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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

#41

Post by rl3 »

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…

http://blog.alphaarchitect.com/2015/03/16/shedding-light-on-...

Although that article reads like an ad for Interactive Brokers, it offers a bit of insight on the subject.

Namely how aggressive limit orders in an order flow situation will be less likely to fill in the face of desirable price movement, thus incurring an opportunity cost.

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

#42

Post by traviswingo »

szirka wrote: post #30
rl3 wrote: post #2

Nice, now hopefully they can deliver on a public API, short selling, and a desktop app.

I would be pretty surprised if they introduced short selling. There's no question that a good chunk of Robinhood's user base are novice investors. Those that do not understand short selling may land themselves into a lot of a hot water. There may be measures RH could take to prevent novice users from dangerous short selling plays. I'd be curious to see how they introduce it.

I actually emailed support about this a while back and was told it's on the roadmap.

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

#43

Post by mortehu »

lexo wrote: post #18

Robinhood will lend people money, so they can invest with that. Buying stocks with money that isn't yours. What could possibly go wrong here?

People do this when buying houses all the time, and often at a 5x or 10x margin, rather than just 2x. Even Vanguard supports this.

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

#44

Post by candiodari »

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?

Because when you buy shares on a platform you don't buy them yourself. You don't have an account at the exchange. The brokerage buys them on their account.

So let's calculate the fees. For a given stock, FCKD, the bid offer is $4.50, the lowest offer is $4.60. Transaction costs for this are $0.10 at the brokerage.

Investor A wants to buy a share, B wants to sell one, on the same brokerage. Okay let's see.

Brokerage does nothing (because the amount of shares they hold on the exchange for their clients doesn't change at all). So they don't pay anything for that either. No transaction fees, nothing.

A gets to buy the share, and has to pay the lowest offer + transaction costs for the share, or $4.70.

B wants to sell the share, and he gets to sell if for the highest bid, or $4.50, and in some cases another $0.10 in transaction costs.

So the brokerage "captures the spread", and of course the transaction costs. In this case they made $0.40 for doing ... nothing, no share was sold or bought.

This is the official story. Now in practice, this means that a rather large amount of value is "stored" at the brokerage. It is a long accepted practice in banking that only a percentage of the stored value is kept. So while you might think that as a result of this transaction the bank/brokerage makes $0.40 in profit, but it doesn't. Assuming 10% reserve ratio (which is on the high end, usually either 2 or 4%). It makes (100% - 10%) * 2 * $4.55 + $0.40, and pays that out to it's shareholders/managers/... (twice, because once in cash, one in a share)

Now you might think that's where it stops. Well, not quite. They then go to another bank, and they say "we are holding an asset worth $X on behalf of our customers, can we borrow against that ?", and the next bank say "sure ! if we can do the same". So bank A gets a 2 * $4.55 debt at bank B, and bank B gets a 2 * $4.55 debt at bank A. Since this also counts as reserves, they then only keep 10% of that money actually available, and pay 90% out to their shareholders.

So now the bank has paid out (100% - 10%) * 6 * $4.55 + $0.40 to it's shareholders.

Needless to say, keeping this whole situation stable if the market were to gasp drop even slightly is more than a little tricky. Hence, "too big to fail".

That's why you want to be a bank. This is the reserve currency system we currently work with.

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

#45

Post by rl3 »

GeneralMayhem wrote: post #38
szirka wrote: post #30

Earlier quoted context omitted.

I would be pretty surprised if they introduced short selling. There's no question that a good chunk of Robinhood's user base are novice investors. Those that do not understand short selling may land themselves into a lot of a hot water. There may be measures RH could take to prevent novice users from dangerous short selling plays. I'd be curious to see how they introduce it.

They could introduce put options, at least.

Just so they offer some form of betting against the market. I don't care how.

Creating beta-neutral systems with Robinhood would then be possible.

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

#46

Post by brianwawok »

drzaiusapelord wrote: post #20
joshdance wrote: post #6

Earlier quoted context omitted.

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

Lets say you're unsophisticated. You say "I like my 1080ti, so I'll buy some NVIDIA stock." I'm a tech stock expert, I know NVIDIA is on a downward slope because its over-valued right now. I tell you "Sure kid, here's a promise for 100 shares at today's price of $50 each." I take your $5,000. Everyone is happy. Joe Investor doesn't actually have the stock in his possession just yet. I buy the stock myself a few days…

Well, I don't think this is a legal use of order flow (waiting days to make a purchase), but the analogy is kinda sorta on the right path.

Reality is more like "I know an order for NVIDIA is going to hit at $50, but I see it for sale for 49.9998 all over the place, I can go scoop some up at 49.9998 and put for sale at 49.9999 and make some money.

But then real reality is a step more complicated about when it is legal to do this vs not (front running is not legal, but things that are similar can be), and dark pool vs not, and you are way past what I know ;)

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

#47

Post by scurvy »

supster wrote: post #26
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…

True, but all major retail brokers allow investors to trade on margin (and charge you interest on it), so this is nothing new.

And that interest is tax deductible

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

#48

Post by mr_turtle »

supster wrote: post #19
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…

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.

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

#49

Post by wufufufu »

pillowkusis wrote: post #12

Pretty skeptical about the value here. >A Gold subscription lets users borrow up to double the money in their account to trade on margin with leverage Users pay money to be loaned money? How is this different than a microloan service? >Robinhood also earns money from rebates its gets for directing its order flow to broker dealers That means, presumably, the dealers are profiting in some way by handling trades from in…

Gold subscription is a fixed monthly cost whereas microloan services are interest based.

https://support.robinhood.com/hc/en-us/articles/214681823-In...

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

#50

Post by rl3 »

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…

>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 enough that the employment of margin and the leverage it affords is simply mundane and considered a cost of doing business.

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