Robinhood For New Investors
Robinhood is a fun brokerage for new investors — but newbies must find educational resources and research tools elsewhere. They’ve been in the hot seat in the past few months over Gamestop, but there could be other reasons they’re under many scrutinies. Maybe it’s because they claim free trades and no account minimums, but it’s likely not that it’s exactly free trading if you do a little research. When is something truly ever free? They do simplify the trading experience, and this is both a good and a bad thing. I’m not even suggesting that this is a greedy company. The saying “there are no free lunches” exists for a good reason.
FINRA fines Robinhood 1.25 million dollars.
Robinhood is making money. An estimated $69 million in revenue in2018, that’s up 227% from the previous year; in 2019, they made an estimated $91 million, and in 2020 a whopping $682 million.
Financial Industry Regulatory Authority, known as FINRA, fined Robinhood for how they “route” their customer’s orders. They often make their money from selling their customers’ orders to high-frequency trading. FINRA said they also didn’t perform some systematic reviews of order types such as stop and limit orders. As part of the settlement, Robinhood agreed to hire an independent consultant to review its compliance practices.
High-Frequency Trading
HTF’s make money by algorithmic financial trades. These are trades done at incredibly fast speeds, with high turnover rates leveraging financial data and electronic trading tools. After all, we’re only human, not quite fast enough to move in and out of positions in seconds or fractions of a second. Some research argues that HFT poses a brand new type of challenge to the financial system. HFT has contributed to volatility in the Flash Crash of May 6, 2010, as the liquidity rapidly withdrew from the market. Some European countries propose curtailing or banning HFT due to concerns about volatility.
Robinhood is marketing itself as an “anti-Wall Street” stockbroker.
Consumer advocates and regulators believe there’s a conflict of interest here as they’re looking to route orders to the market maker who pays the most instead of the best execution for the client. “Over the last two years, we have significantly improved our execution monitoring tools and processes relating to best execution, and we have established relationships with additional market makers.”
Vladimir Tenev and Baiju Bhatt (co-founders) saw an additional $5 to $10 trading fees along with a $500 minimum as younger and poorer people out of investing. They don’t set minimums, which has raised the bar amongst the investing giants, it kind of ruffled their feathers. It’s what makes Robinhood easy for beginner investors to get started. This rivels with e-Trade, Charles Schwab, Free trade, and others.
Is there trouble with demographics?
Fidelity Investment’s Will Danoff, who, on average, beats the benchmark for decades, now has some anxiety about Robinhood. Claiming young new investors, millennials, pay much attention to mutual funds’ high cost. The number of mutual funds decreased over the past four years, while the number of Exchange Traded Funds has since 1996.
“Speaking up for civil rights or equal rights attracts a better-caliber employee,” Danoff said. “The great companies that I’m invested in care deeply about our country. They care deeply about the environment, and they realize making all stakeholders happy is good for business and good for the shareholders.”
The Financologist,
Marcia Santos Sadler
