The problem with Robinhood, like many startups, is an issue of profitability and monetization. They've been switching up Robinhood Gold to try to get more customers to sign up. I'm sure that's where a lot of their effort is being put as they approach "have to IPO" valuations.
This low dollar amount round is also an indication that while they are still burning money, they may not be burning as much as they may have in the past. If I were to guess, turning on self clearing was a big part of that.
They did not disclose the metrics that are important. You would need AUM information to effectively support your statement.
Would you pay 13.5% more per account for a company that's growing at least 5x, if not 10x as fast? I know I would in a heartbeat, all else being equal.
Now, not all else is equal, so you can make an argument either way, but I wouldn't call Robinhood's valuation "insane."
I mean, we're all just guessing here but 50% seems _super generous_ to me. It's really easy to sign up for a Robinhood account. I'd love to know what the real numbers are :)
What becomes more relevant in that case?
Also I thought the fees are more like $7 rather than $2... have they decreased?
But the OP's point is correct: even with trading fees, the cost is below the noise floor. Brokerages can make quite a bit of money off of how they structure trade execution, so the top-line trade cost isn't everything.
A sampling of things that differentiate brokerages for me, price per trade is so far down my list since I buy rarely but hold for a long time.
The reason I would have some doubts is they were talking recently about providing checking and savings features like a bank, only tied to a brokerage account, and they said cash therein would be SIPC insured and the SIPC had to contradict them publicly and say "nuh-uh".
This doesn't indicate your stocks aren't safe per se, but it suggests that Robinhood may not always verify that something is 100% ok with regulators before doing it, or think about all the implications, and some day we might find out "oops" they didn't do something crucial that traditional brokers do, because they were being disruptive, moving fast and breaking things.
Another point is that while Robinhood Financial appears to be a more or less normal broker that is a member of FINRA and SIPC, Robinhood Crypto is not. This isn't exactly surprising, but again, it could make a person slightly nervous that there could be drastically different consequences someday to trusting different entities that are all called "Robinhood". Maybe people will get used to trusting both of them and someday there will be a new "Robinhood XYZ" and it will not be regulated the way people expect. Or what if when Robinhood Crypto is hacked and loses their customers assets, it turns out there is some linkage that causes problems for Robinhood Financial, even though it wasn't supposed to work that way.
To avoid this effect one can use a limit order instead of a market order (you are setting the price instead of ‘taking’ the market price), but then it may take longer for your order to execute, and it may not execute at all if the price moves away from your limit price.
EDIT: apparently they have a web interface now.
I don't even have the app installed on my phone.
E-trade is a public company so all its numbers are GAAP. Their account numbers are funded. So it's not an apples to apples comparison. Plus they are profitable, so the valuation numbers make Robinhood look even worse.
Except not: see Matt Levine's explanation: https://www.bloomberg.com/opinion/articles/2018-10-16/carl-i...
> So by selling its customers’ orders to market makers, Robinhood is actually stealing from two sets of “the rich”: Rich market makers like Citadel are paying it directly for the orders, while rich hedge-fund managers are getting worse execution on public stock exchanges so that Robinhood customers can get better executions off those exchanges. Big institutions are paying to subsidize free trades for Robinhood’s customers. It feels pretty Robin-Hood-y! If I were Robinhood I would advertise that!
Essentially: you are cheaper to make a market for than a giant fund is, and you, Citadel, and Robinhood can split the savings.
Competition. Why does Coca-Cola spend money on advertising, driving up their costs and (seemingly) ensuring they make less money? Retail order flow is essentially free money for the market maker who gets it, and they compete with each other to obtain it. That competition shows up in a mixture of tighter spreads (ie, better than the "best price" for the customer), and payment for order flow. And payment for order flow, in turn, shows up as some mixture of lower fees or higher margins for the broker.
At a big picture level, retail orders are valuable, and that value will be split between the market maker, the broker, and the customer, with the exact split depending on a number of factors.
> I don't see what you mean by savings - if they're making less money, how does that translate into savings for anyone?
Keep in mind, market makers make money by being extremely efficient at buying stocks when people want to sell, and selling them when people want to buy, minimising the stocks they hold at any given moment, making a tiny amount on every transaction, and making it up on volume. If the incoming orders are "uninformed", ie, it's just a dentist in Milwaukee daytrading his retirement account, then this is very safe. If the incoming orders might be "informed", ie, it might be the first indication of a fundamental shift in the value of the stock, then this is not safe, because every trade could just be noise, or it could be the start of some hedge fund shifting a billion dollars into or out of the stock.
The NBBO (National Best Bid and Offer) is the best available price for "mixed" order flow, that captures the risk to the market maker that, if they fill the order, they might be about to get run over by a bus. The more they can get order flow which is safer than that, the more they can afford to beat that "best price". They do this because they believe that, on average (and after adjusting for risk), they will be making more money, not less.
This is all pretty concrete, nothing here is new, every broker does this, and it's all very well understood. If the current best ask is $X, and you can promise that you're an uninformed idiot who has no clue what's going on and just wants to buy 50 shares, then you can find someone who'll give you a better rate than $X. If you're Bridgewater and you want to buy 50 million shares, you won't.
So that MM will in fact buy orders that may on the face of it be a loss.
The offer will always be higher than the bid, and they make the spread between the bid and offer price.
If buy and sell orders are roughly balanced, they will not lose money. The idea behind purchasing flow such as Robinhood's is that the traders are random noise traders, with a balance of buys and sells as such.
> meaning your trades are executed by a real market maker but with slower fills, larger spreads and more restrictions on trades.
Incorrect. Retail customers who have their orders routed like this obtain instant execution at prices at least as good as, and sometimes better, than the best available price on public markets, and in the case of Robinhood, they also pay zero fees.
In other words, everything you said is wrong. They don't get slower fills, they get tighter spreads, and lower fees. This is strictly good for the retail investors.
The bad news is that the reason for that is because the broker doesn't have to screw them; they're uninformed noise traders buying and selling in basically equal measure. The traders buy at $1.001 and sell at $0.999 as much as they want until they're blinded out by the spread, which the broker keeps.
The "savings" being passed along is just a reduction in the portion of the spread that the broker would normally use to protect itself against informed traders.
If it was that simple then I find it strange that these brokers don't offer free starter accounts to new users to compete against Robinhood. They must know something we don't about the real value of the company and how much competition they're adding.
Or it just may be an example of how changes don't happen instantly. If they lose enough customers, they may cut commissions, even to zero. As long as it isn't a big problem, they won't.
It seems to me that a lot of brokers are providing an increasing number of commission-free securities, and you also see promotional deals where a new account of sufficient size gets several hundred free trades.
What Uber's IPO has shown is that VC funding is far too overly delusional. They buy their own bullshit about how growth trumps all but investors want profits and you won't see the real reaction until it starts trading for real, like Uber and Lyft. Until then, all you see is VCs talking their book and lazy tech writers repeating everything they say without actually thinking about it. So, sure some investors were stupid enough to invest $200M at $7B valuation, but I doubt Robinhood will grow into such lofty valuations that are reflected by the markets unless something drastically changes. 2M customers simply isn't enough.
TD Ameritrade: ~29 Billion
E-Trade: ~11.5 Billion
Fidelity Investments is privately owned, so harder to value, but is probably worth 50-75 Billion
Each of these companies is far more diverse than Robinhood, and their valuations are not comparable.
And, it is irrational to compare startup valuations to established companies. They're not the same category. If they were, we'd look at F and GM and wonder why anyone would ever invest in TSLA (though, that's maybe not a great example because I suspect F and GM are better investments than TSLA right now, but not because they are more diverse or whatever...but, because there's a lot of risk built into TSLA due to sloppy management). But, it's easy to find examples of old companies beating new companies that seemed to be stronger investments. Google vs. Yahoo, Amazon vs. Borders, etc.
Robinhood may be the biggest provider of 401k services in ten years. Or, they might partner with storefronts to offer banking+ services. Or, they might just keep bringing in new small dollar customers and eking out tiny profits by being more efficient; there's plenty of room at the bottom. Those other guys charge ten bucks a trade (or more)! You can bet all the people tucking away $100 from each paycheck don't want to lose 10% of it to fees right off the top. McDonald's doesn't make a lot of money from each customer, but they have a lot of customers.
I have an Ameritrade account that I've had for 25 years (well, it was Datek back then), and I have a Robinhood account. I stopped automatic withdrawals to Ameritrade a year or two ago, and now all my trading happens on Robinhood. It's just a lower-friction experience. If Robinhood goes public, I'll consider buying, because it's a good and novel product in a market with a lot of money changing hands.
Supported by this new big round raise.
Uhh, hate to break it to you but startups don't get "special valuations" because someone calls them startups. That's just not how it works. There's a little thing called "comps" that are used when companies get valued and no banker says "oh thats a startup so their valuation is different".
Source: M&A guy.
Is this condescending tone necessary?
I was suggesting growth plays a large role in why startups are valued differently than established businesses, and I don't see how you can argue that a rapid growth company will be valued according to the same metrics as a company with very low growth.
Is it necessary to be so matter-of-fact and imply that people aren't being rational (and thus inferior to your clearly rational point of view ). You're not wrong, the tone isn't necessary but I guess I was just following your lead.
It's not that much, but I feel you.
It's very hard to prove that someone is doing the wrong thing when you invoke the term "the long game".
I can't think of any mechanism by which wealth owned by the rich (i.e. old) can skip a generation.
The only way this proves to be false is if we eventually discover the secret to healthful immortality and end up with a generation that never dies, and therefore never bequeaths its wealth to younger generations. The longer people live, the longer it will take younger generations to inherit the wealth of older generations.
The only other way this proves false is if there is a massive wealth destroying event such as war, revolution, ecological collapse, etc. such that there isn't much wealth to inherit.
The IRS can!
That said, I was talking about a generation collectively across all of society, not a specific family.
I still have my Ameritrade account from 25 years ago (then Datek, which was, at the time, revolutionary), so I'm not even the obvious consumer of Robinhood services since there was friction for me to stop using Ameritrade and start using Robinhood, but I switched all of my investment activity over to Robinhood a year or so ago (still have some stock at Ameritrade, but I don't actively trade there).
Their money is moving, because old people—at a higher rate than young people—become dead people, whose former money is then controlled by someone else, often younger.
'RobinHood' is just a portal for sales to a generation.
Also, FYI, this name 'RobinHood' i.e. a brand created to make people think somehow they are 'good' (and all of their 'occupy wallstreet we wanted to do somethiong' BS) is laughable rubbish and kind of stain on a generation. Robin Hood is the same as anything else in a different config. Nike is not somehow 'moral' because they take some arbitrary stand on their billboards. They still pay people pennies to make shoes. It's a sad statement to think any of this marketing actually works. It's fine to 'want to do good' but if people can't understand that it's only 'talk' ... well, very naive.
Previously it was about a world where the productive class had their wealth usurped by the taxman and a man who took that money back to give it to those that produced that wealth.
Now it's interpreted as a story about a man that takes from the rich and gives to the poor. There is no longer any consideration for who generated the wealth in the first place.
Nowadays, your wealth still goes to either the taxman involuntary by threat of licit force by the state or to voluntarily people that provide you goods and services that you deem beneficial. The difference is the Robinhood now steals from the latter instead of the former.
A common response is that property rights are obviously necessary- that society couldn't function without them.
The same argument, though, applies to things like taxation! "Obviously, we need some taxes just to keep society running- roads, water, firefighting..." isn't an uncommon argument from more centrist types, and that tastes exactly the same as "property rights are necessary for civilization".
The fact is, the moral authority of "I can kill you if you try to use this object, or enter this area of the world, which I call 'mine'" is just as worth questioning as that of "I can kill you if you try to use this object, or enter this area of the world, which I call 'mine'- unless you're authorized by a democratically elected, representative government, and we as citizens have collectively agreed that each of us must contribute towards the common good."
If taxation is theft, then killing somebody to defend or retrieve your property is cold-blooded, probably premeditated, murder.
> your wealth still goes to either the taxman involuntary by threat of licit force by the state or to voluntarily people that provide you goods and services that you deem beneficial
This voluntary-involuntary distinction is just sort of asserted without a lot of examination of the actual situation.
You're starving. Somebody else has bread for sale. You can buy the bread for an inflated price or starve. Is this voluntary?
Perhaps it is- even though in practice you had no meaningful choice, in that particular situation the best outcome for you comes from paying almost any sum for that bread. There's an argument there that you chose to buy it willingly, rather than starve.
You also have an option not to pay taxes! If you pay, you do so willingly. Yes, you'll wind up in prison, but- the best outcome for you comes from paying the taxes. You had a choice- you decided to purchase your freedom. This was voluntary.
In fact, assuming a rational actor, in this shallow definition, practically everything they do is voluntary- if a spy is being tortured and gives up some information, they did so willingly- after all, they could have continued to suffer. If you're being held up at gunpoint, you choose to hand over your wallet- you make the rational choice that losing some cash and having to cancel your credit cards is preferable to being shot.
Now consider one last situation- You're locked in a room, starving. There is some bread on a table. You go and try to eat the bread, but are stopped by a man with a gun. He will kill you if you eat it, he says, unless you pay him first.
Your options are to die by starvation, get shot, or pay money. Is your choice to continue to live and to pay the money a voluntary one?
And did you notice that this is the same situation as the first one?
In Canada, we made a new Constitution in the 1980's and the 'left party' was going to veto it if we included the specific rights to private property. Trudeau caved and so we don't have constitutionally protected rights to private property in the sense we might want. Though I don't think it's pragmatically much different from most nations.
FWIW there are a large number of places that to this day have an all-volunteer fire department, and there are places with private water companies and private roads. (And having an all-volunteer police force in the same spirit of a volunteer fire department is a thing more places should have -- and avoid all the trouble we get when the police think they're different than regular people.)
Of course, the places with private roads tend to have the road maintenance company end up looking a lot like a local government, in the sense that you either pay your share of the road maintenance or you can't use the only road to your home, which is coercive. But there is still a highly relevant difference in that the road maintenance company doesn't force you to buy into their social insurance programs and pay for their military excursions even if you don't want to. And if you decide you want to be a hermit who never leaves home and doesn't need roads, you don't go to jail for not paying for them.
The difference is the level of coercion that actually exists. Nobody is going to refuse to pay a reasonable road maintenance fee for their own local roads, because the value vastly exceeds the cost. But if the road company tried to claim that in order to use the roads you would have to give them your sons to die in their wars, you would tell them to eat sand and pay the cost of building new roads so you don't have to use theirs. Which, even though very expensive, puts an upper bound on the level of coercion you have to put up with.
That doesn't exist with a government. Even if their demands are completely unreasonable, they have the capacity to make your alternative worse.
> Your options are to die by starvation, get shot, or pay money. Is your choice to continue to live and to pay the money a voluntary one?
You're ignoring the possibility of buying food from someone else. The anti-government argument is fundamentally an anti-monopoly argument. If there is a private monopoly on food then that's just a de facto government which has seized power by controlling the food supply. But if there isn't a monopoly then no one can point a gun at you and force you to pay an arbitrarily large amount of money for necessities, because you can turn around and buy it from any of a hundred others who charge more reasonable prices. Or produce it yourself if you're so inclined.
I don't even know what my politics are- not "i don't know what to call them" but "I honestly don't know what policies to advocate in general", though they're somewhere to the left of center.
> If the road company tried to claim that in order to use the roads you would have to give them your sons to die in their wars, you would tell them to eat sand and pay the cost of building new roads so you don't have to use theirs. Which, even though very expensive, puts an upper bound on the level of coercion you have to put up with.
This theory sounds good, but I've always seen no guarantee that this can happen in practice, for roads specifically. Space is finite, and roads owned by the fun new road startup can't cross those from the old evil monopoly- they don't own that land, and they're sure not going to get permission to use it to build their own roads! Tunnels are also right out (since if you own the earth under your land, so does the road company). You'd be left in a situation where no land vehicle could access your land - only aircraft. This is, probably, a very expensive situation.
So, while it sounds possible initially, at least for me when I consider the logistics of it, "build your own private roads competing with the other ones" works only in rural areas, and only for point-to-point, relatively short connections. If the Interstate Highway System was owned by an evil organization, could you build your own highway system? Probably not; at some point you'd just have to cross land owned by them.
How do you see this problem being solved in practice? Again, there's something silly about the whole thing, but I can't figure out how it'd play out myself.
> You're ignoring the possibility of buying food from someone else. The anti-government argument is fundamentally an anti-monopoly argument. If there is a private monopoly on food then that's just a de facto government which has seized power by controlling the food supply.
This is interesting, and seems somewhat valid. It does produce a sort of silly conclusion that if you meet a starving man and are his only source of food- say, you're up in the wilderness and he's a lost hiker- you now have seized government power, which doesn't make much sense.
My point, though, was less just "private monopoly bad" but "coercion can and does exist in capitalism in practice". Specifically, there are items for which demand is nonzero and extremely inelastic- an antivenom for the rare Hypothetical Scenario Snake's deadly bite is the only thing that can save you, and a monopoly or cartel could easily form in the pharma industry for such a thing. Given current IP law, which is essentially in the business of granting monopolies... that'd do it right there. But assuming IP wasn't around, you'd almost certainly wind up with a price-fixing cartel.
Now, everybody knows cartels are unstable- it's basic game theory. But there's a stabilizing influence- the "cartel game" is not played only once. Rather, it's more like the iterated prisoner's dilemma. As a group of pharma companies fix prices on drug after drug, they come to know each other better- undercutting the cartel, they know, would mean losses for them both, and they can develop trust that they won't themselves be undercut.
And specifically in pharma, where investments in manufacturing can be quite high, the threat of a startup who isn't trustworthy, entering the game is low.
All considered, these make the pharma industry, in the absence of regulation, prime for cartels to form. And these cartels would have, economically, no incentive to set prices for life-saving drugs lower than "whatever your life's worth to you".
So- in this sort of situation, if there were two people selling antivenom, both asking an exorbitant price, and the startup costs keep any competitor out (and remember, the potential new entrant knows quite well that they need to undercut the cartel to succeed, which means they'll be in a race to the bottom with two more-experienced competitors, which means they'll...probably not have a good time)... is the man bitten by the snake coerced to pay, or is his choice free? And have the pharma companies formed a government here? Does it govern anybody besides snakebite victims?
I'm quite interested to hear your reply- especially the stuff around how anti-government is fundamentally anti-monopoly. I often see the state defined loosely as "a legitimized monopoly on violent force", and I've always figured the critical part there was the "violent force". But is there some connection to monopolies in general? (Of course, the monopoly on violence itself isn't quite what we mean here- they're not "the only seller of violence", they're "the party whose violence is accepted by society"- it's not an economic thing in that context.)
Robin Hood long predates any kind of even basic economics.
Even those concepts you site a little tricky in 2029.
It's about as complex as a Tranformers or Fast and Furious film: ugly authoritarian tax guy takes money from people and treats them like crap, Robin Hood fights back. That's it. It's the ultimate in populism.
VC investors were perfectly logical. The people who get in early on a Ponzi scheme often make out like bandits. It’s the people who bought in the public market who were the bigger suckers.
Is there historical evidence to back this up on older brokers?
We've been in a ~10 year - largely unprecedented - bull market where you could throw darts and make money. Recessions usually destroy the returns of index funds and broad ETFs that millennials have been sold on. When the market's rising tide isn't raising every ship, picking ships becomes important.
If anything a recession should increase the number of retail traders because their index ETF is getting destroyed, but there are a handful of companies or positions that are flourishing. In the past, at least we've had advisors who while glorified salesman you can at least call and will get you to calm down. Now we're going to have a generation of retail investors watching their investments tank 20% across the board with only Robinhood support to tell them to calm down? Is that going to be enough to stop them from liquidating their ETF and taking a more active role investing in recession-safe companies?
On what planet?!
I am an amateur trader for pure hobby because of Robinhood.
Many years ago, I tried to create an etrade account and it was an insanely long process (it may have changed now). I don't even remember what I did after I got an invite from a friend, but I was up and running right away.
I started trading $300 just to see what it was like. The first three months, I learned a bit and lost some money. Fast forward 1 year to now, and I have around 54k in there and am up 16.05% - and that includes the crazyness of December. I have invited some friends and they all trade between $300 to 10k AFAIK. I am in no way rich, but I compare the performance of my retirement portfolio to what I do with a few ETFs, and honestly it has demystified the whole process. Before, I used to login to Clash of Clans when I had a few minutes to spare, now I spend that time browsing Robinhood. To me Robinhood was a game changer for this and many other reasons.
I say this because I honestly don't see how anyone who is serious about financial planning can use Robinhood for anything besides "play market". Case in point: the graphs in Robinhood show no y-axis values. This is insane if you actually care to see how your portfolio has been doing. Yet this is obviously intentional by Robinhood, so it must be designed to obfuscate what is really going on.
When things really start to go south (which they inevitably always do) there is going to be a run on the bank at Robinhood.
and where would you be if you'd just stuffed all your original cash into VTI and not fiddled with things?
You mean when the market dipped and completely recovered in two months? Hardly crazy.
Unlike the stereotypical Robinhood user, I buy and hold a 1-fund portfolio, and I think it works pretty well for that.
What makes me even more nervous is that Robinhood seems to deliberately cater to those crowds of uneducated emotional day traders.
I said this before but they seem to become the "facebook of finance" with the same "break things and go fast" mission. I would never use them for any significant amount of money. That being said, I use them occasionally for options because the fees of traditional brokers are such a joke (20$ typically to sell and buy).
In fact, I know in the US you need to be an accredited investor for some times of investment for exactly this reason - it is so easy to get ripped off.
Robinhood are also hilariously inept; See the box-spread fiasco and the checkings and savings account.
More seriously, I love the price pressure on brokerages, but I shudder to think what will happen to its users in the next recession.
That the team went out and built a company for that reality is just stellar, and it’s fun to see insights like that turned into something real. Congratulations.
People often focus on the HFT payments for order flow, but another important leg of the stool (along with stock lending, and the premium tier/margin lending) is the interest rate differential.
If rates were going to 5%, that'd be one thing, but with rates at 2-2.5 and a couple of cuts being priced in, that's going to decrease profits there.
Also it's kind of hard to launch a 3% cash management account when the ten year is yielding 2.3%.
What I do still need are better research tools, but my impression is that none of the consumer trading platforms provide anything very impressive on that front.
Very curious to know what you're thinking when you think of better research tools
99% of American's don't understand the stock market. So I made a video with McKinsey and UBS to explain it in 10 minutes: https://www.youtube.com/watch?v=G6EoPlaPO5c&t=20s
But that's not enough to justify their valuations.
I don't know if I would call it revolutionary so much as potentially exploitive.
Not sure if $7B is valid but the company is disrupting the status quo of commission based trading.
If you're lucky.
Stealing from the poor and giving to the rich, genius!
This is how order books work. If you don't want counterparties to see the fact that you want to buy or sell stock, your options include a) not telling a stock exchange to advertise your willingness to buy or sell stock by putting in limit orders, b) using a dark pool, or c) become more sophisticated with respect to your execution strategy, such as e.g. using repeated Immediate-or-Cancel orders, etc.
This is called Level II data and goes beyond the simple bid, ask spread of Level I. The feeds are cheap and usually free if you have enough money in your account at any traditional brokerage.