want to spend 100$ on a stock for the first time, but for anything else I will stay with Ameritrade. Thanks


It’s not just your information that’s the product, it’s your order flow. Professionals are willing to pay extra for the right of first refusal on the other side of Robinhood trades because Robinhood users are (on average) especially active and incompetent traders.


Ameritrade is a really bad broker. excessively high fees..all sorts of shady stuff with option order fill. Tons of online complaints. I have not used Robinhood but I cannot imagine it being worse than TDAmeritrade or any broker being worse than TDAmeritrade. If you trade with sums larger than $50k, use a professional broker such as Interactive Brokers, which institutional clients use.


TDA is a fine broker and the fees are negotiable. I’ve seen active traders get their fees knocked down lower than Schwab or Fidelity, and their Thinkorswim platform is fantastic for trends and analytics...

IB is of course a great broker as well, but TDA is definitely a top tier choice.


Interactive brokers seems quite expensive, doesn't offer trading on swap, and has quite a few other downsides. I doubt that it's used by many serious institutional customers.


I run a hedge fund. There are no hedge fund managers I respect who don’t run their personal accounts on IB. The IB platform is in many ways ahead of the full suites provided by leading prime brokers and third parties. I see many hedge funds -especially smaller ones - going with IB as a prime solution.

Your statement here is just empirically false.


I started my career as a trader at a bank and then moved on to quant/trading/PM roles at extremely cost sensitive firms. Not a single one of them used IBKR.

> There are no hedge fund managers I respect who don’t run their personal accounts on IB.

This thread is about institutional customers rather than personal accounts.

I know at least one former hedge fund manager who ran a high 10 figure hedge fund whose personal account is not at IBKR. I respect him a lot.

> I see many hedge funds -especially smaller ones - going with IB as a prime solution.

Are they cost sensitive? The fact that you have hedge fund structure set up does not mean that you are cost sensitive.


IB is actually one of the cheapest, but are also in almost every global exchange and have a lot of let's say "features". Of all the retail investing platforms, I think they are the biggest and the top pick for rather serious investors. It's actually not very user-friendly.

What makes you think they are expensive? Trading US stocks is like $1 per trade and interest rates are benchmark + 1.5%.


> Of all the retail investing platforms, I think they are the biggest and the top pick for rather serious investors.

I would agree with this, but I'm not sure that this is a meaningful universe for comparison.

It's also quite different from the original claim with which I disagreed.

> use a professional broker such as Interactive Brokers, which institutional clients use

I'm sure that there are some institutional customers who use IBKR, but it's probably not many and they're probably not very cost sensitive.

This is also why I added so many qualifiers to my disagreement. You can open an LLC and be an institutional customer in a certain sense, but it doesn't mean that you're cost sensitive and trying to cut your costs to the bare minimum.


Expensive in what way?

I assume you mean "trading on margin". Swaps are custom contracts and not something average people are doing. IB definitely supports trading on margin and has one of the lowest rates around to do so.

IB is definitely the choice for someone who wants to have real market access and tools at their fingertips.


It's expensive in literally every way from commissions to margin rates.

I meant swaps specifically. I know that they offer margin trading.


That’s just false. Commissions, rates, etc are rock bottom.

However you will be charged at least $10 per month regardless of transactions, unless you have >$100k with them.

Or were you saying specifically their swaps are expensive?


They also have a terrible user interface and horrible support. Highly un-recommended.


It has or at least had really cheap margin rates.


Margin seems pretty expensive too and AFAIK they auto liquidate you rather than letting you meet the call. That's not great in both dimensions.


What the fuck are you talking about dude? They have rock bottom margin rates, like multiple % lower than you get with retail brokers like schwab, etc


Who do you like that's cheaper? IBs margin rates max out around 2% in the US, which seems quite low.


The best tier is about 30bps over fed funds or libor, doesn't matter in the current environment. I've seen better from major banks.

This is on top of the other downsides that I mentioned.

It would be fine if the financing terms were worse, but everything else was better as long as your total costs are lower.


> the spread seems to be inflated (as they probably make money with it)

The Order Protection Rule of Regulation NMS makes this illegal (during regular trading hours).


Execution quality matters and given enough order flow a they can still match client orders to make a profit without giving a worse price than NBBO.


That's easier said than done. If you don't already have proper market making infrastructure and strategies you'll probably lose money trying to do that. Add in market makers paying per order and it doesn't make sense


Yeah am wondering if the OP means that robinhood is playing privileged market maker?


> They might be a good answer for newbies that want to spend 100$ on a stock for the first time, but for anything else I will stay with Ameritrade. Thanks

I don't think you're their target audience. Their marketing materials say things like "democratize markets", "investing for the rest of us" and "learn to invest in the stock market". Also notice that the screenshots of their app feature portfolios with low dollar amounts, compared to the larger dollar amounts the big-boy brokers use as examples in their marketing.

Because they're targeting newbies, and because of their behavior in that context, I think Robinhood wants to be your bookie more than they want to be your broker. The marketing pitch on their landing page reads "Robinhood lets you learn to invest in the stock market for free.", but the updates they've introduced while I've been paying attention to their app seem to be aimed at encouraging people to do risky, stupid things with their money. I assume they plan to monetize this somehow.

What follows are some examples of things I think are pretty scummy, given that Robinhood's target user is an investment newbie:

- They pressure new accounts into paying a monthly fee for what are essentially margin trading accounts, but the vast majority of people should not be trading on margin.

- They promote aggregated news stories from crap outlets like seekingalpha to their users, but curiously not educational material with sound investment advice. Another indication that their pitch about learning, which probably makes newbies feel safer using RH as a platform, is insencere.

- They added the ability to trade cryptocurrencies a short time back. The vast majority of people should not be investing in cryptocurrency. I tend to agree with Nicholas Weaver that most coin funds/offerings are basically scams or thefts waiting to happen. The values of the coins are volatile, and what happens if governments decide to make it difficult to exchange them for desirable currency? At least you can buy drugs on TOR, I guess?

- They recently added option trading. The vast majority of people should not be trading options. It's probably closer to straight up gambling than buying stock at random.

If they really wanted to open up markets to any average Joe with a smartphone and help them learn to invest, rather than encourage them to lose all their money, they wouldn't be prioritizing the things they have.

Just for contrast, you know what simple things Robinhood users can't do? They can't check the managment fees when looking at a fund. They also can't sort their portfolio into short and long term holdings before choosing to sell stock.


Interactive brokers... simple but sophisticated.


I have a hard time believing that the spread is inflated. The SEC would not allow that.

I agree the app could be better, but then again, is it really a wise decision to research companies through your Broker's phone anyway?


And schwab doesn't collect your data ? Of course, it does AND you are paying for trades.


The one feature that I'm really missing from Robinhood is selling based on Spec-ID instead of just FIFO. FIFO means I won't be able to tax-loss harvest making Robinhood effectively much more expensive than the alternatives (as the additional taxes are much higher than what I would save in trading fees).


Why isn't Spec-ID/FIFO completely automatic by default? The fact such an immaterial determination can have such a financial impact is absurd, but isn't the obvious solution for brokers to automatically do FIFO or Spec-ID based on which is more profitable for their clients? As far as I can tell the greedy algorithm would be pretty straightforward and effective.


Can you explain what this means?


If you’ve been holding stock for more than a year and then sell, it will be taxed at a lower capital gains rate. If you sell sooner, it will be taxed at an ordinary rate.

If you have stock at a brokerage and you want to sell it, FIFO is first in first out. The brokerage will sell the oldest shares you own. It sometimes makes more sense to sell a specific set of shares you bought later depending on purchase price and current price. For example a FIFO sell could generate taxes while a specific lot sell could generate no taxes (you sold at a loss).


Is there anything like that available in Europe? In particular in Switzerland?

I checked what my bank, Postfinance, wants to charge for a brokerage account - it's in multiple hundreds of dollars.

EDIT: Thanks to All for the responses! The offered options seem to be much better than my bank.

- Interactive brokers

- DeGiro

- Lynx


Interactive brokers are a cheap European shop. Not free to trade but very cheap and they give you access to a lot of big markets.


IB is not European but based in the US. I would also recommend it but tax could be somewhat more complicated (W-8BEN form, etc.).


IB has US and UK accounts (and likely more). For Switzerland (and Europe) you'll get a UK account and you will not have W-8BEN problems.


They also have local resellers in many countries, but avoid them because the rates are higher.


Interactive brokers is probably the best brokerage out there.

Used 3-4 others, but IB is the simplest and also most featureful one for sure.


I strongly disagree. Their reporting is convoluted, their interface terrible, their support is horrible.

I've tried half a dozen brokerages over time, and IB is by far the worst.


What's your favorite?

I actually found their app pretty simple, but hat might be because i'm an engineer & tend to understand what i am seeing in IBKR app and web site.

Reporting wise, they are the most capable - i needed to apply for a loan, and wanted to hide the list of all securities, i was able to create just that. Pretty flexible, and powerful.


Try getting a list of transactions, or working out what you are paying with a margin account. Their reporting is inscrutable. On top of this, their recommended way of buying USD securities with a foreign base currency account is to short the forex in order to tie your margin to the exchange rate at purchase.

I'm also an engineer, but I know a bad UI when I see one.

Pretty much any other brokerage lets you see a clear historical list of transactions, balances and fees, without having to configure a complex report or jump through any hoops.


If you have larger sums to invest (or if you trade a lot) Interactive Brokers could be an option. Also there are a number of other European brokers - e.g., DeGiro and Lynx.


How do THEY make money? The article didn't say, or I missed it.


Since this question always comes up, I'll aggregate:

- Payment for order flow - Interest on idle cash - Robinhood Gold, a subscription model with side benefits, the most notable of which is... - Margin lending

It's unclear whether Robinhood is profitable or has a road towards profitability since none of these are really unique in the retail brokerage space, but it certainly seems possible that these combined with a huge customer base and the right amount of frugality could allow for it.



Interesting that they don't mention payment for order flow. From what I've read, that's major way in which they make income.

Note that most (almost all?) retail brokerages accept payment for order flow, i.e. getting paid to direct their order flow to certain firms for order execution.

For example, these are the firms that TD Ameritrade receives payment for order flow from: https://www.tdameritrade.com/retail-en_us/resources/pdf/AMTD...


Replying to instead of editing my original comment, for posterity:

From this article, it appears that they do not currently take payments for order flow:

Originally, Robinhood planned to make money off of order flows – a common tactic used by discount brokerages in the 1990s to generate revenue. According to the company's FAQ, Robinhood backpedaled on the idea because it executes orders through a clearing partner and, as a result, receives little to no payment for order flow. The company is willing to return to its original plan in the future if it receives order flows directly or begins to generate a lot of revenue from them.

Definitely surprised by this; I assume that if they did take payment for order flow, that they would be required to disclose this due to some SEC rules, so I'll take it at face value.

https://www.investopedia.com/articles/active-trading/020515/...


Another update: Actually, they do take payment for order flow, and here's the relevant disclosure: https://brokerage-static.s3.amazonaws.com/assets/robinhood/l...

Apex Clearing Corporation – Robinhood receives payment from Apex Clearing Corporation for directing equity order flow to this venue. Payment varies based upon a number of factors including but not limited to: the type of security, time of order placement, and the underlying price. Payments received averaged less than $0.00008 per dollar of executed trade value for order flow in the first quarter 2018.

Citadel Execution Services – Robinhood receives payment from Citadel Execution Services for directing equity order flow to this venue. Payment varies based upon a number of factors including but not limited to: the type of security, time of order placement, and the underlying price. Payments received averaged less than $0.00026 per dollar of executed trade value for order flow in the first quarter 2018.

Two Sigma Securities, LLC – Robinhood receives payment from Two Sigma Securities, LLC for directing equity order flow to this venue. Payment varies based upon a number of factors including but not limited to: the type of security, time of order placement, and the underlying price. Payments received averaged less than $0.00026 per dollar of executed trade value for order flow in the first quarter 2018.

Wolverine Securities, LLC – Robinhood receives payment from Wolverine Securities, LLC for directing equity order flow to this venue. Payment varies based upon a number of factors including but not limited to: the type of security, time of order placement, and the underlying price. Payments received averaged less than $0.00026 per dollar of executed trade value for order flow in the first quarter 2018.


> How does Robinhood make money?

> With Robinhood Gold, you get up to 2x your buying power and access to after hours trading for as little as $6 per month. This is the only product Robinhood charges you for, and is completely optional. Trading is still commission free.

> Additionally, Robinhood earns revenue by collecting interest on the cash and securities in Robinhood accounts, much like a bank collects interest on cash deposits.

They are selling Robinhood Gold's extra features, but I bet they make much more on the interest in deposits. If I recall this was their initial path to profitization.


Margin trading..the real money-maker. Charge clients 8%/year for a loan that costs you 3%.


Do they mention that they're also selling your order flow?


If you're not the paying customer, you're the product. It is likely that your data on Robinhood is sold to third parties, although I can't speak to the exact scope or whether it should be of any concern to users.


Come on. Robinhood wants you to be a paying customer, it's a freemium model, not an advertising business like FB


1) Cash (from users) can be loaned out for a small return

2) Individual investor flow is good flow. Trading companies pay for this flow. Uncertain whether robinhood does this, but (all?) other Joe-Shmo facing brokerages do.


I read them stating the money comes from the interest on the money of yours they hold.


They sell orders/trading data of small retail investors to Big High Frequency Traders so that they can gain an edge in the zero sum game of day trading. 'Robinhood' seems like an apt name.


In my experience, if you stick to highly liquid stocks/options (SPY for example) the bid/ask is a penny and you don’t experience much slippage, less liquid stocks you can end up getting a worse price (0.01-0.02, in my experience)

The amount of capital I actively trade with makes Robinhood a good fit for me, the amount of contracts/shares I trade in an average position would need to gain 1-2% more to get the same profit if I was paying fees (particularly on options)


I have heard from the horse's mouth that small retail investors orders/trading data is used as a contrarian signal. In other words the Big Traders see what the small retail investors are doing, and do the opposite.


It's somewhat similar to that.

Assume you are a market maker - you make money off of the bid-ask spread. Specifically, you supply liquidity by issuing standing orders: To buy at the bid, and sell at the ask.

For a market maker, you typically want the price to "stable", and you set your bid/ask to reflect the current order flow supply/demand - this is the "equilibrium" price.

When prices are volatile, your risk is greater. Typically, market makers have to maintain some position in the securities they transact in, and if they don't effectively hedge this position and the price moves against them, they could take big losses.

The optimal condition for a market maker is to have supply and demand balanced, and unchanging. Then you can simply make money off the bid-ask spread without much risk. (All else being equal, having fast access, i.e. HFT, and fast processing systems to detect upcoming likely prices changes also helps)

Market makers are worried about adverse selection; that is, if a huge buy order comes into them, they are worried that the buyer knows more about the price of the security than they do. If they sell to them, the price could subsequently increase, and they could take a loss. (The same applies for a big sell order)

That is why they would prefer not to transact on the open market - i.e. the exchange. It's difficult to tell who are the informed traders.

Instead, they would rather transact against "uninformed" traders. "Uninformed" here does not imply "stupid", but rather just implies that, on average, these traders don't possess any special information or any more information than they do.

In the optimal sense, market makers would prefer to transact against an order flow that is unbiased; one example of this would be an order flow where there are equal numbers of buy and sell orders.

This is why market making firms pay for retail order flow. Retail order flow is assumed to be uninformed, and therefore unbiased relative to the information that the market makers themselves have. Being able to transact against retail order flow thus gives them a relatively unbiased order flow from which they can profit off of the bid-ask spread with much lower risk.


None of the market makers as far as I know consider retail orders to carry any information at all, which is precisely why they love then so much.

They can fill retail orders with no real concern about adverse selection (unlike on an exchange where an informed institution is trading against you) and make much more of the spread per trade. Hence why they pay for the orders and give price improvement

Source: work at a market maker


Other brokers do this too, like TDA.


spread


What does that mean, for those of us not in finance?


The spread (bid-ask spread) is the difference between the bid (what the seller is willing to accept to sell it) and the ask (what the buyer is willing to pay for it).

When you buy a stock, you're buying at the ask price, when you sell you're selling at the bid price. The difference is what the clearer keeps.

https://www.investopedia.com/terms/b/bid-askspread.asp


This is mostly correct except for the last sentence, for any conventional definition of "clearer." You could replace "clearer" with "market maker" to be more correct, but it is important to note that the market maker isn't earning the spread every time they trade with you. They're only earning the spread in the aggregate, which is to say that they hope to both buy and sell with many people like you so that over time they are effectively earning the spread.


If you look on any exchange or broker for any security, the sell price at any given time will almost always be lower than the buy price. The instantaneous gap between the sell price and the buy price is known as the spread.

This spread reflects how much the exchange makes.


Market makers profit off the bid/ask, not exchanges.


They also get rebates for trades from the exchanges to encourage liquidity.


It's a very indirect relationship to how much the exchange makes.


This would imply Robinhood is itself is a market maker, which is not true.


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The 75 rejections number doesn't seem to mean anything without some context... Maybe the mean for companies with similar valuations over similar time frames is 300 initial rejections, and this is actually an outlier.


I never “got it”. It’s just a brokerage like etrade? Those places charge under ten dollars per trade. What’s the big draw for zero fees? It’s not like you buy stocks that often.


If someone with $30,000 in savings makes 30 stock transactions per year at $10 a trade, they’ve lost 1% of their total to fees, $300. If they’re expecting 7% annual returns that ends up reducing earnings by 14% per year. The math for the masses is pretty straightforward.


Interative brokers charges considerably less https://www.interactivebrokers.com/en/index.php?f=1590&p=sto...

They also have super cheap margin loan rates.


They charge $10 a month if you have less than $100k though.


Someone with only $30,000 total invested should not be making 30 charged transactions a year.


Out of curiosity, if there are no fees, why not? That lets you theoretically diversifying your risk by investing $1,000 in 30 companies rather than say $5,000 in 6 companies.


An index fund would be yet more diversified, and that's one trade. Very few individual investors have any reason to believe they can pick stocks in a way that outperforms the market.

The zero fees might still be nice if you want e.g. to contribute every paycheck; but an old-fashioned Vanguard mutual fund would be just as good for that, or many brokerages have zero fees for specific classes of ETF. The only advantages that I'd see to Robinhood are (a) no minimums, and (b) pretty UX.


That's a fair point. I use Robinhood to diversify my porfolio so it's not just tracking against the market. So far, whether due to luck or skill, or both, it's been working out pretty well. So to put it another way, I don't see Robinhood as a replacement for the traditional brokerages (yet), but as a supplement.


A good reason would be dollar cost averaging. If you have a monthly transaction split across 3 index funds, you're over 30 trades per year.


As a Robinhood user, no fees is a big draw because while I don't buy/sell stocks that often, I might still be saving $50 a year. That extra $50 can be invested.

But beyond that, Robinhood has a really easy to use UI compared to platforms like TDAmeritrade. It's not only much easier to make trades but also see information like how much dividends I've earned, whether a company has hit their earnings, etc.

Robinhood also lets me invest any money I transfer from my bank immediately. There's no 3-5 business day wait. That said, I'm not sure if this is feature available to everyone or only those on Robinhood Gold.


Same here. I'm only putting in a couple hundred a month right now so 2 x 7 x 12 = $168 and that would eat up much of the returns. I buy and hold dividend paying ETFs. I am not on gold and they gave me instant deposit. I think they give it to you after a while once it becomes obvious you aren't a fraudulent player. I'd like to move to IB given the significantly lower margin % but the fees would kill me. Robinhoods margin is 6%.


Brokerage is a book business. Robinhood is collecting a book of young customers (whom traditional brokerages have not been successful attracting) who frequently trade and use margin (which makes them lucrative).


They don’t have enough capital to trade frequently on margin accounts. $10 billion assets and 3 million users puts the average account has little over $3k. E*TRADE has $300 billion for the same number of users.


Sounds like the business model is to accumulate a base of customers and then to sell the business to some kind of Bank of Wells Fargo who will then proceed to phase out the no-fee service.


Can you explain what the phrase "book business" means?


> Can you explain what the phrase "book business" means?

You accumulate a “book” of end customers, usually from a particular demographic, for the purpose of selling to someone who doesn’t have that demographic. Versus flow (e.g. exchanges) or asset accumulation (e.g. ETFs) businesses.


I think I see some flaws in how we automatically label a company's value based on how much an investor is willing to invest. Why isn't a startup's "value" pegged to real metrics? So in that sense, an investor is free to invest more, but they can't automatically raise the company's value simply by the fact that they were willing to invest more.

Semantically I guess it's accurate, but we really should come up with a better way, or different words, to explain what it really means. Distilling it down to "a company's value is X" is extremely misleading IMO.


Rejection can also mean a sign the investors didn't understand the idea, opportunity, or the ability.




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