Robinhood Week 2: How Does The App Make Money?
Week 2 Results: Volatility works in my favor
July 15 2020. My portfolio notched another 7% profit this week, thanks to Moderna, the vaccine maker., whose stock skyrocketed after announcing it was closing in on the first successful COVID-19 vaccine. I bought Moderna at $3 before the news and sold it at $4.12 a week later, for a 35% return. As others poured in, I banked my profits.
Volatility is the name of the game these days. My spiky performance chart is a stark reminder that juicy profits can disappear as quickly as they’re made, and I’m not waiting around to test that wisdom: When there’s a windfall on my books I’m banking it.
Shares in vaccine maker Moderna shot up after the company said it’s closing in on a COVID-19 vaccine
My 7% return this week follows a 14% rise from my first week of trading. A 20%+ return in two weeks is summa cum laude by any measure, but all this volatility is detracting from any triumphant rush of unadulterated profitability. My Himalayan-esque chart is a poignant reminder this game is best played over the course of months and years, if not decades, for honest results.
Omg it’s the coolest trading app, like, ever
Robinhood
Robinhood made headlines last week in this New York Times article https://nyti.ms/2DorkW7, highlighting the dark side of day trading. Young people in particular are falling prey to unscrupulous investments, which some critics say the app encourages by offering easy access to sophisticated investment products like options trading and margin loans. Whether Robinhood has changed the playing field of investing for better or worse is a complicated issue, but I think it’s fair to say anyone like Richard Dobatse, 32, who blames Robinhood for his losing $860,000, is treading on fragile ground. Anyone willing to trade that sort of cash isn’t in a position to plead naivity in financial matters.
More curious was the article’s discussion of how Robinhood makes its money. Institutional brokers pay Robinhood a fee for the right to transact customer trades, both on the buy and sell sides. This is the same as other big online brokerages like E*trade and Schwab, but Robinhood charges Wall Street brokers 4-15 times more, according to the Times’ findings. They can do this, apparently, because Wall Street brokers earn more from Robinhood users than at other online brokers. As a result, Robinhood’s profit margin per dollage is massively higher. Like astonishingly so. Check this out:
Robinhood investors’ style of trading is driving the company’s profits
It is unclear to me if this is because Wall Street earns a better spread from Robinhood trades (the ‘spread’ is the difference between the price a broker buys/sells a stock to a Robinhood user and the price he buys/sells the stock for in the open market); or is it because Robinhood users make smaller trades more frequently?
The graph has me wondering what this means for me as a Robinhood investor. Does the cute app and easy access to the stock market come with a higher price tag? Am I willing to pay it?
Oo-de-la-lly! ‘Commission free’ trading for everyone!
Robinhood has opened the investing floodgates to smaller investors, and that’s a good thing. But when it comes to personal finance, smaller players like me rarely benefit from the same pricing as wealthier investors with more money to put to work. As frustrating as it can be, it also makes sense: Bigger pots of money mean bigger sized trades and better pricing. I can’t believe Robinhood has somehow managed to capitalize on the value of smaller investors in a way none of their bigger competitors has been able to do in the past. Maybe I’m wrong, and more power to Robinhood for democratizing the market for smaller investors with the use of technology.
Either way, I wish there was more readily available information about the spreads, and profits, earned by Wall Street - and how these spreads compare with the prices on offer to individual investors like me through Robinhood and other retail brokerages. More to come on this issue.