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Robinhood stock trading app confirms $110M raise at $1.3B valuation

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Re: Robinhood stock trading app confirms $110M raise at $1.3B valuation

#111

Post by jtraffic »

x2f10 wrote: post #62

I've been interested in Robinhood for some time. Does anybody here have experience with the app (good or bad) they can share?

I've been using it for a while. I think it's best for longer term positions (2+ years at least). I realize it's ironic, because in theory, I could trade all the time with Robinhood, but I find that I don't do that. (Though that may be because I've learned over time that trading often is difficult, a recipe for me to lose money, and draining.)

It's really just good, from the customer perspective. It's the brokerage that needed to exist.

My uncle, who lives off of trading, gave me his transaction list and I saw that like 12% of his profits were eaten up by trading fees. Ouch.

I think more sophisticated individual investors don't jump on because you can't trade options. For me, that's a good thing, I'm not tempted to speculate.

Re: Robinhood stock trading app confirms $110M raise at $1.3B valuation

#112

Post by jessriedel »

chollida1 wrote: post #11
jessriedel wrote: post #3

> Robinhood also earns money from rebates its gets for directing its order flow to broker dealers, though Bhatt insists “We do not sell data to anyone. We have never sold data to anyone. We just do not do that.” Just so everyone knows, order flow from unsophisticated investors is considered a valuable resource because, when filling it, you know that you're more informed than the person trading against you.

I don't think that's a very good way of putting it. I'd say its more correct to say orders from retail investors are valuable because: 1) They tend to be a relatively equal number of buys and sells. This is figurative manna from heaven for market makers 2) They don't mind crossing the spread, also a gift for market makers. 3) They can't really move the spread and probably least importantly...... 4) they aren't tradin…

Can you quantify why you think 1-3 are more important than 4?

Re: Robinhood stock trading app confirms $110M raise at $1.3B valuation

#113

Post by rl3 »

scott00 wrote: post #107
rl3 wrote: post #50

Earlier quoted context omitted.

> Even if you are a professional trader you'll take a bath on margin over the long run. Huh? It would be difficult to find a professional trader that doesn't ​ trade equities on margin. They pretty much have to due to the way the settlement process works. The returns of a professional trader depend on many factors, including available capital and the capacity or manner in which the trader operates. That said, they're…

Typical margin rates for professional traders are far below 5%. See https://www.interactivebrokers.com/en/index.php?f=1595 . And IB is basically the most expensive professionally focused brokerage. If you've got a million bucks you can probably get Fed Funds + 50 basis points.

Thanks for pointing this out. 5% is probably more representative of typical major retail margin rates. I removed the statement in question.

Re: Robinhood stock trading app confirms $110M raise at $1.3B valuation

#114

Post by harryh »

joshdance wrote: post #6
jessriedel wrote: post #3

> Robinhood also earns money from rebates its gets for directing its order flow to broker dealers, though Bhatt insists “We do not sell data to anyone. We have never sold data to anyone. We just do not do that.” Just so everyone knows, order flow from unsophisticated investors is considered a valuable resource because, when filling it, you know that you're more informed than the person trading against you.

Can you extrapolate on order flow from unsophisticated investors? Why is it valuable?

It has to do with how people/companies called "market makers" make money. Let's say you want to buy a share of stock. Generally you don't end up buying it from another random person who happens to want to sell a share of stock at the exact same time. There might not even be another random person that wants to sell right now.

Instead you are likely buying from a market maker. For pretty much any stock there are many market makers who are offering to both buy stock and sell it at the same time. The trick is they'll buy for, say, a penny less than they are willing to sell for. So if they can keep their buys/sells even they make a penny for every share they move. They're middle men.

Make sense so far?

OK, but there is a problem. Say that REALLY BIG HEDGE FUND has proprietary knowledge that some company is probably going to go up in value soon. So they go out and buy a lot of stock from a market maker. And then the stock goes up. Uh oh. The market maker sold a bunch of stock at PRICE and now instead of buying an equal amount at (PRICE - 1 penny) and making money the market maker has to buy an equal amount at (PRICE + the_stock_went_up_amt) and loses money.

Basically market makers would prefer not to trade with sophisticated investors making big trades with proprietary knowledge. When that happens and they lose it's called getting picked off. They want to trade with people like you and me who aren't trading because of any special knowledge but because we're just putting our regular $1,000 in our 401k for the month.

Retail brokerages like Robinhood are a good source of these types of trades.

(As with a lot of topics, there is a lot of nuance and detail underneath this relatively short description, but this is the gist of it.)

Re: Robinhood stock trading app confirms $110M raise at $1.3B valuation

#115

Post by lend000 »

AndrewKemendo wrote: post #16

“But ‘how are you going to make money long-term?’ has been a question mark” Bhatt says. Gold has answered that question.” A Gold subscription lets users borrow up to double the money in their account to trade on margin with leverage Wow, so that's effectively opening up new easy to get credit vehicles for unsophisticated investors. How could that go wrong? Even if you are a professional trader you'll take a bath on m…

Wouldn't want to enable people to make their own decisions with their money, would we? The fact that you have to make a paid account to use leverage (whereas you can trade indefinitely for free) is deterrent enough for most people who do not already actively manage their investments.

I think Robinhood is doing a great service -- I just wish they would expose a better API.

Re: Robinhood stock trading app confirms $110M raise at $1.3B valuation

#116

Post by harryh »

arcanus wrote: post #5
jessriedel wrote: post #3

> Robinhood also earns money from rebates its gets for directing its order flow to broker dealers, though Bhatt insists “We do not sell data to anyone. We have never sold data to anyone. We just do not do that.” Just so everyone knows, order flow from unsophisticated investors is considered a valuable resource because, when filling it, you know that you're more informed than the person trading against you.

Great catch, missed that during the article skim. Doesn't this also enable front-running? Regardless, this is useful info for HFT funds, right?

Front running is illegal. Robinhood is regulated by the SEC. If they were front running they would get caught and shut down.

Re: Robinhood stock trading app confirms $110M raise at $1.3B valuation

#117

Post by scott00 »

malanj wrote: post #10

My understanding is that if you trade through a platform like this, that's monetizing through order flow, you're getting screwed by HFTs. I.e. AFAIK Robinhood doesn't need to be selling the data to HFTs (which they don't do), for you to get screwed by them. Anyone here in the space who can quantify the "hidden" cost you incur because of more sophisticated traders trading against you? It feels like working with a brok…

You'll actually get better fills from HFTs operating on purchased order flow than you would if you went directly to market. Also, there's nowhere you can go that won't sell your order flow on undirected orders. But if you don't like it, you can always send it directly to a particular exchange, regardless of who your broker is.

Re: Robinhood stock trading app confirms $110M raise at $1.3B valuation

#118

Post by mywittyname »

mr_turtle wrote: post #48
supster wrote: post #19

Earlier quoted context omitted.

All the major retail brokers sell their order flow, so you generally eat this cost no matter who you use. In addition, the hidden cost is fractions of a penny on the dollar (so still better than the $5-7 a regular broker charges per trade anyways).

What's the long play then? Surely Robin Hood isn't absorbing the the transaction fees as a loss leader just to increase it's user base? If that's the play, any other company can emulate that.. The incentive seems to be this may cause a price war with existing brokerages.

The long play seems to be deliver retail stock trading at the lowest possible price. There's a lot of money to be made even if they don't try to maximize profits.

Plus, I bet they are banking on the existing brokerages not responding until things are too late for them. Most brokerages offer free trades and other perks, but limited to "high-value" customers. They won't drop trading fees until they absolutely have to, but by that time, their low-value customers will all be gone.

Re: Robinhood stock trading app confirms $110M raise at $1.3B valuation

#119

Post by scott00 »

mr_turtle wrote: post #48
supster wrote: post #19

Earlier quoted context omitted.

All the major retail brokers sell their order flow, so you generally eat this cost no matter who you use. In addition, the hidden cost is fractions of a penny on the dollar (so still better than the $5-7 a regular broker charges per trade anyways).

What's the long play then? Surely Robin Hood isn't absorbing the the transaction fees as a loss leader just to increase it's user base? If that's the play, any other company can emulate that.. The incentive seems to be this may cause a price war with existing brokerages.

There aren't actually any transactions fees to absorb. Wholesale brokers (think Citadel) pay retail brokers (think Robin Hood) for the privilege of executing their orders.

Re: Robinhood stock trading app confirms $110M raise at $1.3B valuation

#120

Post by theseatoms »

lend000 wrote: post #115
AndrewKemendo wrote: post #16

“But ‘how are you going to make money long-term?’ has been a question mark” Bhatt says. Gold has answered that question.” A Gold subscription lets users borrow up to double the money in their account to trade on margin with leverage Wow, so that's effectively opening up new easy to get credit vehicles for unsophisticated investors. How could that go wrong? Even if you are a professional trader you'll take a bath on m…

Wouldn't want to enable people to make their own decisions with their money, would we? The fact that you have to make a paid account to use leverage (whereas you can trade indefinitely for free) is deterrent enough for most people who do not already actively manage their investments. I think Robinhood is doing a great service -- I just wish they would expose a better API.

On the flip side, we do a terrible job of educating young people about even the basics of personal finance (in the US).

I was lucky enough to have a father who ran a small business, so I got an early education in these matters. But that's the exception to the rule.

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