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Robinhood and How to Lose Money

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Re: Robinhood and How to Lose Money

#111

Post by imustbeevil »

SpelingBeeChamp wrote: post #69
vmception wrote: post #47

Earlier quoted context omitted.

All additional participants to the options market makes options more liquid. No, I am not quantifying Robinhood users, only elated to see one chisel helping narrow the bid and ask spreads across expiration dates. Shouldn't bother you that much.

I don't know... that's certainly what I thought you were saying, and I don't like being misled.

I read it as: regardless of Robinhood's volume, their popularity has caused other organizations to restructure their investment opportunities, and that has benefited all users.

It's the same as Tesla making electric cars popular. They don't sell the most cars, but you'd have a hard time arguing they haven't moved electric vehicles forward.

Re: Robinhood and How to Lose Money

#112

Post by romanovcode »

tptacek wrote: post #110
dlivingston wrote: post #5

Robinhood was an absolute game changer for me. Outside of my 401k (and a Viacom stock my mom bought me 20+ years ago to teach me about the stock market), my investment portfolio was nil. I now maintain a growing but conservative portfolio of stocks thanks partly to the frictionless UX of Robinhood - but, primarily, to the addition of fractional shares. To pay $1500 for a share of TSLA? When I could put that precious…

It's the beginning of the democratization of the market because they made it easier and more attractive for you to buy meme stocks?

Yes

Re: Robinhood and How to Lose Money

#113

Post by totalZero »

JumpCrisscross wrote: post #41
hftrader998 wrote: post #34

I work in the industry and these kind of articles are always full of bad information about order routing. * Robinhood order flow is informed and toxic like all other brokerages. Taking the opposing side of all Robinhood trades would cause a broker-dealer to lose all of their capital very quickly. * The "bad prices" the "novices" are trading at, are in fact, the same market price that all participants trade at (at or…

> Taking the opposing side of all Robinhood trades would cause a broker-dealer to lose all of their capital very quickly Why? This is literally the definition of order flow purchasing and market making. Flow amidst spreads creates profits. The non-cynical explanation for Robinhood’s flow being attractive is in the law of large numbers. Robinhood’s trades are tiny. That means buying their flow gives one lots of small,…

To add to what you're saying about less chunky risk...people in the market-making industry also prefer to cross with retail customers because there is less negative selection bias. Retail customers are generally less sophisticated traders and they are less likely to trade fast alphas, insider information about pending news, etc.

That said, there's money to be made in providing liquidity on chunky trades, as long as the price is right.

Re: Robinhood and How to Lose Money

#114

Post by abduhl »

WalterBright wrote: post #81
Melting_Harps wrote: post #61

Earlier quoted context omitted.

> Sure it does. I've seen lower middle class people become millionaires that way. Of course, one needs the discipline to not succumb to spending it on a car/house/divorce, and the intestinal fortitude to not panic sell when the market tanks. I think he was referring to the adrenaline rush, not the potential to make life changing amounts of money playing the long game, which clearly doesn't yield the same 'rush' he wa…

I don't get a rush from gambling, because I know the math and know I am doomed to lose. Stocks, on the other hand, have an upward bias. Of course, there could be events like losing a war where your portfolio will be vaporized, but in such cases you're going to lose anyway, so there's no point in worrying about such catastrophes.

Alternatively, you don't get a rush from gambling because you have a lack of imagination on how you can beat "the math" and so have never gotten the rush from your plan working out (at least in your small sample size and from your perspective).

Re: Robinhood and How to Lose Money

#115

Post by totalZero »

JumpCrisscross wrote: post #39
vmception wrote: post #36

> In the first three months of 2020 ... [Robinhood users] also bought and sold 88 times as many risky options contracts as Schwab customers, relative to the average account size > And let’s remember that options are far more illiquid and opaque than standard equities. Okay, first of all the growth of the options market is AMAZING, and their utility increases the more liquid the market is. So massive new groups of tra…

> new groups of traders with a low barrier of entry make options much more liquid Are you claiming Robinhood users are responsible for a significant fraction of option market liquidity over the past year? Because that’s categorically wrong.

I think it's reasonable to suggest that option activity among retail clients has increased over the past 12 months. Brokerages are reporting record levels of new account sign-ups, and many people are sitting at home trying to find ways to pass the time profitably. Obviously it would be nice to see some evidence about this, but I don't know where I would go to find that information publicly.

Options don't trade as frequently as cash on most names, so you don't actually need people to buy and sell in order to make the market tighter. They just have to place orders that tighten the spread. Price discovery becomes easier even if you only have one additional order placed inside the prior NBBO, because it affects the fit of the vol surface.

Re: Robinhood and How to Lose Money

#116

Post by totalZero »

ping_pong wrote: post #49

I don't think Robinhood is doing anything wrong. They are making things easy, which it should be. They still need to use the NBBO price, so it's not like they are making things more expensive for traders. But I've seen this exact same pattern during the dot com boom. Lots of people making a ton of money day trading. This usually culminates in a heavy crash and many people are completely wiped out. /r/wallstreetbets i…

Their platform has had outages during periods of extreme market volatility, and they allow unsophisticated traders to take option risk that they may not readily understand.

/r/wallstreetbets doesn't have any fiduciary responsibility to anyone. RH does.

Re: Robinhood and How to Lose Money

#117

Post by totalZero »

raverbashing wrote: post #109
hftrader998 wrote: post #34

I work in the industry and these kind of articles are always full of bad information about order routing. * Robinhood order flow is informed and toxic like all other brokerages. Taking the opposing side of all Robinhood trades would cause a broker-dealer to lose all of their capital very quickly. * The "bad prices" the "novices" are trading at, are in fact, the same market price that all participants trade at (at or…

Question, does RH (or other brokers) do internal clearing/matching of orders? That is, they clear the purchases/sales internally if they can, going to "the stock market" only if they can't fill it? Or that is a big no-no for brokers?

They could do that, but it would be detrimental to their business. They (or their partners who pay for order flow) are better off filling the selling customer on the bid, and the buying customer on the offer. If this sounds unscrupulous to you, remember that the market-maker and order-router have a right to make a profit from their business, and wouldn't be able to operate without making a profit.

Either way, they would have to print the trade to the tape, so it's part of "the stock market" regardless.

Re: Robinhood and How to Lose Money

#118

Post by leetcrew »

pjc50 wrote: post #68
WalterBright wrote: post #38

Earlier quoted context omitted.

> Steady investment will never give you that. Sure it does. I've seen lower middle class people become millionaires that way. Of course, one needs the discipline to not succumb to spending it on a car/house/divorce, and the intestinal fortitude to not panic sell when the market tanks.

> needs the discipline to not succumb to spending it on a car/house/divorce Apart from the 2008 boom/crash, owning a house has been a great way for the middle class to become asset millionaires. I knew someone in London who was routinely out-earned by the asset appreciation on their own house. Besides, inflation has rather moved the bar for "millionaire" to every middle class couple with a house and two retirement fu…

> Apart from the 2008 boom/crash, owning a house has been a great way for the middle class to become asset millionaires. I knew someone in London who was routinely out-earned by the asset appreciation on their own house.

there are certainly some hot real estate markets where houses appreciate a huge amount over a short period of time. in hindsight, it looks like a no-brainer to purchase a house in these areas. on the flip side, maybe someone builds a huge apartment complex on your street right before you wanted to sell and the value plummets. if you look at the whole american housing market though, there is a ton of variance but in the long term it seems to barely outpace inflation. [0] once you factor in maintenance and property tax, it doesn't really look like a good investment vehicle. imo, buying a house is best looked at as an alternative way to pay for housing which may or may not be superior to renting.

> Besides, inflation has rather moved the bar for "millionaire" to every middle class couple with a house and two retirement funds..

for sure, a million dollars just isn't that much anymore. if you follow the 4% rule, it gives you about $40k to spend every year. which is basically what it costs me to live in a studio in a relatively nice part of town as a single twenty-something.

[0] https://static01.nyt.com/images/2006/08/26/weekinreview/27le...

Re: Robinhood and How to Lose Money

#119

Post by JumpCrisscross »

biql wrote: post #97
dmoy wrote: post #11

I do not get the appeal of largely gambling with your money on RH instead of just passively investing for the long term. Maybe with some of your money, but not to the extent a lot of people are doing. People want to get rich quick I guess? Even if you do want to do that, why not pick a brokerage which doesn't take as much from you, like IBKR? It's just a surreal situation to me.

Based on my limited experience, you enter during the bull market, make some easy wins, and start wanting to bet more and more because winning feels so easy. I could totally feel this process when I bought a few option calls that over a few months made 10x. That felt fantastic at first but shortly after I noticed that I started to blame myself for not taking more risk because on the hindsight, it felt so obvious that…

> I started to blame myself for not taking more risk because on the hindsight, it felt so obvious that the price would go up

This is a gambler’s mindset. That’s fine. I enjoy playing poker with friends, and when I do so, I reinforce those neural pathways with respect to cards.

But I’m risk limited, socially and personally, in that setting. Robinhood is different. There is no social pressure to limit how much money one puts in a trading account. So when the UX pushes one to gamble with thousands of dollars, and to reinforce gambling over investing pathways when it comes to the markets, we end up with a self-destructively trained generation.

That’s troubling. Robinhood can be used responsibly. But even taking most of the comments on HN, it seems to make that difficult.

Re: Robinhood and How to Lose Money

#120

Post by JumpCrisscross »

toastal wrote: post #101
renewiltord wrote: post #27

Earlier quoted context omitted.

Same with gambling, I imagine. The utility of 107% guaranteed of this dollar is less than a less than one in a billion chance at a billion dollars. The net expected value of the dollar doesn't have to be positive. Losing $2000 over 80 years of your life is certainly worth is a non-factor for many. Add in the fact that RH has reduced barriers to entry to investing. It's way easier to get RH and buy VOOG than to get Va…

I know a couple of people that did just that. With the lowered barrier to entry (free), people have been able to buy say a single share per paycheck instead of having to hold on for months to get a cost effective amount of cash to make it worth the trade. Not only this, but you can effectively dollar cost average your way into the market to minimize losing to bad timing. The trade fees were always absolute and not a…

> people have been able to buy say a single share per paycheck instead of having to hold on for months to get a cost effective amount of cash to make it worth the trade

This is the problem solved by ETFs. Small amounts of money buying lots of diversification.

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