‘BUBBLE’ TROUBLE?
‘Robinhood’ app luring amateurs – like in ’90s
THE 1990s were simpler times. The news was dominated by Bill Clinton’s various sexual escapades, but also a bubble in Internet-related stocks that was partly fueled by the democratization of stock trading.
The latter inflated the stock market generally, and if you’re old enough to remember, pretty much crashed it. Newbie investors took the brunt of the crash, with some losing their lifesavings, well after professional traders had sold their positions.
Now history may be repeating itself in the form of Robinhood, a stock-trading app that has become something of a cultural phenomenon during the pandemic.
Robinhood now boasts 13 million users and growing — about 3 million of those joined since COVID-19 hit. Bars and gyms are closed, people are in lockdown, but Robinhood gives you a chance to make money — and a way to alleviate boredom.
It’s aided and abetted by the massive government economic-relief effort that appears to make trading a no-lose proposition, enticing retail investors to flip stocks just like they did two decades ago.
During the dot-com era, there was a famous commercial of an office clerk teaching a C-suite executive how to trade online. Meanwhile, Robinhood is so easy to use that even a Luddite like me can set up an account and start trading stocks, options or cryptocurrencies in a matter of minutes, as I did in preparation for this story.
Plus it’s free, or at least that’s the impression the company wants to give (there are no commissions, but I’ll explain how the company makes money later).
There’s a lot to like about Robinhood. It’s a clean, easy-to-use interface. You can even get a free stock for signing up. I received a free share of a company called
Agenus, trading under the symbol of AGEN for $3.28, a company described in my Robinhood portfolio as a “clinicalstage immuno-oncology company.”
But the lure of Robinhood is also the lure of the roulette wheel — you can make a lot of money, but you can also lose a lot because trading isn’t easy. It’s something that is honed and perfected and even the best go through periods of losing money.
Of course, I found none of this on Robinhood’s Web site. Nowhere does it tell me that my free share of stock is described by Wall Street pros as a speculative “penny stock” because it trades below $5 a share.
And that gets to the problem with Robinhood — it’s built for the person who doesn’t know a lot about the markets and doesn’t ask a lot of questions.
It’s also built for people who think they can trade like the big guys, people like Steve Cohen, Dan Loeb, Ken Griffin. To arm you against the professional, Robinhood gives users access to research and reporting in its news feed, but again, when much of this type of news hits the tape, the pros have already traded on it.
That’s not insider information, but the way the Wall Street information mill works. The big guys who pay the biggest commissions get the best info, not some guy trading a few shares of AGEN.
Robinhood is now valued at around $8 billion given its recent success, meaning it’s heading for a big IPO payday itself. You might ask how it makes money without charging brokerage commissions, and the simple answer is that it sells its trading-order flow to third parties that match buyers and sellers, a practice known as payment for order flow.
Big brokers pay Robinhood for order flow because they can trade out of these orders at huge profits, and given all the action on Robinhood, brokerages are clamoring for this business. In other words, nothing comes for free, and Robinhood users are the product, just like they are on Facebook.
I’m not a Robinhood hater. Founders Baiju Bhatt and Vlad Tenev come from immigrant families and met at Stanford and created a great business designed to “bring in those who’ve been left out of the system by making investing more approachable,” a company spokesman tells me. Moreover investing is a worthwhile pursuit, and that’s why there are mutual funds and index funds for the masses.
But there is a learning curve to buying and selling individual stocks, which isn’t investing but the profession of trading. That’s how Steve Cohen makes $1 billion a year and can afford to buy the Mets.