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Robinhood: What Went Wrong? - YouTube
Channel: Wisecrack
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this video is brought to you by keeps
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[Music]
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what's up wisecrack michael here the
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game stocks debacle captivated the world
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because
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it showed that apps like robin hood have
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given us normies a collective and
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unprecedented power and influence over
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the stock market
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until it didn't robin hood interactive
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brokers and i believe e-trade came out
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and we're limiting
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the ability to buy stocks through their
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app so limiting going after gamestop
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amongst the chaos and to the outrage of
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its users robin hood and other apps like
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weeble and td ameritrade
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temporarily stopped people from being
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able to buy shares of certain companies
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after this happened subreddit wall
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street bets tweeted an
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outrage that individual investors are
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being stripped of their ability to trade
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on the robin hood app meanwhile hedge
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funds and institutional investors can
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continue to trade as normal
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a lawsuit was filed accusing robin hood
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of purposefully willfully and knowingly
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removing the stack gme from its trading
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platform in the midst of an
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unprecedented stock rise
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thereby deprived retail investors of the
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ability to invest in the open market
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this all raises some pretty cool
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questions robinhood promises to
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democratize finance to put
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power in the hands of the people but
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does it really
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let's find out in this wisecrack edition
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on robinhood what went wrong
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and before we continue i want to shout
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out this week's sponsor
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off your first box now back to the show
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scholars
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journalists and finance nerds alike
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argue that trading apps like robinhood
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make investing money accessible to
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everyone
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it's even in robinhood's mission
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statement to democratize
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finance and to do it for free in the
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pre-app days it wasn't possible to go to
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war with a hedge fund from the comforts
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of your home before the popularity of
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trading apps and online brokerages like
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e-trade
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the small percentage of people who
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wanted to invest and buy individual
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stocks would have to go to a library
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read up on finance and research company
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financial reports to help them decide
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what stocks to buy
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day traders would call up voice brokers
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who were either on the floor of the
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stock exchange or had access to
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expensive stock ticker machines called
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quotrons
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and asked them to execute the trades for
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a fee in some places like the new york
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stock exchange you can still shout such
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requests at your broker
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but most people don't have time for that
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in short the ability to buy a stock for
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four dollars and sell it for five
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dollars on the same day
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was pretty rare for the normal
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population and often reserved for the
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pros
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most normal people who invested in the
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market went through an institutional
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investor
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an organization specializing in
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investing other people's money they
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would manage a diversified stack
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portfolio for you
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if you're lucky enough to have a 401k it
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probably works like this
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but most institutional investors require
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you to put in a minimum amount of money
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usually in the thousands rendering them
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inaccessible to lots of people
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basically if you wanted to go to the
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moon with an individual stock at this
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point
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you needed a solid stack of cash no
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offense but you wouldn't have been and
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still
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aren't of interest to many traditional
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brokers as a client because small
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investments usually don't bring in big
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commissions and of course
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there were people like jordan belfort
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running around taking your money to
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invest in penny stocks
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you mailed in my company a postcard a
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few weeks back requesting information on
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penny stocks that had
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huge upside potential with very little
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downside risk does that ring a bell but
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with the advent of apps like robinhood
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people are suddenly able to build their
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own portfolios and invest in whatever
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they want with a tap on a screen
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want to buy 1 18th of a share of amazon
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and see what happens
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go ahead want to spend your last 5.52
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cents
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on your friends buddies uncle's weed
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company that just went public just swipe
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up to confirm
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with trades like this being so easy the
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number of individual investors also
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called
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retail investors increased dramatically
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in the past 10 years alone the percent
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of equity trading volume by retail
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investors nearly
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doubled from 10.1 percent to 19.5
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percent and with trading commissions
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going out the window
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on places like fidelity e-trade and
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robin hood it's easier than ever to take
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a shot at day trading or
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dump your spare change into the clever
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crevice stock this is
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all well and good but you may have
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wondered how exactly does robinhood make
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money when it's letting you trade for
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free the answer lies in something called
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payment for order flow and an
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explanation of it can help us understand
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that in spite of
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democratizing finance robinhood's
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primary customers are the exact same big
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financial players they are quote unquote
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disrupting payment for order flow is
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when big financial institutions also
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called
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market makers pay robinhood for the
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privilege of handling your transaction
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basically for a fee robinhood routes
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your order information
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through a hedge fund to execute the
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trade instead of sending it directly to
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a stock exchange
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think of order flow as a bunch of moving
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traffic
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your order leaves the robinhood app and
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heads towards its final destination the
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stock market
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in an ideal world we all want to get to
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the destination in the quickest way
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possible
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but instead of doing that big trading
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firm or hedge fund will pay to have the
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traffic diverted through them
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first this might seem fine and good like
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a traffic conductor merely directing
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some cars to where they need to go
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but it's maybe more accurate to think of
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it as set conductor diverting cars to a
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parking garage where their buddies can
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promptly rip off the drivers
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okay maybe a little extreme but it's
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important to remember that every
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transaction in the stock market has some
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theoretical winner
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and loser that is to say the buyer
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either bought the stock for what it's
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actually worth or the
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seller should have gotten more money
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when hedge funds go against hedge funds
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it's like a complicated math war to find
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information nobody has
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and buy stocks that are undervalued or
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at least sell
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overvalued stock to some sucker who
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doesn't know any better
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and that sucker is probably you as the
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wall street journal notes of companies
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who use payment for order flow
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they are willing to pay for order flow
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from online brokerages because they are
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less likely to lose money trading
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against individual investors than on an
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exchange
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where traders tend to be larger and more
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sophisticated that is
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you are less sophisticated aka money
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dumb
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it is quite literally like when your
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older brother told you your foil pokemon
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card was worth one dollar
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bought it from you and flipped it for
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fifty dollars while you might have cried
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and said it wasn't fair
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you also learned a timeless lesson about
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the inner workings of capitalism
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congratulations in the case of robin
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hood they direct your order to someone
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like citadel capital
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who knows they can get the stocks you
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want for a few cents cheaper and sell it
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to you
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splitting the profit with robinhood a
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few cents off every order
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might not seem like a big deal and when
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compared to a six or seven dollar
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trading fee
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it might even seem like a good deal but
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the ethics of it are still
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pretty sus so you're stealing
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uh no no you don't understand it's uh
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it's very complicated payment for order
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flow was pioneered by one
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bernie madoff you know the ponzi scheme
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guy it's
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literally how he made his fortune before
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the aforementioned ponzi stuff
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madoff made his name through bernard
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madoff investment securities which bond
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sold stocks on behalf of brokerage firms
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to encourage orders to come his way
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his firm would pay brokers a fee usually
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brokers with
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large bases of relatively
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unsophisticated retail clients
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now if stock trading is sophisticated 3d
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chess payment for order flow
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lets your opponent know what your move
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is ahead of time the key to the stock
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market for hedge fund managers is
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knowing things
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other people don't specifically by
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getting in a stock when it's still
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priced low before everyone else figures
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out how valuable it is thus driving up
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the price
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in the case of payment for order flow
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the orders of you or the wall street
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bets crowd
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are known to market makers literally
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before they happen
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that right there is valuable information
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to big hedge funds who can know what
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large groups of people are investing in
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before they actually do
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a harvard law review article from 1994
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notes concerns that the practice
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distorts incentives for brokers to serve
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the best interest of you
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the investor there were also concerns
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that it perverted the basic logic of the
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market
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specifically that the practice might
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foster oligopolistic concentration
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within the market of brokers and dealers
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during a senate hearing about our boy
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bernie one professor testified that the
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way madoff used payment for order really
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wasn't all that different from the way
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he lured
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feeder funds into his ponzi scheme it
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would not have been beyond him
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to pay the feeder funds under the table
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because
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for decades he had paid brokers to
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direct order flow to him
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and the two are not that functionally
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different in a letter about the robin
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hood game stock fiasco
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elizabeth warren notes that regulators
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have criticized the behavior as a
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conflict of interest
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while another called it legalized
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bribery and
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as warren notes citadel invested two
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billion dollars in melvin capital which
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famously lost
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over four billion dollars in shorting
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gamestop providing a very clear conflict
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of interest between citadel and its
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business partner robin hood
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the chairman of the sec talked openly
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about his disdain for the practice as
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far back as 2001
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but admitted it would be seemingly
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impossible to ban i am not
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a great proponent of payment for order
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flow it's
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always troubled me the imperfect
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solution he thought
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was to openly disclose the practice to
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customers there is no
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possible way really that we could
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effectively ban that kind of
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reciprocity uh
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i don't like it and i think the best way
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to respond to it
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is by seeing to it that it is disclosed
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anyway in december the sec fined robin
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hood 65 million dollars for not
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disclosing this to customers between
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2015
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and 2018 because even though payment for
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order flow is legal
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it's regulated so it's only legal to
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accept payment if the third-party
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brokers are buying and selling at rates
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better than or the same as the stock
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exchange and it must inform its clients
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in writing
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robinhood had really high order flow
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rates and never informed its users it
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was doing this
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and that information is still buried in
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the fine print of the thing you hit
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agree on the sec said it found that
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robin had deprived
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customers of 34.1 million dollars
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through its payment for order flow
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practices
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and just for the record plenty of people
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think it should be flat out illegal
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and have been fighting against it since
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madoff started doing it saul gets us to
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the basic truth
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robin hood's real customers aren't its
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users its real customers
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are hedge funds like citadel the
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investors like you
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are simply the product which brings us
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to the second sad reality of robin hood
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you're just not as smart as you think
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you are and neither am i
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part two you suck i'm just kidding we we
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love you
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study after study shows that even the
[668]
savviest investor
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can't perform better than the stock
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market average around 6.8 percent
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adjusted for inflation and sure
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people do better than that some years
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but they also do a lot worse during
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other years
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warren buffett famously wagered a
[681]
million dollars that no hedge fund could
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outperform the market
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and he won to put your dreams of getting
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wildly rich from day trading in context
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bernie madoff drew suspicion for
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consistently paying out returns of 10
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or above every year which before the
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ponzi scheme unraveled
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some people thought was too good to be
[696]
true he identified numerous red flags
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returns that were too good to be true
[702]
consistent gains over 10
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every year in bull and bear markets
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alike which is to say
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remember that magical number when some
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friend tells you about some
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totally legit opportunity that will
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double your money they're coming to hear
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kyle talk
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about how he turned 15 000 into over 3
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million
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the point is picking individual stocks
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is totally your personal prerogative
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and might even work out for you but
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statistically it's a very bad idea no
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matter how many youtube ads you see of
[729]
dudes and ferraris
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but robinhood plays on these dreams by
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making a user interface that treats
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investing like a very fun game
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sociologist adam hayes and a host of
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other scholars argue that this user
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interface is intentional it's designed
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to encourage
[743]
trading rather than discipline because
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that's how these apps make money
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robinho doesn't care if you win or lose
[749]
your stimulus check because it makes
[750]
bank by skimming a few pennies off every
[753]
trade you make
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hayes suggests that these apps
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purposefully exploit human propensities
[758]
to over
[758]
trade playing upon emotions like fear
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and greed and the thrill of gambling
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one study found that active customers on
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average check the robinhood app
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10 times per day often because they're
[768]
spammed with push notifications
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and for the average user the more you
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trade the worse you'll probably do
[773]
as we're beholden to so many
[775]
psychological traps while making trades
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that just aren't smart financial
[779]
decisions robin is designed to keep you
[782]
pouring money in so that it can keep
[783]
profiting off of your trades
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you get congratulated with confetti
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every time you invest
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you get free stocks when you sign up and
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refer friends
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every time you buy or sell anything you
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get notifications with fun emojis and
[795]
exclamation points
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actually this sounds awesome give me a
[798]
second
[800]
daddy's gonna be rich robin and founder
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beiju ba
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defends it pretty bluntly saying it
[806]
shares some of the mechanics with
[807]
gambling activities but the reason it's
[809]
different is because on average
[810]
you will make money through investment
[812]
in the stock market well if you go to
[813]
the casino on average
[815]
you lose money and that makes sense if
[817]
i'm using robinhood to buy safe index
[819]
funds
[819]
but not so much when i learn what
[821]
options trading is
[822]
and lose tens of thousands of dollars
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which if wall street bets is any
[825]
indication
[826]
happens all the time in one case a
[828]
reddit user managed to turn
[829]
five thousand dollars into a negative
[832]
fifty eight thousand dollar balance
[834]
thanks to something called a box spread
[836]
which he thought was a sure thing
[837]
twenty-year-old alex kearns took his
[839]
life after robinhood's easy access to
[841]
options trading went south he mistakenly
[843]
believed he owed the company seven
[845]
hundred and thirty thousand dollars
[847]
after making some bad trades but it's
[850]
still better than not being able to
[851]
invest at all
[852]
right right i'm i need to delete that
[855]
app immediately
[857]
fraud fraud alert i didn't my kid did it
[860]
kids
[861]
you could make that case but the apps
[863]
that giveth
[864]
can just as easily taketh away and they
[866]
do
[867]
even though better alternatives might
[868]
not seem obvious it's at least
[870]
important to see through the bulk that
[872]
this well-financed startup company
[874]
really has your interest in mind or
[876]
cares about anything resembling
[877]
democratic finance aside from a maybe
[880]
once in a lifetime victory for the
[882]
gamestone crowd
[883]
what's clear is that the game is rigged
[885]
individual investors still need to rely
[887]
on these platforms to execute their
[888]
trades but these platforms are beholden
[890]
to the market makers and the system
[892]
itself until we figure something else
[894]
out it seems like the hedge funds
[896]
will always win but what do you guys
[898]
think
[899]
do the pros of robin hood outweigh the
[901]
cons or are we all
[902]
destined to be suckers let us know in
[905]
the comments
[906]
big thanks to our patrons for all your
[907]
support hit that subscribe button like
[909]
you're clicking delete on your robinhood
[911]
account
[911]
and don't forget to ring that bell and
[913]
as always thanks for watching
[915]
later
[917]
[Music]
[924]
okay username santa claus
[928]
of datscrilla 420 that works
[932]
oh my i'm gonna be so rich never going
[934]
back to the studio again
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