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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

#261

Enticing millenials to "trade" individual stocks is quite possibly the most anti- Robinhood thing I can think of. The only thing more ironic would be to encourage them to take on margin...which as it turns out is literally Robinhood's business model. 99% of users on the platform will ulimately end up participating in a direct transfer of their own wealth to a more sophisticated trader or algo (i.e. The banks and hedg…

Out of my own ignorance on the subject of "buy some index funds": what happens when 50%, 75% or 90% of the market buys index funds? How will stocks be priced properly if no one is trading them directly?

Okay, there's two parts to this: "in theory", and reality.

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Yes, you need somebody to listen to the news, crunch numbers, and then actively trade stocks in order to set an accurate price. But what matters here isn't the percentage, it's the absolute number of active traders, and their analysis "skill". Let's say you start with 50k professional bankers and 50k totally passive etf investors like you and me. Let's say that the passive investors buy/sell based on events that are totally uncorrelated with the market; they buy small orders of VTI every once in a while when they have a bit of extra cash, and they sell large blocks when they experience major life events like buying a house or having a kid. In other words, their effect on prices is random. Also let's assume that new passive investors are introduced into this system gradually, and that we're taking a "long term" view of everything. In this case, having another 100k, or 500k, new passive investors riding the wave of market growth doesn't change anything.

On the other hand, going back to our 50k/50k split, if you add another 100k poorly-performing analysts into the mix, e.g. uneducated consumers day-trading on emotion instead of news, they'll distort prices and create a bit of market inefficiency. Distorted prices are actually good for the above-average analysts, since they'll capture those extra pennies on their trades by more-accurately pricing stocks, but obviously bad for the below-average traders themselves--who will underperform the market--and the passive investors--who just buy/sell at market prices. You can kind of think of this situation as the etf investors paying an additional "management fee" to the good traders for their trading expertise.

So to summarize, the percentage of passive traders to total traders doesn't matter as long as the absolute number of active traders doesn't decrease, which won't happen because of the large incentives created whenever the system moves away from equilibrium.

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Now, in practice you'll never have completely passive investors. People will panic if they lose 10% of their investments overnight. Also, merely making a decision to invest in a particular index, like the S&P 500, is making an active choice to invest in Apple and McDonalds but not Tesla or thousands of other companies. So in practice a horde of passive investors buying Vanguard ETFs won't be completely neutral to the maket, but nonetheless the effect will be minor and--according to some people--perhaps even positive: http://www.businessinsider.com/passive-investing-makes-marke...

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

#262
post #153

Enticing millenials to "trade" individual stocks is quite possibly the most anti- Robinhood thing I can think of. The only thing more ironic would be to encourage them to take on margin...which as it turns out is literally Robinhood's business model. 99% of users on the platform will ulimately end up participating in a direct transfer of their own wealth to a more sophisticated trader or algo (i.e. The banks and hedg…

I wonder what percentage of their customer base is holding leveraged ETFs in a hope to get rich fast.

Nothing wrong with leveraged ETFs in principle. It's just another, slightly sub-linear, point on the risk/reward spectrum (ie. 2x/3x extra risk for slightly less than 2x/3x reward).

http://ddnum.com/articles/leveragedETFs.php

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

#263
post #114

Earlier quoted context omitted.

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 m…

It's worth noting that "sophistication" is not really the defining characteristic that makes retail order flow appealing, it's that it's non-correlated with other market events.

Retail flow is driven by things like needing money for purchases or having excess cash lying around.

Also retail flow is less execution cost sensitive.

That's what people mean when they say less sophisticated.

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

#264
post #203

Earlier quoted context omitted.

They're offering 2x margin, if I read the article correctly. So it's at best 1/3 secured, and probably a lot less than that if you need to make a margin call and try to collect. The gigantic risk to Robin Hood isn't that they'll have problems collecting occasionally. They can make up for that by fiddling with their fees to come ahead in the average case. It's that some big market move busts everyone at once and they…

Question: if they do go bankrupt then you still own your stocks, right? Do customers lose anything?

Robinhood Financial is a member of the Financial Industry Regulatory Authority (FINRA) and the Securities Investor Protection Corporation (SIPC), which protects securities customers of its members up to $500,000 (including $250,000 for claims for cash).

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

#265
post #34
post #22

Earlier quoted context omitted.

Might be questionable for investors (although trading on margin is extremely common) but gambling seems to make a ton of money for casinos, betting parlors and lottery boards, many of which have been around for "long term." Sounds more like you have moral/personal objection.

Casinos do not make money on borrowing for gambling, but on gambling.

https://wynn.nccreports.com/

Pretty common.

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

#266

Earlier quoted context omitted.

Question: if they do go bankrupt then you still own your stocks, right? Do customers lose anything?

Robinhood Financial is a member of the Financial Industry Regulatory Authority (FINRA) and the Securities Investor Protection Corporation (SIPC), which protects securities customers of its members up to $500,000 (including $250,000 for claims for cash).

Thanks!

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

#267
post #225

Earlier quoted context omitted.

I use Robinhood and NO ONE should use margin if they don't know what a Margin Call is. Having understood that, the effective yearly simple interest rate on my particular Robinhood margin (extra buying power) is only 5%/year so all I have to do is earn higher than a 6% return each year. This last year, my return rate was 14%, so that margin was worthwhile. If new to investing and you aren't sure what to invest in, I s…

It is probably helpful to explain individual investment vehicles and why it is sane for someone new to invest. VTI is an ETF that is basically representative of the entire US market. It is somewhat like holding a little bit of everything in the US market. If you have a bunch of cash sitting in a savings account, and instead want that cash tethered to the swings of equities market, VTI is a reasonable choice.

Thanks for this, can you explain the others the parent mentions?

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

#268

Earlier quoted context omitted.

> so your naiive "how people spend their money has no consequences" attitude Who said it has no consequences? People make bad decisions with money their all the time. In fact, many of the working class get their fix in real casinos, where there's no real chance of winning, even if you know what you're doing. But the parent argument is going in the direction of "people shouldn't have the freedom to use this type of pr…

But the parent argument is going in the direction of "people shouldn't have the freedom to use this type of product." No, my comment was in the direction of: "It's bad if your core business is getting unsophisticated people making trades (bets) with credit." It's the same reason we all know it's a bad idea to give someone a 400k mortgage on an ARM when we don't know if they can pay it back or not. Great way to find y…

[deleted]

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

#269
post #255

Enticing millenials to "trade" individual stocks is quite possibly the most anti- Robinhood thing I can think of. The only thing more ironic would be to encourage them to take on margin...which as it turns out is literally Robinhood's business model. 99% of users on the platform will ulimately end up participating in a direct transfer of their own wealth to a more sophisticated trader or algo (i.e. The banks and hedg…

>Enticing millenials to "trade" individual stocks is quite possibly the most anti-Robinhood thing I can think of. Listen, I understand that this is widespread, so I'm not targeting you specifically. But could we try not to use generalizations like "millenial", especially when they refer to vaguely defined generational boundaries? Your point is very strong, and stands on its own without making what I interpret as an i…

I used the term as it was originally intended, to describe an age group in the context of marketing a product. Robinhood's massive growth is being driven largely by their target of "millennials" (ie. young adults) coming to the platform without any allegiances to legacy brokers. The millennial customer base is one of the reasons cited for their valuation, since legacy brokers have had trouble gaining younger customers.

Any negative assumptions being read into the phrase "enticing millennials" are created by the reader's own bias. I think because so many articles are published complaining about "those damn millennials" we automatically assume anyone using the word is doing so in a negative way. I wasn't (I am a millennial myself).

Robinhood's strategy would be predatory in the context of any target market. If they were going after boomers, I would have said "enticing boomers."

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

#270

Earlier quoted context omitted.

Except it's credit, not their own money, so your naiive "how people spend their money has no consequences" attitude, doesn't hold water. That's the whole point.

Sure. It's Robinhood's money, which they're choosing to lend to their customers. So Robinhood can bear the consequences if the loan can't be repaid. (As others have pointed out, they have ways to protect themselves. Margin calls, forced liquidations, etc)

Is it Robinhood's money? Are they required to maintain reserves to cover 100% of the loans they issue? If not, then it's not their money.
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