By Chris Costello, CEO
I can no longer restrain myself. My concern for the average investor grows with every news story around the Robinhood investing platform. This most recent meme stock Gamestop trading fiasco only brings to light the potential long-term damage that the gamification of investing can bring upon a whole generation of unsuspecting new investors.
I do love the name – Robinhood. It immediately conjures up the image of the expert archer in green tights and matching green hat leveling revenge on the wealthy to benefit the poor in Sherwood Forest. I can only assume that Robinhood’s founders, possibly in their early more benevolent days, thought that name would help convey the image of pushing back against Wall Street for the benefit of the smaller investor. Now that I can get on board with. This has always been the ethos around the blooom office and across our community of clients. At some point along the way though, Robinhood must have lost sight of the intention of their name and instead became laser focused on encouraging, if not incentivizing, harmful short-term speculation and in their wake, managed to turn the stock market into legalized gambling in the palm of your hand.
Robinhood is now purported to be worth somewhere in the vicinity of $20 Billion, as of a few months ago.
But then again, MGM, the Wynn and Caesar’s Palace are all multi-billion dollar enterprises as well. Gambling and the lure of an easy quick buck by the flip of a hand, turn of the dice or now, the click of a button on your smartphone have always and will always be too tempting for many folks to avoid. Never mind the millions of people that have ruined themselves and their families over gambling addictions and now, I fear, this powerful lure is being brought to the stock market under the guise of actually helping people. Heck, at least the casinos in Vegas never purport to be “helping” their customers with their retirement savings!
If you aren’t familiar with Robinhood, I will do my best to explain their platform. Essentially, they have made their name in the stock trading business by telling everyone that they offer commission free trading. That used to be a cool marketing feature before every legitimate firm (Schwab, Fidelity, E-Trade, etc) started offering commission free trading as well. The problem with this “free trading” moniker was that although Robinhood’s customers didn’t pay a specific line item commission for their trades – please don’t think for a second that Robinhood wasn’t profiting off their customers trades. Their business model was to earn small fees for directing their customers orders to certain market makers and exchanges that compensate Robinhood for these orders. The term is called Payment for Order Flow (PFOF). Robinhood certainly is not the only firm receiving their revenue through PFOF – they just became the poster-child for this due to them beating the drum of free, free, free. Remember what your Mom or Dad used to say….if it sounds too good to be true (free) then it probably is too good to be true! Robinhood is/was definitely not offering commission free trading out of the kindness of their hearts… please remember they are a .com and not a .org. Or if you pay nothing for the service (Facebook, Twitter, Google) then YOU are the product. (I’d be remiss not to mention that blooom does indeed offer a free analysis. For those of you wondering, “Is blooom’s analysis really free?” Check out the linked blog.)
At the end of the day, I have very little issue with Robinhood trumpeting free trades while making their revenue off their clients order flow (maybe it would have been better if they were at least a bit more transparent with their customers about their revenue model). But what I take great exception to is how they have turned the stock market into some form of the casino roulette wheel, using gamification to profit from the most detrimental investing behaviors. Only this time, I worry, the stakes may be even bigger. Las Vegas won’t let you gamble your investments on the blackjack table, but Robinhood has become a multi-billion dollar company by encouraging their customers to do just that. With the click of a few thumbs on your smartphone you can wager any amount in your account (maybe even more if you are approved for margin trading) on something like Gamestop – a company that appears to be headed in the same direction as Blockbuster. Hey but guess what, at least you paid zero commission to lose $50,000, that is cool, right?
Just as the sophistication has evolved at companies like Facebook, Twitter, and Google, in terms of capturing and monetizing your data and behavior – Robinhood has taken this same model and become experts at knowing how to subtly and opportunistically encourage you to place more and more trades with absolutely no regard as to whether you make money or lose money. At the end of the day, they just want you to keep trading.
I don’t fault Robinhood for trying to build a big business, clearly they have done so quite successfully. I just wish they would be more up-front about their true intentions when it comes to something as important as their clients’ life savings. Stop beating the drum of “helping” their clients and call it what it is – a unique way to legally gamble without the stigma of walking into a smoke-filled Vegas casino.
The information is provided for discussion purposes only and should not be considered as advice for your investments. The information does not represent a recommendation to buy or sell securities. Please consult an investment advisor before you invest.
Published on March 1, 2021