In British folklore, Robin Hood is an outlaw who is supposed to take from the rich and give to poor people. The Robinhood broker firm was founded on the idea to disrupt the brokerage industry by making all their trades commission-free. That sounds great, but some people are wondering if they really are all that they represent inside their slick marketing. The question you should be asking whenever some one in the financial industry offers you something for free is “What’s the catch? ” And yes, there is on average a catch.
Is RobinHood Safe: Free trades, really?
That was precisely what I said when a friend of mine first told me about RobinHood. It literally sounded too good to be true. My knee-jerk reaction was to warn him that “that doesn’t sound very secure” and that it might be best for him to “stick to eTrade”. But as it turns out, I could safely trade stocks and ETFs from the comfort of my phone… for free! Obviously, the friend who said about RobinHood is a notorious cheapskate, but I won’t hold that against him. Let’s begin this Robinhood Review 2018!
This is the question: Is RobinHood a scam or can it be legit?
RobinHood was developed to “democratize access to the financial markets”, or to put it more plainly – make it affordable for the everyday person to invest in the stock market. RobinHood is a free app that enables you to buy and sell stocks with no commission fee. This model sounds like a no-brainer, especially when you only have a hundred or so dollars to invest. When you have to pay a $10 commission to both buy and sell a stock your little ‘investment’ of $100 won’t last very long. RobinHood Financial a member of the Financial Industry Regulatory Authority (FINRA), so they are legit and they’re also members of the Securities Investor Protection Corporation (SIPC), which protects securities clients of its members up to $500, 000 (including $250, 000 for claims for cash). What all that boils down to is that RobinHood is as secure as opening a CD at a bank, or using any other on the web trading platform.
Legit Free Trades?
Yes, its true, no tricks there. You can literally do commission free trading directly from your own smartphone. But how? I have been paying $10 a trade with eTrade for past decade, you might say! These Stanford Grads headed to California after beginning their careers on Wall Street to find venture capital and use that money to get RobinHood off the ground. So the real question is, how is this possible? At RobinHood, they have decided to “trim the fat” as they say on their internet site. The lack of expensive brick and mortar stores is one way to help them work on the bottom of the cost curve. As everyone learns in operation school, if you want to cut costs, you are able to decrease headcount, and also turn to TECHNOLOGY to cut costs. As the founders of RobinHood discovered, many brokerage firms pay literally nothing to place trades, but run a huge overhead. The elimination of this overhead by making effective use of technology allows them to pass that savings on to the person with average skills! True to how startups are known to operate, they have implemented a slick smartphone app that is user friendly and focused heavily on a great user experience (UX). They now have the ability to quickly roll out new developments, run split tests on users, and find the best way to engage with the consumer.
How Does RobinHood Make Money?
Taking From The Poor And Giving To The Rich? After digging through their SEC filings, it seems that today’s Robinhood takes from the typical retail investor and gives to the high-frequency trader. Not merely does Robinhood accept payment for order flow, but after making a quick calculation, it seems they are selling their customers’ orders for over ten times as much as other brokers who engage in the same practice. Some view this as a potential conflict of interest, although others simply write it off as nothing more but standard practice. The brokerage industry is split on selling out their customers’ order to HFT (High Frequency Trading) firms, and people that don’t. Robinhood does engage in selling customer orders to provide their trading services for free, but some feel they have been making far more than their competitors from it. Among brokers that receive payment for order flow, it’s typically a small percentage of their revenue but a big chunk of change nonetheless.
Robinhood is Shady for Sending its Orders to HFTs for Money?
HFTs are possibly paying Robinhood more due to their order flow than its competitors. Now you might think, why are the willing to do so, unless they are making a quiet killing off of it? All of it comes down to quality and quantity. While the standard brokerage is supplying HFTs will their seconds, the orders they certainly were not able to complete themselves, meaning the best deals are already captured from the order flow, Robinhood does zero internalization. This means that every possible deal and profit is flowed out of Robinhood to the paying HFTs. Here is the key reason for the higher payouts to Robinhood. HFTs gamble that from the higher quality first order flows they pay for they can extract a higher profit. Robinhood’s order flow is a literal unexplored goldmine for them. The surprising fact I found out about this is that it does not hurt investors. Your orders are unable to be changed, they are locked in. A market order does little service to an investor except to possibly expedite the completion of an order with less concern on the final price, whereas a limit order expresses precisely what you want.
Robbin’ Good Or Not?
This is the main point of this RobinHood review. What they’re doing to make money is to monetize order flow, which is a well accepted and normal industry practice, and the deal you get out of it is commission-less trading on their platform. If that’s not a thing you can live with, then rather go with another broker where you get everything you pay for.