Hey everyone! Happy Monday! For this week’s newsletter, I decided to write up a piece on Robinhood with the help of my buddy Akash Desai.
Robinhood’s been in the news a lot for its server outages and dangerous options trading platform, which recently led to the suicide of a young trader. As a Robinhood user for many years now, I thought now to be a good time to reflect on its impact.
Since Robinhood launched its commission-free trading platform, every major brokerage firm has followed suit, democratizing access to trading and helping investors save on fees. Additionally, Robinhood set the trend for mobile trading as opposed to traditional web and phone-based platforms. By opening the door for average investors to participate in the broader markets, it contributed to a healthier distribution of wealth in our society.
Robinhood became the fastest-growing brokerage firm in history by eliminating unnecessary fees and balance requirements.
By eliminating commissions, it gave users a license to experiment without being penalized for their mistakes.
By implementing a cryptocurrency trading platform, it democratized access to a new, emerging, and high-growth asset class.
By facilitating fractional shares trading, lower-income investors gained access to participate in the equity market.
Its minimal and simple user interface helped amateur investors to better understand the fundamentals of owning stocks. Before Robinhood, brokerage app interfaces were heavily cluttered, and with an early 2000’s look. In fact, the current Vanguard app still looks horrible. However, for the average individual with very little knowledge about investing, having an understandable and intuitive interface is extremely important.
Robinhood was the first finance app to win Apple’s design award, proving how innovative and refreshing its user experience and its mobile interface was.
On Robinhood company pages, there are just four components: the ticker symbol, the price, a chart showing price changes over time, and a “Buy” button that beckons at the bottom of the screen. This simplified user interface helps amateur investors take away the core information of a stock instead of being deterred by complicated graphs and financial ratios.
Overall, Robinhood deserves credit for pushing a beautiful and extremely simple brokerage experience to first-time investors. If not for their innovative business models and user-centric design, legacy brokerage firms like Charles Schwab or Fidelity would never have delivered the same value to their users. While Robinhood certainly has its faults, chiefly not preventing dangerous investing behaviors, it has opened up access to the $30T equity and the $240B cryptocurrency markets. The best products open up doors and make it easy for people to walk through. This is precisely what Robinhood has done over the last five years, and why I believe the team can continue building safe, simple, and high-quality experiences for the decades to come.
“Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.” - Paul Samuelson. Robinhood has turned stock trading into a gambling addiction for its millions of users.
Robinhood pushes the “get rich quick” concept by hiding behind an intuitive, slick UI. It allows people to post pictures and quick screenshots on gains that are not yet accrued or realized.
Robinhood issues house credit via a subscription model we are all so used to, incentivizing us to take bets, hoping it will pay off.
The app calls out how many day trades a user has left. They are pushing for a gambling approach in plain sight.
A free stock for signing up? Sounds like a free room at a casino to lose $1000 that night.
The UI was built to nudge traders to invest (gamble more). The goal of the UI and presentation of colors are deliberately done in a way to maximize the emotional impact.
The revenue model incentivizes volatility, constant trading, and more orders. This infrastructure and model only lead to more opportunities for losses for the mass.
According to NYT, in the first three months of 2020, Robinhood users traded nine times as many shares as E-Trade customers and 40 times as many shares as Charles Schwab traders.
According to NYT, Robinhood traders also bought and sold 88 times as many risky options contracts as Schwab customers, relative to the average account size.
Robinhood is incentivizing users to trade more illiquid assets because it results in higher spreads and larger orders for their flows to go to securities firms.
Robinhood gets paid on a “push to order” model and gets paid 5-18 times more than its competitors on orders. No wonder they want to create a UI that is so simple to use so people continue to place orders at the click of a button. This isn’t an Amazon purchase, this is hard-earned dollars put to use.
Options in my opinion are not for the masses. It is very complex and the reason more historical apps had such steep barriers to entry.
Financial inclusion is meant to grow wealth for the poor, not facilitate them losing their savings, creating a potential larger gap.
The average user on Robinhood is 31. We are told we should learn how to invest early in life; however, an early major loss can have a devastating impact on our financials and future investing strategies.
The stop losses, large spreads and margin covers are making Robinhood and its affiliate brokerage firms rich. Yes, certain individuals do come out in the green, but without proper knowledge, we know the house wins. When you can collect significant data on stop-loss points, purchasing power, and client habits, all Robinhood has to do is convince you to book more trades. Trading here becomes more a psychological play, with the house winning a majority of the time.
Robinhood faced multiple server outages during critical market drops in the last few months. For day traders, these outages cost them the chance to rebalance their portfolio in the midst of 5% market drops.
Robinhood has not been around for a downturn. Since its launch in 2013, we, retail investors, have only experienced one of the greatest bull runs in history. Few of us can recall the sharp crash when the dot-com bubble burst in the early 2000s. It will be interesting to see the scale and level of panic retail, Robinhood investors display when our current market crashes once again as it did back in March.
All in all, we believe Robinhood has provided a very valuable platform. It is important that we empower all individuals globally to be a part of the financial industry and provide them an opportunity to use their dollars to grow. However, it should be done in a more righteous way that results in the true defined mission.
Thanks for reading!
Jaimin Desai - CEO & Co-Founder of Reconcile
*P.S. If you have any thoughts on our content, please leave a comment or email me at firstname.lastname@example.org!