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SIPC Says It Has Serious Concerns About Robinhood's New Product (bloomberg.com)
480 points by jakarta on Dec 14, 2018 | hide | past | web | favorite | 305 comments

Through all of this I can't help but be reminded of the 2008 financial crisis and think "this is not going to end well." One part of that crisis was Icelandic Banks making a huge push for savings all over the UK and other parts of Europe ("IceSave") with the promise of better interest rates. When it all went belly up those savers realized these Icelandic banks were not quite the same thing as UK banks and Iceland refused to make depositors whole.

If Robinhood had offered this as a normal bank with FDIC insurance I would have been impressed. For now it just seems they're just moving a little bit higher up the risk/reward curve and trying to pretend the risk is the same.

SIPC insurance is entirely different from FDIC insurance.

FDIC insures the value of your deposits. SIPC covers the case where your broker or mutual fund cannot keep operating (eg. pay the help)

In a case like that all of your stocks and bonds are still there and have most of their value, but you can't get at them because there is nobody to process the transaction. Somehow the holdings need to be transferred to another brokerage or liquidated, and SIPC is there to make sure the resources exist for that happen.

Circa 1970 there was a crisis on "Wall Street" in the sense that many brokerages failed, see


for a backgrounder on why we have the SIPC.

The danger that the FDIC protects us from is even more pernicious because fractional reserve banking is one of the most dangerous things people do. By design the assets and liabilities of a bank are very close to each other, in fact far larger than the equity of the bank. If the depositors want their money out, a bank might not be able to support the cash flow -- which means depositors REALLY want their money out.

The stock market on the other hand is "risky" because stocks can go up and down, but it is not dangerous systemically because if your stocks went down you have to accept that they went down. The bank is legally required to pay you back what you put in and promising to do that 100% of the time is a big promise. If people don't trust banks and banks don't trust each other then you can't cash your paycheck, get money out of the ATM, buy groceries, and then you really have a problem...

You seem to be indicating that SIPC wouldn't protect the liquid (cash) assets in the account, only reunite you with your stocks/bonds/etc. Based on the SIPC site [0] this is incorrect, and they get you your cash as well: " SIPC works to restore to customers their securities and cash that are in their accounts when the brokerage firm liquidation begins"

[0] https://www.sipc.org/for-investors/what-sipc-protects

This is correct but most people don't carry a lot of cash in their brokerage account for very long. They either use it to acquire securities, or they move it out to a real bank account. So SIPC is not equipped, financially or logistically, to act like the FDIC.

Incidentally, here is a really good article about what happens when the FDIC takes over a bank:


>This is correct but most people don't carry a lot of cash in their brokerage account for very long. They either use it to acquire securities, or they move it out to a real bank account. So SIPC is not equipped, financially or logistically, to act like the FDIC.

My understanding is that:

- "Cash" in brokerage accounts is usually actually some form of investment, and is usually listed as such (eg, as a deposit, money market fund, etc). The SIPC protects the holding of the investment, not the value of the investment, so if the fund goes bad, there is no protection.

- Cash in brokerage accounts is cash, and is not very common. It isn't going to make any interest, because it's not being invested by either the account holder or the brokerage, unlike fractional reserve banking. The SIPC protects this, but that's because it shouldn't have been at risk anyway.

The Robinhood account is thus confusing. If it is offering interest, then it's not cash, but a cash investment, and the actual value of the investment, which is what the clients would actually care about, isn't protected at all.

Edit: it appears they've pulled the announcement. Reading into that apology, maybe it was some sort of sweep into FDIC-insured bank accounts? But if so, how could that possibly offer 3% return?

I'm glad to see they're rethinking the details and promotion of this new service. I don't see how they can provide 3% return and still get covered under FDIC, but maybe they can find a way to get on the right side of SIPC.

> Iceland refused to make depositors whole

As I recall it, the 340,000 people of Iceland had no chance in hell of covering the enormous amounts even if they wanted to.

That’s what I thought was funny. How did Iceland’s financial laws allow a local bank to take deposits so big the entire country can’t insure it. Not to mention the criminal element.

> How did Iceland’s financial laws allow a local bank to take deposits so big the entire country can’t insure it.

Why not? Shouldn't Icelandic law protect Icelandic residents?

Icelandic law should apply equally to people regardless of of nationality. In my country, it’s illegal to murder someone regardless of the perpetrator or victim’s nationality. And bank insurance applies regardless of nationality. Restrictions apply to prevent such systemic problems.

So it’s good to protect Icelandic residents. But the law is inefficient if it allows too much capital that it can’t be managed and insured.

You're right that what happened in Iceland hurt Iceland. But I was addressing the more general point of why the Icelandic taxpayer should insure depositors from other countries.

> it’s illegal to murder someone regardless of the perpetrator or victim’s nationality

You're mixing up two things: whether the law as it exists was violated (in which case Icesave should of course be punished) and whether the law SHOULD protect foreign depositors. I'm discussing the latter.

> bank insurance applies regardless of nationality

I'm not well-versed in cross-border banking to say the least, but isn't that an opinion? One could just as well argue that Icelandic taxpayers shouldn't have to subsidise the British (as an example) public, by providing free insurance. If Britishers want insurance, it's up to their government to incur the costs, since it's the Britishers who'll be benefiting.

Edited: Iceland isn't a member of the EU, so my comment didn't make any sense.

Iceland is not a member of the EU

Iceland is not a member-state in the EU but they have close economic and political ties. They are a part of the European Economic Area (EEA) and the European Free Trade Association (EFTA).

They once applied for membership after the financial crisis but it didn't go through; currently most citizens are opposed to the idea.

Becoming a full EU member would require them to accept the EU's fishing limitations, potentially hurting their economy. There are also other factors involved:


So confusing:

Iceland is in the Schengen Area, and the EEA, but not the EU or Eurozone

A bit outdated it as Latvia and Lithuania are in the Eurozone.

Probably other changes too.

needs ECJ jurisdiction, and ECHR. literally unplayable.

but for real, country names would be helpful too

ECJ jurisdiction is the EU, and the ECHR applies to all Council of Europe members.

Whats that one flag outside of the council which can mint Euros

Vatican City

I figured it was one of the microstates

> When it all went belly up those savers realized these Icelandic banks were not quite the same thing as UK banks and Iceland refused to make depositors whole.

That's a very inaccurate recalling of history which you can see from reading the intro to the relevant Wikipedia article[1] and a summary of the EFTA Court's decision on the matter[2].

The case centered around a dispute between mainly Britain, The Netherlands and Iceland about how to interpret certain EFTA regulations. Iceland's position ultimately prevailed in court.

1. https://en.wikipedia.org/wiki/Icesave_dispute

2. https://en.wikipedia.org/wiki/EFTA_Surveillance_Authority_v_...

I read both your links, and I don't think my characterization is an inaccurate recalling of history at all. From the second and third paragraphs of that wikipedia page:


When Landsbanki was placed into receivership by the Icelandic Financial Supervisory Authority (FME), 343,306 retail depositors in the UK and Netherlands that held accounts in the "Icesave" branch of Landsbanki lost a total of €6.7bn of savings. Because no immediate repayment was expected by any Icelandic institutions, the Dutch and British national deposit guarantee schemes covered repayment up to the maximum limit for the national deposit guarantees – and the Dutch and British states covered the rest.[1]

The Icelandic state refused to take on this liability on behalf of the guarantee fund. Originally this was because the state lost funding access at credit markets due to the Icelandic financial crisis, but later proposed bilateral loan guarantees for repayment were rejected by Icelandic voters.


At the end of the day there were a ton of foreign depositors who felt like these were just normal savings accounts with higher rates, but when the financial crisis came they were in a much more difficult position than people who used domestic banks.

I took issue with the abrupt ending of "refused to make depositors whole[...]".

That sounds like unilateral action, whereas what happened was that there was a dispute about how deposit guarantees should be treated within the EFTA agreement, and all parties involved ultimately didn't insist on what they individually felt like doing, but followed the rulings of the EFTA Court.

But yes, it was a big learning experience for everyone involved. But that's exactly the reason it's important to make the distinction.

It's not that Iceland was unilaterally callous and pursuing those relatively small amounts was deemed small potatoes. Rather, EFTA rules were clarified in a way that would also apply to e.g. French depositors in Danish banks should a similar Danish default occur in the future.

What happened with domestic depositors is that the Icelandic state was free to selectively grant benefits to whomever it pleased once it became clear that its banks weren't subject to the EFTA deposit guarantees for anyone.

That's also an important distinction, and is why the action didn't violate the rules of the trade area.

I remember (but cannot find a citation) in ~2005/6 AIG was offering 4% saving accounts. I'm having deja vu all over again.

That wasn't an unreasonable rate at that time[1], I don't recall the exact timing, but my credit union was at 4% on savings for a while, before fed set interest rates to near zero for many years.

[1] https://www.depositaccounts.com/blog/archive/2005.html

CDs were in the 5.10% range in 2006-2008, I had a ladder of them.

Many of the institutions I had CDs with were dissolved and I was refunded the principal (without interest) by the FDIC. Compared to the losses everyone else was seeing I was more than happy with my 0% "return".

That’s because interest rates were around that level at the time and the bank was also getting paid that much to hold your money. It wasn’t a conspiracy.

Consumer savings accounts had absolutely nothing to do with the crisis.

Like, on the list of “things that caused the crisis,” they would literally be dead last.

Did you know your parents had savings accounts that delivered 10% interest at one time? Look up historical interest rates in the US. 4% is like average.

IIRC, high interest rates are caused by an economic boom, as raising interest rates is caused by both an increase in demand for cash flows to finance investments and also as a monetary policy to put economic pressure to control inflation.

Currently the world in general is very far from an economic boom, and central banks are actually implementing desperate monetary policies to jump start inflation. Thus, we are very far from those times to the point that nowadays a 3% interest rate is considered huge, as the norm is for interest rates to remain below the inflation rate

3% is not huge for the US right now (we have been the most aggressive of the developed markets in normalizing). 3% is only a bit above the federal funds rate right now.

When you account for the investor cash that will subsidize this service as a loss leader offering, it’s not unreasonable.

The only risk is we enter a severe recession and the fed has to drop interest rates to 0 again. In that scenario, robinhood simply has to lower the rate of their offering as well. This isn’t some big existential risk.

> Consumer savings accounts had absolutely nothing to do with the crisis.

That's just not true. A significant contributor to the mortgage crisis is that banks loan out savings that are backed by the government. Savers deposit their money with banks even if those banks are underwriting risky mortgages

That’s like saying a significant contributor to the mortgage crisis was restaurants, because restaurants pay interest on their loans to banks which the banks then used to underwrite risky mortgages.

Not sure I follow your argument. How did savings accounts that offered 4% cause the crisis?

That's extremely reasonable for a savings account. The fed rate at the time was around 5% [1]. Today's is much lower which raises questions about where this rate is coming from.

1: https://en.wikipedia.org/wiki/Federal_funds_rate#Historical_...

Long term bonds are just above 3% now.

That was a real bank. Historically savings accounts are in the 2.5-5 range.

In Germany 5% was common at that time for savings.

yeah i had a 4% account from HSBC around that time. This immediately brought up an uneasy feeling for me, like this is the "pump" side of a pump and dump or the books are so ugly they need cash deposits at any cost to make it look sane.

Investment banks were leveraged 40:1

The consumer banking side of the story has almost nothing to do with it

Short term investment grade debt has a default rate of near-zero and pays more than 3%. See for yourself:


It is entirely possible for them to safely promise a 3% account under these conditions. This is not at all like the financial crisis. It's just wrapping an investment grade bond fund in a bank account interface.

This is extremely misleading and no one should be using bond funds as a checking/savings account replacement. You have mark to market and liquidity risk here which in normal circumstances you do not have with a savings/checking account.

Additionally, Robinhood is reportedly investing proceeds in US Treasuries. US Treasuries have a completely different risk profile than corporate investment grade bonds.

> no one should be using bond funds as a checking/savings account replacement

Literally all money market accounts are bond funds under the hood, actually.

With the important difference that money market accounts should never lose principle (aka "breaking the buck"). It has happened, but its fairly uncommon.

Bond funds, however, frequently can and do lose value - if interest goes up, price goes down (the reverse should also be true, though).

Under the hood vs how they function in everyday situations are completely different things.

If I sock away $100 a month for the next 12 months to pay for something, which one is more likely to have >=$1200?

That depends on what you mean by "sock away".

Thought was implied but money market funds vs corporate bond funds.

When you buy a bond and the interest rate goes up, the nominal value of the debt goes down when the interest rate goes up, while with bank accounts they stay the same.

Ex: You buy a $100 bond at %3, then the prime rate goes up %1 so the typical market price of bonds of your class are now %4. Now your bond is worth less than $100 if you were to liquidate it.

Big difference.

that's a good point.

However, in this case, won't it be more like a bond-fund, where the fund essentially has a ladder of bonds that are constantly expiring and getting reinvested (and also investing new investments from retail investors), and so the overall value of the fund may still remain close to $100.

I could well be wrong, so please feel free to correct me! Trying to learn.

Yes bond funds do that to even out interest rate changes kindof, but those fund prices can still go up and down in price as a result of interest rate changes and other market dynamics.

If they called this the 'bond fund account' with easy liquidation and buying to make it bank account-ish, then I don't think people would be as upset about this, but it would be a fairly niche financial product.

There is a strong difference between Yield to Maturity and effective yield. Yes, If they hold bonds until they mature, specifically government bonds, there will be no loss in principle.

What people seem to be misunderstanding is that a yield curve exists. If they were to go the safe route of short maturities, the interest rates will be must lower than long dated securities. If they reach for yield in longer term securities, they will have to mark to market when interest rates rise (which they most likely will due to the fed signaling that they'll be tightening in 2019).

You can't have your cake and eat it too

One risk is that the other investors might suddenly decide for some reason (say a sudden wave of panic) to cash out their holdings in the fund. This would force the fund manager to immediately sell some of the bonds, perhaps at an unfavorable price. Bonds (safe ones) eventually pay out at their full value, but their market price fluctuates before maturity, and a sale forced by other investors could stick you with a loss.

But it carries more risk. It may not continue to pay 3%. In a financial crisis the money may not be there any more, the companies may go bankrupt en masse for example, or companies that were previously thought to be safe may not be able to meet their obligations. There is no sort of guarantee here, and the SIPC guarantees are supposed to be about making sure investors end up with the securities they purchased, not making investors whole if their investments turn out to be worthless.

It is precisely this kind of bundled 'derisked' derivatives which caused the last financial crisis (those were sold as very low risk mortgage debt , these are corporate debt).

It may be fairly safe, but it's not risk-free (and certainly not guaranteed by the government). Even if companies don't default, their borrowing rates can still increase, reducing the value of the bond and causing you to lose money.

The 3% return is compensation for the added risk. The financial markets are pretty efficient for liquid stuff like this.

Banks also provide services that consumers are willing pay for through lower rates on their checking accounts, and need to cover their administrative costs or have some other way of making money with the deposits.

It's very unlikely that regulators and smart money would smile upon "wrapping" VCSH or similar corporate bond fund and trying to transform it thereby into a demand deposit account.

A bond fund like that, even with a relatively short duration of 2.65, is going to have significant price movement in the principal amount due to interest rate risk. (Not counting credit risk etc -- credit spreads could move significantly too in a financial crisis.)

A big rate move coupled with a big jump in credit spreads could easily move the price of the underlying by several percent in a matter of days.

Not so cool when your deposit of $100 can only be cashed out for $97 a few days later.

Yeah. But MMFAs can default in ways that aren't guaranteed by the government. The distinction between zero and near zero matters.

This is an important distinction. When the money marketeer redeems a dollar for less than a dollar it "Breaks the Buck" [0]. Cowen's MM account IIRC was the first one to do that back during the 01 crash.

[0] https://www.investopedia.com/terms/b/breaking-the-buck.asp

The rules around breaking the buck were significantly changed after 08. Funds can suspend transactions instead now.

As if not letting people out is better than letting them out at a haircut. Need to maintain the illusion of safety I suppose.

Yeah. And the haircut is usually quite small. If I sold my money market for 98 cents on the dollar in a financial crisis I really wouldn't be that upset.

I clicked 'performance' on that page and it says 1.5% over the last five years. Am I reading it wrong?

Look at the "SEC yield." That's what it pays going forward. Returns were lower over the past five years because the Fed had lowered rates to stimulate the economy.

The yield is only part of the return, one has to consider also the change in price. If interest rates go up prices will go down and the actual return will be lower than the yield.

Over the last 12 months, the price of the VCSH fund is down more than 2%. This offsets the dividends paid with the coupons received and results in flat performance.

That's the average annual performance. Interest rates only started climbing over the last couple of years.

does 'performance' include dividends?

Yes. This is a marketing website for Vanguard, so of course they want to list the highest return possible, and dividends definitely do count in performance.

For what it's worth, the point of deposit insurance is not to mitigate against typical situations where bonds behave "like normal" and stick to their typical default rate. The FDIC and SIPC were founded in response to what happens when everyone just turns a blind eye and says "oh, that's totally safe, risk is _near_ zero!"

Well, we're in a strong economy so of course the default rate will be near-zero. What happens if there is a financial or economic crisis and companies start defaulting?

You get your dividend, but the actual price may (and did) decline. Actual performance over the past year is under 0.1%.

If you want a guaranteed return you do not buy bonds or stocks. You buy a money market fund like VMMXX. See https://investor.vanguard.com/mutual-funds/profile/performan...

Very important distinction between money market funds and checking accounts is that they aren't FDIC insured.

True, true. But with a megacorp like Vanguard backing it, I'm personally not too concerned...

Vanguard is not a corporation. It is structured as a mutual company; it is owned by funds managed by the company, and is therefore owned by its customers.

See: https://en.wikipedia.org/wiki/The_Vanguard_Group

Vanguard has many pieces and parts, many of which are, indeed, corporations. It says so on the bottom of its website: "Vanguard funds not held in a brokerage account are held by The Vanguard Group, Inc., and are not protected by SIPC. Brokerage assets are held by Vanguard Brokerage Services, a division of Vanguard Marketing Corporation, member FINRA and SIPC."

Regardless of its legal structure, I meant "megacorp" in the generic sense of "large company."

It is a large company.

good point.

Vanguard has a pretty good reputation regardless of it's company structure. I'm not so trusting of some other financial firms.

You're assuming they are just holding onto all the deposits and buying these bonds... that strikes me as extremely unlikely.

No, it's much worse than the financial crisis.

Matt Levine comments on this today: https://www.bloomberg.com/opinion/articles/2018-12-14/nyse-n...

"There is a lot of confusion about what Robinhood’s thing is. Delightfully, it is called “Robinhood Checking & Savings,” apparently because calling it a “checking account” or a “savings account” would come too close to implying that it is a real bank account insured by the Federal Deposit Insurance Corp., while “checking & savings” is not a thing and so does not carry that implication. A magic ampersand!"

That's great. It's like the "chicken wyngz" you can buy at the grocery store that are probably chicken but can't legally be called wings.

I prefer the chikken wings, which are probably wings but cant be legally called chicken.

You should try the Frozen Dairy Dessert.

Try "potted meat food product" on for size.

Ingredients: Mechanically Separated Chicken, Beef Tripe, Partially Defatted Cooked Beef Fatty Tissue, Beef Hearts, Water, Partially Defatted Cooked Pork Fatty Tissue, Salt. Less than 2 percent: Mustard, Natural Flavorings, Dried Garlic, Dextrose, Sodium Erythorbate, Sodium Nitrite

Seems like a good way to value-add the parts of animals that would otherwise get turned into dog food or exported.

> “I disagree with the statement that these funds are protected by SIPC,” Stephen Harbeck, president and chief executive officer of SIPC

How the hell did this product get launched?

In applying Hanlon's Razor[0], I think the conversation went:

A: Are our customers accounts insured?

B: Yes, through SIPC, which is like FDIC for brokerages.

A: Great! Let's create this product.

No more questions were asked.

[0] http://catb.org/jargon/html/H/Hanlons-Razor.html

I would hope that wasn't the case and that they actually consulted all this with specialized lawyers.

You just don't launch a financial product of this nature, out of your ass like that. If that was the case then Robinhood customers have legitimate reasons to be concerned about the safety of their funds and securities. (For the record, I'm on of those Robinhood customers).

> You just don't launch a financial product of this nature, out of your ass like that.

… not without prominently mentioning the block chain, at least.

Even if they did consult specialized lawyers, you don't really know if it works until there's an adjudication.

Unless they worked with the SIPC up-front to ensure that these funds would be covered, and that the SIPC actually, you know, has the means to cover them, then the only way account holders are going to find out if their are protected or not is in the aftermath of a crisis, after a long and drawn out lawsuit.

When I saw the headline, I thought about signing up but hadn't gotten around to reading the fine print.

Glad I didn't waste my time.

Probably because someone took "ask for forgiveness, not permission" a bit too far.

This works in certain industries (e.g. Uber), but not in others, especially heavily regulated ones.

Didn't Uber's self-driving car hit and kill a jaywalker?

In Uber's defense, killing someone is pretty much always an "beg forgiveness" rather than "ask permission" situation

no, killing someone is what happens when you absolutely should have asked for permission. you don't get forgiveness for that.

Didn't seem to stop them for long:


To be fair, they're proposing significantly improved safety procedures. To also be fair, there are not many people (as opposed to corporations) who would be out on good behavior 6 months after being convicted of vehicular manslaughter.

I think he/she was talking about them avoiding taxi legislation, not the self driving branch.

Or the president of SIPC is not speaking authoritatively for the organization and doesn't realize the RH lawyers have already been talking with SIPC about this.

Of course, maybe that didn't happen, but between the idea that RH would build and announce a new product without running past the proper regulatory authorities, and the idea that the president of SIPC might just be wrong ... well, the latter seems more plausible to me.

"It's plausible" is not the answer anyone wants to hear to the question "Is my money safe?"

You really think the president and CEO of the SIPC is a... freaking clown?? Sorry if that tone is harsh, but that statement appears completely ludicrous on its face to me. Can you provide a little context on why you would trust startup lawyers over the chief executive of a major government organization?

Nobody said a "freaking clown" or anywhere near that. The higher up you are at a company or organization, the less visibility you have into the day to day operations. What OP is saying is simply that the CEO of SIPC may not be informed in the discussions that already happened with Robinhood.

Simply put, Robinhood has far more at risk than the SIPC by launching without SIPC insurance. The banking industry is heavily regulated and Robinhood has been in the brokerage game for enough now to know that a major product launch like this in a tightly regulated area requires massive amounts of paperwork and approval. A mistake like this could collapse not only this new product but also their brokerage. It's far more likely that they have done their due diligence before announcing and launching a product that has that big of a risk.

It's more likely than the CEO of this organization making an uninformed public statement. Doing so is indeed the behavior of a clown. But I guess we'll see.

Edit: We don't even have to wait! SMH...


It hasn't launched.

Their website says "Robinhood Checking & Savings is launching early 2019."

But they are accepting signups for the waitlist (which require signing up for RH) and moving positions on the wait list based on referring other people to RH.

Which may be the whole point of the offering.

Ding ding.

Even if they don't actually achieve the 3% APR checking accounts available ("sorry, it's actually 2% like the rest"), they still got people to sign up and they won't not register because they'll convince themselves "oh I got a debit card, and brokerage account, etc etc...who cares this is still great")


Ya, could be.

Though hanlon's razor makes me think this was more them not thinking things all the way through than a devious plan to get a bunch of signups without ever launching anything.

I mean that the major point of offering the checking and savings feature was to get people to sign up (both directly and by referral) for RH and make it easier for them to market trading services—and that it was serving that feature without being launched—not to argue that they planned never to actually launch the feature.

Move fast and break nest eggs.

I laughed out loud when I read this..kind of bad I know

First, it hasn't.

Second, the SIPC boss probably is not in the best position to understand how RH is setting it up. Harbeck seemed unaware that the "cash" in RH accounts was actually going to reside in investments like Treasuries and thus be covered.

So what happens when the value of those treasuries fluctuates? Does the value of these "checking accounts" fall according to changes in the underlying asset? They aren't really cash accounts then. Treasures may be the safest investments, but are not perfectly safe and value still fluctuates based on changes in interest rates. That's a pretty key part of if they should be treated like a retail checking account or a money market account. Also, do these account provide some kind of certainty that they only invest in treasuries? What happens when "Robinhood Home Loans, get yours in 60 seconds or less!" opens up a year from now?

These accounts remind me a lot of the accounts offered by Washington Mutual right before there was no longer a Washington Mutual. Except back then, their bold rate offering was only something like 1.5%. A lot of young dumb people are going to lose their shirts on this one.

You can open an Ameritrade or any other brokerage account and deposit money into the account with no intention of purchasing securities. There is no dispute that the SIPC would cover your account in that instance.

The only thing that has changed here is Robinhood is explicitly marketing their brokerage account as being able to be used as a savings account without any need to invest in securities.

It’s not black and white on either side. If there ever was a default event, it would surely go to court and it’s not 100% clear who would win. For that reason, I wouldn’t make use of the account.

I'm not sure how Ameritrade works, but the other brokers I've used (Fidelity, Schwab, and Vanguard) you either have an 'uninvested' position where your cash is parked (generally a federal money market fund) or bank sweep that is FDIC insured. They never actually hold cash for you it is either in a money market or a bank sweep.

It's highly likely that Robinhood will do the same. It'll be parked in a money market, with the option of writing checks, etc. all of which you can do already with the other brokerages.

The new thing here I think is the ATM card and them covering the difference between the money market rate and 3%, which right now is less than 1%. They'll probably make up that difference via interchange fees when you use the debit card.

That SIPC thing though ... that's a bit of a wrench in the gears.

Then why are those organizations saying they won't be insured?

What other reason would you have an Ameritrade account?

Zero fees on their international debit card (one of the best )

almost every bank has that. mine even reimburse the ATM fee.

(ok, unless you count the US crap list such as BoA, etc)

It's still in alpha. The beta version will include better protection for the customers. /s

there is little he can do, as cash in brokerage account is obviously protected by SIPC.

Downvoters: you are confused. When you move cash to a brokerage account, it's protected by SIPC. It's a loophole, because this protection was not intended to be for permanent cash parking in an account - but there is nothing that can stop that protection from taking effect. SIPC statute is clear, cash in account is protected. You don't have to invest it, you just have to move it there with the intent of at some point maybe investing it, which is impossible to verify.

You don't seem to have read the article:

"“The statute that we administer says that we protect money with a brokerage firm that is used for the purchase of securities,” he added. “On Robinhood’s help page, it says that you don’t need to invest to use Robinhood checking and savings, that statement is wrong. If you deposit money for any other purpose, it is not protected.”

If they disagree it's a brokerage account, and it's certainly not being sold as such, then it seems to me there's alot he can do.

I think there's a lot the SIPC president can do if they believe a product doesn't fall under their jurisdiction. Specifically, he can decide SIPC won't act when the firm goes belly up. Disagree with that interpretation? Well the firm doesn't exist any more, they can't fight it. Feel free to mount your own legal offensive against SIPC. If you can get to your money.

But that aside, here's the point you're missing: Robinhood is marketing this as a product that can be used independently of brokerage purposes. SIPC covers brokerage firms and, yes, cash in such accounts. But the SIPC president is arguing that it's not a brokerage account if it's marketed as an independent product for people with no intention of using it as such.

ok, so if they changed the marketing and not the substance of their offering, then voila, it is covered by insurance and pays 3%? in that case, he can't do much, correct?

I don't understand the infatuation silicon valley has of Robinhood. Take almost every possible bad idea about personal finance and put them in an app, you get Robinhood. The business model is also suspect, I think there's a little more that hasn't been disclosed and I suspect the chase for cash started when the crypto currency fad started deflating in a hurry. I wonder if Robinhood is hiding something bigger under the covers.

> every possible bad idea about ____ and put them in an app

this sounds like a lot of silicon valley darlings

The infatuation has more to do with not missing out on the Fintech bandwagon. They are betting that one of Robinhood, Stripe, Square, etc will become a megacorp or be acquired by one. So it makes sense to be a cheerleader for all of them.

> almost every possible bad idea about personal finance and put them in an app, you get Robinhood

That sounds extremely profitable, so long as you stay ahead of the law - just like Robin Hood, in fact. But in this case it's not taking money from the rich ...

Now, do I have the tranch for you! It's 4* tranch, only spun from the best tranches of junk debt!

> bad idea about personal finance

Such as?

The vast majority of people should just be maxing out their 401k and investing in index funds.

They shouldn't be using Robinhood to buy individual stocks, buy cryptocurrency, or do options trading.

> They shouldn't be using Robinhood to buy individual stocks, buy cryptocurrency, or do options trading.

What if they do it for fun?

Personally, I would have fun having a few thousands there (but I'm Canadian), it's not worse than having a few thousands over a gaming computer, or gambling at the casino.

If you consider Robinhood as the way to finance your retirement, well you are doing something pretty bad, but that was always true for any stock trading.

If you understand what you're signing up for and still want to dabble in stock trading for fun then sure. Go wild. Everyone needs a hobby. But the homepage of robinhood.com has the following call to action above the fold:

> Investing, Checking & Savings. All for Free.

> Robinhood gives you the tools you need to grow your savings, invest in your future, and do more with your money.

Does that sound like "this is not an appropriate way to finance your retirement" to you?

What should their ad copy say instead? "Robinhood gives you the tools to lose all of your money making impulsive decisions" ?

All brokerage accounts advertise themselves as investments, even if the reality is that idiots open them and lose all of their money trading options.

I mean, if you really have this expectation of marketing copy, I don't blame you, that's a totally legitimate position to hold. It's just not one I would expect many people to share.

The grandparent talked about treating it like fantasy sports, and if they advertised themselves like, say, Draft Kings does then it would be one thing. As it is, though, the more thoroughly you trust their representation of how their product should be used the worse off you will be. I usually take that particular trait as a big red flag that a the universe would be better off without the company in question.

And yes, this criticism does apply to most brokerage accounts. Most brokerage accounts don't have half of Silicon Valley fawning over them, though.

This is a big part of it, which true some people get burned and lose money. But that doesn't mean they shouldn't do it. In fact, I'd argue it's slightly healthy to have a little bit of skin in the game to understand how these things work. If you're into numbers, it's nothing more than a game or say fantasy football and you can cheer for your favorite players (companies).

Robinhood presents a nice way of making it easy to get into the stock market with a pretty interface and without going through a cumbersome broker and paying fees for things you don't understand. Do seek professional help if you are looking for 401k and retirement guidance.

If anything, RH is sophisticated gambling.

I just use Robinhood to buy ETFs for SP500 and AGG without trading fees. I don't have that much left over after maxing out all my tax advantaged options, so trade fees aren't insignificant.

But people like me should recognize that the people using Robinhood to trade individual stocks, buy cryptocurrency, trade options or trade on margin are effectively subsidizing those who do. Along with the participants of Robinhood's funding rounds, I guess.

But you could buy those same ETFs with the same $0 fee on Vanguard (or Fidelity and a couple other platforms now), a substantially more established financial firm, and you could keep your residual cash in well established money market funds like VMMXX, also with $0 fee, or VMSXX for tax-exempt growth.

The only real reason to have money in RH, IMO, is if you're gambling with <$1000 on penny stocks and options-cum-lottery tickets.

I buy Vanguard ETFs and many other index funds (that Vanguard doesn't offer) on Robinhood. The user interface is 100x better, and why wouldn't I want to keep it all in 1 place? They just need an IRA product and most people would be set.

What index funds doesn't Vanguard offer?

Why isn't "the user interface is 100X better" enough of a justification?

I'm not a Robinhood user, but I use simple.com as a bank. It's like every other bank in that it holds money. If anything it's somewhat less convenient than banks with physical branches. But the online UX is so vastly superior to every other bank I've used (large sample size) that I'm a rabid fan.

Oh, I didn't want to address that because I wasn't sure if the person above was generically referring to all ETFs and ETNs as "index funds", when I was specifically responding to someone who was suggesting that they were using Robinhood for buy-and-hold index investing, buying things like S&P 500 etfs (eg. SPY, VOO, IVV). I was trying to think of what investment-quality ETFs Vanguard might not offer. Leveraged ETNs (TQQQ, DRIP, SPXS, etc.), commodity futures ETNs, and volatility products (e.g. SVXY) may not be offered by Vanguard (I'm not sure, actually), but these products are !!!not!!! buy-and-hold investments which, again, was what I was responding to.

[Anecdotally, someone on r/tradexiv or r/tradevol or somewhere on Reddit had a post about their Vanguard advisor cautioning them about buying XIV earlier in the year, telling them, more or less, "you're either exposing yourself to a lot of risk, or you're too smart to be trading with Vanguard" ...... he was not, it turned out, too smart.]

My claim was that RH should not be where you have money that you use for long-term buy-and-hold investment, even outside of an IRA. I think using RH for speculative investment is fine(-ish) if you accept that their order execution is poor (you don't really see this until you get into options), the company has severe product issues (e.g. the options order error the other day causing them to halt all options trading), and the company is not very well established (so there is a non-zero, greater than average, default risk).

I think it's undeniable that RH's UI is prettier than most other brokers. However, I think it's obvious that "prettier" and "better" are not necessarily the same thing. Again, if you are a buy-and-hold investor (which, again, is what I was responding to), being able to make a quick trade is not important, since you should probably only rebalance your portfolio once a quarter (maybe monthly or biannually, depending on your level of engagement).

But specifically, RH's UI is deliberately minimalistic, to a degree that I think is starting to verge on dangerous. They only recently moved from spark lines to offering optional OHLC bars, and their charts have no axes, which makes it difficult to get a sense of the products price movements. RH doesn't show you historical OHLC data, or historical dividends (just yield). The app offers no stock screening. The charts offer no volume analysis, which makes it difficult to see whether or not you'll be able to exit a position. My mom (who thankfully understands that she should only put money she's willing to lose into RH) recently told me she entered into a position with some low-volume real estate company, and couldn't exit the position for some days due to lack of buyers. She was unaware of the liquidity of the product she was trading (and complained that RH should have warned her... but that's another story).

Even worse is their options platform. At minimum, it's useful to show the days-to-expiration when selecting the expiration date. The options platform deliberately hides important information, such as implied volatility (probably the most important figure for an options contract), Black-Scholes greeks, volume and open interest, and a probability of profit estimate, behind an unlabeled corner button after you've selected an option to purchase. RH introduced multi-leg orders over the summer, but these still don't really give you the tools you need to construct strategies like spreads, calendars, straddles, strangles, condors, and butterflies. These are fairly complex trades with non-linear responses to spot and volatility changes, but RH won't even show you your net position delta before placing a trade (it will show it to you after you've entered a position). If you want to see what a real options trading platform looks like, you can demo ThinkorSwim or Tastyworks. Yes, it's more complicated, but that's because it's necessary.

So no, I disagree with the claim that RH's UI is "100x better". I think it's UI is maybe "50x prettier", but I don't think it's "better" for the user (and I've seen some wretched UIs, like Ameritas). In options trading, I think that RH's interface is objectively worse than those offered by other platform. Unlike checking and savings, which are generally regarded as low-risk activities, I think that RH's UI is deliberately designed to encourage risky behavior, and minimize "information overload" (in favor of "blissful ignorance") in what is inherently a risky activity for which most customers are not adequately prepared, under the thin guise of "democratization" (hence its beeline from stock investing (risky) to stock investing on margin (riskier) to cryptocurrency meme investing (extremely risky, and launched during peak bubble) to options trading (extinction-level-event risky for novices)).

> I wasn't sure if the person above was generically referring to all ETFs and ETNs as "index funds", when I was specifically responding to someone who was suggesting that they were using Robinhood for buy-and-hold index investing, buying things like S&P 500 etfs (eg. SPY, VOO, IVV).

Specifically, I have a boring investment strategy of SP500 and AGG. I'm just seeking the lowest cost means of investing in those two indices. When I opened the brokerage account RH was mostly top of mind. Things have gotten more competitive lately, with Fidelity's 0 expense ratio funds and maybe I should look at Vanguard more carefully. Although 'Vanguard is more established' isn't particularly resonant personally, so to my mind they seem relatively equivalent.

I completely recognize that RH's platform enables a lot of unsophisticated traders to make unwise trades, and leaves sophisticated traders wanting.

You've convinced me of your point, but I only understood about 25% of what you said. How can I get more educated on this subject? I'm not really interested in actually executing any of these strategies you mentioned, just learning about them.

The extent of my knowledge just comes from reading /r/wallstreetbets for entertainment, while doing passive index fund investing for personal finance.

I'm far from an expert. I don't trade professionally (i.e. I don't derive my income from it), and I'm a chemical engineer by day.

I think the best resource for anyone starting out investing would be "A Random Walk Down Wall Street" (Burton Malkiel), and maybe "The Intelligent Investor" (Benjamin Graham), even if you don't intend to be a traditional value investor. I think these books (I'll admit I haven't read all of The Intelligent Investor) set your expectations. I also listen to Masters in Business, Odd Lots, and P&L podcasts by Bloomberg (P&L is more short-term, while MiB and Odd Lots are more generally applicable). Both of those books might be floating around the internet.

I also really enjoyed "The Physics of Wall Street" (James Weatherfall). It's a look into how financial mathematics got started and how it has grown and been increasingly applied in modern finance.

If you're interested in options and other derivatives (I find derivatives to be the most interesting, and least arbitrary, financial product), I'd start with John Hull's "Options, Futures, and Other Derivatives", which is a textbook at maybe the sophomore or junior level. I hear the PDF is freely circulated online. I think understanding how options and futures work is essential for understanding finance. A slightly more technical text, "Dynamic Hedging" (Nassim Nicholas Taleb) is also good (and maybe also available online somewhere...). It is less philosophical and polemic than his other books, but doesn't resist calling you an idiot either, as is Taleb's style.

You might also find work on non-ergodicity (Ole Peters), the Kelly criterion, universal portfolios (Thomas Cover, 1991), and Ed Thorpe (a mathematician who derived a precursor to the famous Black-Scholes model) of interest (Ed Thorpe is an incredibly interesting person in his own right). If you find yourself wanting to get into technical analysis, I'd recommend "Evidence-Based Technical Analysis" by David Arons (a spoiler: the evidence is not good). If you're interested in ML applied to trading, I keep seeing references to Advances in Financial Machine Learning (Marcos Lopez de Prado), although I haven't actually read it.

Regarding other financial products, CME has a large number of resources available for understanding futures trading, although futures are generally too high value for regular traders to use safely (the highly liquid /ES contract controls ~$130,000 exposed to the S&P500 and allows one to take about 22x margin, or even as high as 250x for intraday trading). Similarly, there are some nice introductions to the forex market, but again I'd caution you to stay away. And as much as I'd similarly caution you about blindly following their advice (and in general about being a "volatility seller"[1,2] -- see Taleb's book), TastyTrade produces a ton of videos on options trading (particularly retail options trading), which include the mechanics of options trading and how their trading platform works (which is similar to TD's platform -- the CEO/Founder, Sosnoff, was involved in the development of it when he was at TD). You can download TD's ThinkorSwim and paper trade options, or just "preview" their application with delayed prices and see how options work.

Finally, rather than r/wallstreetbets (which is now 99% low quality memes and loss porn), I'd recommend checking out r/options and r/thewallstreet, which are more professional forums, and potentially forums such as EliteTrader and Nuclear Phynance as well.

[0] https://www.bloomberg.com/news/audio/2018-12-07/why-part-of-...

[1] https://www.bloomberg.com/news/articles/2018-11-29/broker-se...

[2] https://www.bloomberg.com/news/articles/2018-02-06/credit-su...

You can buy index funds in Robinhood. That's how I use it. Just a simple, to the point, interface for buying and holding index funds.

How do you do that?

ETFs are traded exactly like stocks. For example, if I wanted to invest in the S&P 500 index, I could just buy a few shares of $IVV on Robinhood.

You can buy Vanguard and other ETFs in Robinhood. For free.

No, you have to explain why robinhood is worse than etrade. You can buy the same index funds or individual stocks with either brokerage.

Single stock trading sold as an investment product to the low-end of the retail market (i.e. people like me who's limited investment dollars should be dumped into passive, diversified funds.)

As a user of RobinHood I have not felt any specific push for buying single stocks. A lot of people just buy index funds on RobinHood. If RH had made it more difficult to buy those compared to single stocks, your claim might have some weight...

Push notifications around a pre-defined 'watch list'? Notifications of major stock movements? Showing 'popularity' of a stock? 'Most Popular Under $25'? Gifting people free stock for referrals?

I had a good laugh at this. I expect a certain level of professionalism from financial businesses, and this sort of fluff marketing / gamification makes my skin crawl... mostly because it tells you about the rest of the maturity of the organization if the product and marketing team is sending out this kind of amateur crap.

You've got it backwards. The output of the product and marketing team is expertly tailored to target the amateur. Don't for a second think they don't know exactly what they're doing.

Just wait for really fun stuff, like the huge "Buy Stock" button with a tiny "Maybe later..." 8pt link below it. Or "Let us scan your photos and location and have AI generate a TOTALLY LIT suggested portfolio for you!" Or even better: "5 of your friends are currently pumping NVDA! Tap here to write a few naked puts!"

I can't wait until they bring in all the dark patterns from travel sites; "1,213 people currently considering this stock" or "act now; only 6MM shares left!"

>1,213 people currently considering this stock

If I had browser data from everyone on RobinHood, and was able to track which stocks they were looking at, I might be able to make money front-running.

The HFTs they are likely selling their data to are probably already way ahead of you.

Right. It would be strange if RobinHood didn't encourage active single-stock trading, since that's how they made their money.

If all RobinHood users followed sound "buy diversified ETF and hold" investing advice, my understanding is that they'd go bankrupt.

I remember hearing one of the founders talking about users trading stocks. He explained their data shows people get better at trading stocks with more experience. I can't remember the source, but I think it was on This Week in Startups podcast. This is really suspect--kind of like a casino telling blackjack players they will get better the more they play.

If Robinhood is incentivizing or encouraging frequent trading by users, that's not really good in my opinion. It doesn't make them worse than other brokerages, but it doesn't make them better either. And with a name like Robinhood, they are positioning themselves as white knights.

I've got no problem with people who want to trade as a hobby. They should just treat it like Vegas money. Know you're going lose most of it.

Good advice: Normal folks should put their money in index funds - not individual stocks and certainly not options.

For anybody who isn't comfortable learning a small amount about diversification, index funds are probably the easiest way to guarantee an average return. Probably a good choice.

Still not a panacea, course. What was the ROI on the S&P 500 between, say, 1997 and 2009? Ouch. We've been on a beautiful bull run for the last decade, at least up until a month or so ago. I wonder what the next decade or two will look like.

Depends on how well off normal folks are and how long they have been doing it.

I started at £120 a month and it was ten years before I started now my minimum buy is £2000 and I only do the occasional single stock even now 20+ years later.

Idk why this was downvoted, but I would like to know as well. I feel like a know a decent amount about personal finance, and Robinhood is amazing. Primarily, I can trade stocks with zero fees. The app is easy to use. It's not outwardly pushing me to make bad decisions as far as I can tell. If there are issues on the business side, that's a separate concern(?)

Offering stock trades with zero fees is pushing you to make a bad decision. The vast, vast majority of investors should be making as few trades as is humanly possible, and the small fraction who should be making frequent trades are essentially by definition working with large enough sums of money that the brokerage fees are negligible.

This isn't to say you can't make money as an individual by day trading, but it is to say that the median day trader would have made more money by buying an index fund and sitting on it for a decade.

I don't know. It seems like mental gymnastics to say that zero fees hurts someone without a lot of money. It sounds more like you believe that people with access to limited capital can't understand the markets as well as people with access to large amounts of capital. If you didn't believe that I think you would conclude lowering the fees for trading opens up the possibility for less wealthy people to participate in methods previously only afforded the rich.

I do believe that people with limited access to capital can't understand the markets as well as institutional investors, and you should too. It's not about intelligence, it's about access. The rich have more current information about state of the market than you do and can act on that information sooner than you are able to, which allows them to systematically make slightly better trades than you can.

Stock trades aren't instantaneous, and they're not guaranteed to resolve in the order they were submitted. Wealthy traders can throw money at a combination of locating their servers physically closer to the exchanges and just straight up purchasing preferential treatment from them in order to ensure that their trades will always resolve ahead of yours. Moreover, the "price" of a stock is essentially the rolling average of all the buy and sell offers currently in open. When you "buy" a stock from Robin Hood, what you're actually doing is creating an offer to purchase at or below a specified price point.

One of Robin Hood's main sources of revenue is providing access to that stream of trade offers to investment firms who can use it to "predict the future" in ways that will systematically erode your profit margins. There are any number of ways this happens, but probably the easiest one to understand is that after they see you place a buy offer they can use their position near the front of the queue to accept the cheapest available sell offers ahead of you and immediately resell them to you at your offered price, pocketing the difference.

That's the catch with normal humans trying to play the stock market. You can't actually participate in the same way that wealthy institutional investors do, because you can't afford to pay to be near the front of the queue. In fact, the way you participate essentially guarantees that, no matter how well you do, the institutional investors will be able to do slightly better.

One way to work around this is for normal humans to pool their resources so that they can collectively act as a wealthy institutional investor too. That's essentially what index funds are.

This is elitist bullshit. I don't have a huge amount of money save but I use about a dozen index funds to stay well diversified, stocks, bonds, international, domestic. And I periodically rebalance my portfolio to stay within my diversification targets. I appreciate not paying a couple hundred dollars a year for my trades.

There's no such thing as "zero fees". Robinhood is making money by giving your trade orders to hedge funds who then front run them, so you end up paying for it by getting worse prices for your trades.

Crypto, options, and margin investing for the unwary masses.

impulse/app-driven day trading? selling spread as "free"?

Theranos level fraud is much easier in a pseudoscience like finance.

They jettisoned the gains on the stock of a company which was acquired from my account because I missed a single email message. Kind of strange when their app has no problem delivering push notifications all day. Not sure if that was legal or not, but they definitely look more like a gambling app or sketchy forex trading site than a place to put retirement savings.

To a huge number of people Robinhood is taking all the GOOD ideas and putting them into an app.

Robinhood's offering is indistinguishable from a cash management account at a brokerage. Short-term deposits, check writing, debit card, interest bearing, etc.

Fidelity Investments pioneered this product, and now it's available from others like Schwab.

But at Fidelity, the cash management account is distinct from the brokerage account. While the brokerage account is insured by the SIPC, cash management funds are swept into FDIC-insured balances at actual banks.

Looks like Robinhood is gonna lose on this one.

Source: https://www.fidelity.com/cash-management/faqs-cash-managemen...

It seems like RH is taking this to the next step (at least with respect to Fidelity) by building typical checking account features around it, with parameters that are best-in-class.

Fidelity already has best-in-class checking account features?

The CMA account has mobile image deposit, free online bill pay, check writing (with free checks), free ACH transfers, free wire transfers, ATM/debit card (with ATM fee reimbursement at any ATM worldwide, no less), etc.

The only “best-in-class” factor that Robinhood has presented is setting the interest at 3%.

Good to know, I was reading briefly from their site and didn't see any of those things expressed upfront.

The whole "this can't end well" seems to come at every Robin Hood product announcement.

The somewhat recent addition of crypto is just depressing. They've integrated it with chat and live announcements of transactions, so you see people's names as they buy $1500 or $2500 worth of crypto as the whole market makes an inverted hockey stick nosedive to zero.

But the most absurd thing was seeing the HN comments yesterday as people were saying they were living up to their name of taking from the rich and giving to the poor. They're doing something worse--tricking non-rich people into thinking they'll get rich, while making a ton of money in the process.

If they make a ton of money but give users an easy 3% account I wont complain. Why is everyone so mad at them for being successful when they are offering cheaper services then the rest of the market!? Do they need to hire a homeless CEO to actually qualify as doing something good for society overall?

They are exposing a vulnerable and naive class of investors to a higher-risk asset class in an arguably deceitful way. If their 3% account was SPIC protected (and therefore low-to-no risk), this would be a totally different conversation.

I have a money market account at Capital One that earns 2% and is FDIC. Staying there.

How dare they give people more options for investment! Despicable.

It's a bit jaw dropping that they've launched this without talking to the SIPC to check that they agree with the statement that they provide FDIC-like protection on these accounts. I wonder what happened here…

AFAIK they haven't yet launched, it's not going to be until "early 2019". Not a defense of Robinhood, but their lack of (apparent) SIPC protections today do not necessarily imply they will be missing when they formally launch with actual customer deposits.

Yet it's being marketed as SIPC insured _today_.

You're right. I thought I had read it as "will be insured" but now that I go back and look at the content on https://checking.robinhood.com I see it reads "Every Robinhood account is SIPC insured up to $250,000 in cash and protected by modern encryption so you can rest easy and save confidently."

No bueno.

So it’s securities fraud?

Move fast towards to IPO exit, break users' personal finances. This is what happens when your growth team runs up against competent regulators.

Growth team = MBAs is that right?

Could just as easily be amoral technologists. Lack of ethics doesn’t discriminate.

Also, as in all of these products, at the end of the day a developer (or developers) typed in the code. "Whelp, boss said to do it!"

They almost have the UI changes to the phone app done, which is the hard part. What's a little paperwork?

This made me laugh out loud. "We just shipped the new tab bar item!"

Robinhood strikes me as a complete financial amateur-ish company, trying to attract millennials that don't know better by branding themselves as a cool tech company.

I have been using Ameritrade for a while and was curious about their no fee platform so gave it a quick go. The graphs have no legends associated in the app. The spreads seems not up-to-date with official quotes, etc. I went back to Ameritrade as fast as possible.

They are the "go fast and break things" of finance. There is a good chance that this will not end well.

I have been using Robinhood for years, but I don't disagree at all with this statement. I have always been a little bit suspicious of their approaches.

For me the strangest thing about their business is their zero-fee approach. Yes you can make money by getting interest from uninvested funds + premium subscriptions + trade arbitrage, but if it's such a good business why aren't the incumbents taking similar approaches?

Contrarians would say that incumbents are just to engrained in their past approaches to actually adopt modern strategies, but I had that extremely hard to believe, especially when one of the incumbents, E-Trade, was the pioneer of online trading.

Also, unlike other industries, financial firms are savage. They're not scared to make risky bets and spin-off new businesses and strategies. Their industry is naturally risky, so they have the experience and tenure to make risky bets, without souring stakeholders.

I always give Robinhood the benefit of the doubt, because in my day to day I personally can say that it works great. They definitely nailed the Customer Experience. However that doesn't mean that they have an actual viable long-term business, so I prefer to stay reasonably cautious... Time will tell.

> For me the strangest thing about their business is their zero-fee approach. Yes you can make money by getting interest from uninvested funds + premium subscriptions + trade arbitrage, but if it's such a good business why aren't the incumbents taking similar approaches?

They do, they just charge you extra commissions on top of what they make selling order flow, etc, etc. Commissions make up a miniscule portion of income for brokerages. I think that fees a) keep out the "riffraff" and b) brokerages know that it's a zero-sum game to compete on them.

Asking this question is like asking why Ally and Goldman Sachs can offer 2% APY savings accounts, but Bank of America and Chase can only offer 0.01% APY.

There are similarly low-cost brokerages which offer dangerous products, like $500 intraday futures margin (about 250x leverage), 400:1 leverage on Forex products, or more traditional low-cost stock trades. The difference between $5/trade, $1/trade, and $0/trade isn't that significant in reality.

> I think that fees a) keep out the "riffraff" and b) brokerages know that it's a zero-sum game to compete on them.

There are also costs per position per investor. Some services that brokerages have are based on position counts. An investor with 10 shares in 1 stock is cheaper to maintain than an investor with 1 share in 10 stocks.

(One example is prospectuses. If you buy a fund, you're entitled to the prospectus to be delivered within a certain amount of time post trade. If you just by 1, 2, 3, then 4 shares of the same fund, you only get one file/document delivered to you.)

In their defense, their version of "go fast and break things" won't kill any jaywalkers, and instead could be devastating on a far wider scale, if 2007-2008 collapse showed us anything. (upwards of 10,000 extra suicides there [0] so....)

[0] https://www.forbes.com/sites/melaniehaiken/2014/06/12/more-t...

Which leads to one of two scenarios:

1) They knew SIPC wouldn't cover it, but decided to lie about it anyway

2) They weren't competent enough to assess the risk that SIPC wouldn't cover it, but decided to launch anyway without contacting the SIPC

Regardless of which is the truth, I wouldn't trust my money with someone who does either. Might as well jump into a tried-and-true pyramid scheme like bitcoin!

In an interview yesterday, the CEO said they were an "Engineering first company". While located in silicon valley, they have no right to subscribe to the "move fast and break things" mentality when they are playing with people's money. Any financial institution that holds external accounts should be a finance first company. Good technology is essential, but not as essential as following rules and regulations to protect your customers.

Apparently they purposely called it a "checking & savings" account because they were well aware that technically it is neither a "checking" nor a "savings" account and that a "checking & savings" account does not really exist to protect themselves from accusations of false claims...

They are still claiming it is SIPC insured- which is false, regardless of what you call it.

It's not necessarily false - that's up for various attorneys to decide.

Technically true, but irrelevant. Everything might be up for attorneys and judges to decide.

also option 3) Very unlikely scenario that they outsmarted everyone and had some great legal work done to identify a loophole in the SIPC insurance requirements that nobody else has yet identified.

Another example of startup hubris. Much like Uber and AirBnB got started (and in many cases, continue to operate) by flouting regulations, Robinhood thinks they're being innovative, when they'll really just hoping they can get big enough that they can buy or bully their way past the rules. At least long enough to get acquired.

It might work, but in this case, the people most likely to get screwed are the customers.

AirBnB and Uber are both examples of companies that were huge wins for customers/consumers. Just because they flout regulations which are often times outdated and unnecessary (re: protecting inefficient incumbents) doesn't mean they aren't doing what's good for the consumer.

I agree though that Robinhood is a different story with potentially harmful consequences for unsophisticated investors looking for a safe/easy investment.

If I buy a house in a neighbourhood that is zoned single family residential, Am I an "inefficient incumbent" because I expect that over the mid-to-long term it will stay that way?

These companies are not democratizing investment, accommodation, tranportation or whatever they are rent seekers that use a combination of technology, business model and rule breaking to extract a portion of every transaction.

They explicitly position themselves as 3rd party to the transaction. While the rest of us suckers play by the rules or gasp work to change them, they realize a portion of their advantage by just ignoring them.

>If I buy a house in a neighbourhood that is zoned single family residential, Am I an "inefficient incumbent" because I expect that over the mid-to-long term it will stay that way?

Yes, you are. You're trying to freeze your neighborhood in amber, which is most definitely a sign of an inefficient incumbent.

No, they just bought it with reasonable expectations - expectations, which were priced in the home valuation. If they didn't care about single family aspect, they probably could've found a cheaper house elsewhere.

Also, let's not pretend that AirBnB is progress. It's just a third party that encourages people to start illegal hotels, to earn money for themselves at the expense of their neighbours. This is not a case of local owners having opposing interests to society at large; this is a case of a company enabling some people to parasite on the others.

Who's parasitizing? Airbnb has 38 million users. That's a ton of value being provided! Clearly people want options besides classical hotels. Just because some guests aren't respectful or something doesn't mean the service as a whole is bunk.

> If I buy a house in a neighbourhood that is zoned single family residential, Am I an "inefficient incumbent" because I expect that over the mid-to-long term it will stay that way?

The incumbents I was referring to are clearly hotels and taxis. But I think it's also important to point out that I wouldn't presume to tell you who to rent to or for what duration since you own the home and it's your property. AirBnB is merely a facilitator of that transaction.

If you don't own the property, that's different story.

> The incumbents I was referring to are clearly hotels and taxis.

Sure, but you're forgetting about another party in the transaction: everyone else. You don't have to remember about them most of the time, because unlike Uber and AirBnB, most businesses aren't dumping externalities on non-customers.

> I think it's also important to point out that I wouldn't presume to tell you who to rent to or for what duration since you own the home and it's your property. AirBnB is merely a facilitator of that transaction.

That works well if you're the only one with a property within shouting range. Most people live (and most AirBnB activity happens) in large, organized groups. In a civilized society, you're not free to do anything you like without regard to the freedoms of others.

You say this, but in the great depression it was perfectly normal to open up extra rooms to borders if you had the room.

We live in a time/place where money is reasonably readily available; You take that away and "society" makes all sorts of accommodations for "you're preventing homelessness" and "you're doing what you have to do to pay your debts". Though given rising inequality, we might be closer than we think.

> AirBnB and Uber are both examples of companies that were huge wins for customers/consumers.

And for its shareholders, so is a factory dumping heavy metals to the nearby river. And for its customers, so is a slave plantation.

You judge businesses by the treatment of all participants of an economic activity, not just the ones giving and receiving money. Uber and AirBnB are examples of companies that shit on society at large to provide better service to some small fraction of it. In a civilized world, there's no place for this, which is why it saddens me deeply that they're still around.

I don't think AirBnB nor Uber has caused any physical harm to the surrounding communities.

It should be blindingly obvious that the parent post meant social / economic harm.

Unless one doesn't want to notice, that is.

The people sexually assaulted, discriminated against because of their skin color or sexuality, and those recorded in their beds without their consent would all presumably disagree that Uber and AirBnB flouting regulations made for huge wins for customers/consumers.

EDIT: The fact that these crimes "have happened at hotels/in taxis as well" ignores the fact that they are far more likely in an environment where regulations meant to prevent or reduce them are wholesale ignored.

It sounds like you're conflating common law with industry regulations.

If I'm a fisherman in Florida, and I need to follow regulations for the fishing industry there, they don't have a stipulation that you can't discriminate against certain persons based on age, raced, gender, etc. when you take customers out on expeditions.

Why? Because that's covered by United States law.

Yes these things happened, and yes they are atrocious but they have nothing to do with the regulatory gray areas that these companies operated in.

The people sexually assaulted on the subway, discriminated against because of their skin color or sexuality in taxis, and those recorded in their beds without their consent in hotels would all presumably argue that crimes happen even without SV investment money.

Have you ever talked to a member of a racial minority about discrimination by taxis vs. Uber? Everything I’ve heard is that it’s difficult for a black man to get a cab, and easy to get an Uber.

With a centralized platform, people selling rides or lodging actually get recorded when they reject people, which makes it possible to pursue them for discrimination.

I don't want to defend either of

- Uber/AirBnB's regulatory abitrage

- assault, harassment, or illegal discrimination

but this is a complete non-sequitur. The laws that they're avoiding have nothing to do with individuals hurting other individuals. And assault, harassment, or illegal discrimination are perfectly possible in the context of a licensed hotel or taxi.

I'm no fan of AirBnB, but all of those things have happened at hotels.

I agree with the comparison, but it feels as though Robinhood has another layer of hubris or ignorance beyond that - it doesn't seem to have studied those models terribly closely.

Uber and AirBnB both flouted primarily city-level regulations that are tough to enforce against external players, and where they broke larger rules it was by pushing vulnerability onto their service providers (e.g. drivers who assume Uber handles taxes like they're direct employees). And at least some of the regulations they ignored were so obviously protectionist that "look, we're breaking the law!" could actually form a selling point. (Which let them redirect focus from more popular rules like property hygiene.)

Robinhood is tangling with national financial regulations, which for all their loopholes and weaknesses are made to take on far larger players with a history of bad behavior. Meanwhile, the rules they're breaking are pretty much all directly tied to consumer protection, so it's going to be mighty hard to run an ad campaign to raise sympathy.

It reminds me a bit of Theranos, actually - "fake it till you make it" wasn't novel, but they neglected massive differences like offering an unsustainable service versus signing unfulfillable contracts, or failing random website visitors versus crossing major corporations and the DoD. It's like a clumsy new lobbyist offering a bribe instead of making a campaign contribution and expecting consideration; the dynamics might be similar, but the gap in execution could easily destroy them.

“I disagree with the statement that these funds are protected by SIPC,” Stephen Harbeck, president and chief executive officer of SIPC.

Not sure that leaves a lot of room for speculation - don’t sign up to use Robinhood as a savings account unless you are comfortable doing so without an FDIC level of guaranteed protection.

Without deposit insurance Robinhood would be extremely vulnerable to a bank run. In the event of even a slight market downturn I can't see why depositors wouldn't immediately withdraw their funds to an insured account (at the cost of only a slight reduction in interest) just to hedge their risk.

"“The statute that we administer says that we protect money with a brokerage firm that is used for the purchase of securities,” he added. “On Robinhood’s help page, it says that you don’t need to invest to use Robinhood checking and savings, that statement is wrong. If you deposit money for any other purpose, it is not protected.”" -- If they are using the deposit to then behind the scenes purchase a security directly, why wouldn't that be protected??

The SIPC insures and protects consumers, not the brokerage/investment bank itself. So if the funds are deposited by the customer in order to buy securities on behalf of the customer, then it's protected. If the funds are deposited by the customer in order to pay out interest, and the only one with the intention of investing that money into securities is the brokerage itself, then it's not protected.

Isn't Robinhood's Checking & Savings service about the same as non-invested cash in an E*Trade account? That would mean there are a lot of consumers assuming the same risk if they invest with the many brokerages covered by SIPC, since its impossible to not have cash floating around after you fund your account or take profits.

The problem with this is that Robinhood claims you can have a Robinhood "Checking and Savings" account and not buy stocks with it - and the SIPC is saying no, you actually do need to intent to buy and sell stocks with it and to use this account as a source of funding in order for it to be insured.

Got it, thanks for that!

SIPC doesn't protect from losses on investments, so they would not cover the (potential) losses on these securities.

Normally brokerage accounts fall under the SIPC and bank accounts under the FDIC.

Robinhood thinks their checking account should fall under the SIPC...so is their bank account not a bank account? What am I missing?

It's a brokerage account where you buy US Treasuries but also made liquid via a deal with Mastercard and branded as a chequing account

It's kinda smart - but i'm curious how they settle some of the backend with daily transactions moving in and out - if they're actually making bond purchases/sales with each transaction, for each customer each day, or for all customers each day etc.

edit: fwiw I think the entire premise of these new products and 3% paid (way over what treasury bonds pay) is as a loss leader to the gambling that is a lot of the "investing" done by Robinhood users. Must be temping to buy some Tesla options once you have a chequing account in the same app.

edit 2: their fine print:

> Robinhood Checking and Savings is an added feature to existing Robinhood accounts and is not a separate account or a bank account.

so they're saying they might market it as a bank account, but it isn't

I'm not sure what you mean by "way over" but 6-month t-bills are paying 2.5% right now. It's probably a loss leader but since they'll make money from merchant fees on debit cards, it might not be that much of a loss.

I doubt they'd be able to 100% buy tbills at that maturity length (hence curiosity on what they're doing on the backend here), but even assuming 2.30~ average plus whatever Mastercard kickback is negative 50-70bp is still a hell of a margin to make on selling consumers tbills and not raising funds for your own investment activity

edit: a better way to explain it - we'll give you tbills at 3% p.a and let you pull out/in whenever you want and handle the rest is a hell of a business model without the rest of the story

My guess is: they're investing in 6-month T-Bills, they're expecting rates to rise over the next 6 months to 1 year, they're covering the remainder out of pocket, and by doing this they're capturing the lion's share of their target market before their competitors do.

In addition, I'm guessing their AUM are low relative to their popularity. Lots of millennials may be very vocal about Robinhood, but may not have the quietly massive asset balance that boomers have, tucked away in Schwab, Fidelity, or Vanguard. This could be a land grab for AUM to support future VC rounds, an acquisition, or an IPO.

Presumably they structure it as an investment fund and not a bank account? I think "what am I missing?" is the whole point really: this thing doesn't fit within existing regulatory structures. It likely wouldn't qualify for FDIC insurance either.

The question then becomes whether this is a good kind of move-fast-and-break-things a la early Uber breaking into an over-regulated market, or if it's defeating an important protection that consumers need.

I did some quick research. Discover has a money market account for 1.9% APR that is FDIC insured and has a debit card.

Money market accounts have been around a while. Is Robinhood's account different because they are subsidizing it to hit 3% APR?

Difference is the FDIC insurance, mainly. Being member FDIC means that you have to go through a ton of regulatory requirements to be sure that you're financially stable. A bank can offer whatever interest it wants on its account if it manages to stay in compliance. If Robinhood were to become member FDIC and offer 3% I imagine there'd be no qualms about it.

SIPC on the other hand is more relaxed because it covers less. It only covers when a member broker becomes insolvent and is unable to return a security to you that you own.

There are similar funds that invest in short term treasuries and often that you can write checks against, however they don't offer 3% and they're very transparent that you own these securities and are subject to the (very low) risk that comes with owning them.

Robinhood's marketing sounds a lot more like a standard FDIC insured bank account but they're saying it's SIPC insured instead, and the SIPC is confused about what securities they would actually be insuring

Silicon Valley Startup Syndrome (SVSS): Ignore the law and the consequences in favor of Disruption & Growth. Meanwhile ignore any banking laws you can, because you want to sell customer data to HFT.

When I saw the original announcement I thought to myself, that's a high interest rate, but it sounds to good to be true; I probably ought to stay away as I'd rather play things safe with my money.

“Had they called us...”

ffs - they didn’t even do the most basic due diligence on this?

This is not just an indicator that this particular product might be in trouble, this is another order of magnitude kind of incompetence that makes me wonder why anyone would trust this company at all.

Wouldn’t you have to feel like the probability they end up with a major security issue, funding issue, executive behavior issue, etc., are all magnified by this knowledge?

I mean really, this is a staggering thing to read. I don’t think there could be hyperbole in this, it’s just incredible hubris-based incompetence.

I had a bit of interest on this when I first read about it, but was a bit skeptical then... I wouldn't touch this at all now with no guarantee that the deposits are insured.

Here's their very brief unaudited financial statement.[1] This makes no sense for a financial institution. How can their liabilities be so low? Anything on deposit with them is a liability for them. This seems to say "all your assets are belong to us."

[1] https://d2ue93q3u507c2.cloudfront.net/assets/robinhood/legal...

"You see, Mr. Griffin, what makes us different from other banks is that we're not a bank."

Assuming patio11’s comment[1] from yesterday is correct that this is a loss leader intended to target millennials with low value accounts rather than whales, maybe this is Robinhood’s intended outcome to make it less attractive to the customers they don’t want?

[1] https://news.ycombinator.com/item?id=18673426

It may be true, but it's not relevant for the current article. The questions is if these accounts will be insured by the FDIC or the SIPC or neither?

“The statute that we administer says that we protect money with a brokerage firm that is used for the purchase of securities,” he added. “On Robinhood’s help page, it says that you don’t need to invest to use Robinhood checking and savings, that statement is wrong. If you deposit money for any other purpose, it is not protected.”

So it is insured, unless they can prove it's not for investing?

The burden of proof is not on the insurer, but the insured.

Think through this like a court case, where the insured is suing the insurer.

The insured doesn't simply go in front of a jury and state, "SIPC owes me $N. I rest my case."

What if I'm buying stocks with just some of the money? So I buy a couple shares of some penny stock but keep the rest of my 25k uninvested, am I only insured for the amount I have invested or is my entire account insured?

"I deposited $250k with the intention to buy into securities when the market declines by a substantial amount determined by me. Just because I did not purchase stocks does not mean these funds aren't slated for future investment."

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