Responsible Investment Officer
Since it was set up in 2013, Robinhood has gained a really strong foothold with 6 million – mostly young – investors who have joined the platform in the USA. The business takes its name from the legendary English folk hero Robin Hood and argues that it wants to "democratise" financial services. However, the fact that it has fitted out its offices with bullet-proof glass confirms that it is just a bit controversial, like its namesake.
Robinhood has been under severe pressure in the USA since Alex Kearns, a 20 year old student, committed suicide last month. His suicide note indicated that Kearns was convinced he had lost $730,000 by using the app. This staggering figure may well have looked like a loss but was in fact a temporary position in an option (a financial instrument that he didn't properly understand). His account actually had $16,000 in credit.
“If an investor can't understand, in plain English, what he's signing up for, then something's got to change.”
The tragedy led to a wave of criticism, with politicians demanding that the company had to do more to protect vulnerable youngsters. "If an investor can't understand, in plain English, what he's signing up for, then something's got to change", said Sean Casten, a Democrat member of Congress for Kearns' home state of Illinois, in an open letter to the company.
In response to Kearns' death, Robinhood promised to assess whether customers are eligible to trade more complex instruments and to make it clearer to customers what and how much they were trading. Robinhood has also postponed its launch in the UK indefinitely, despite 250,000 UK citizens having already signed up for the platform.
The measures, however, oppose the earnings model of trading platforms like Robinhood.
As you say, this earnings model is based on selling orders to stock exchange traders (PFOF). This is a controversial model, because it can be difficult for small-scale investors to know whether they're getting a good price for the assets they're selling and buying. Even more problematic is that it's an incentive for these platforms to generate as many transactions as they can.
When they open up the Robinhood app, customers are greeted with a plethora of eye-watering information: showers of confetti to celebrate transactions and a list of popular stocks to trade. Instead of instructing users about pursuing a coherent strategy, the app therefore pushes riskier options, such as individual stocks, crypto currencies and even the trade in loans and options.
These investors, who are new to trading platforms, are inclined to take major risks, for instance with a full focus on businesses that have lost a lot of their value during the Covid-19 crisis. Remarkably enough, some badly polluting sectors, such as aviation and shale gas, have proven to be popular shares for investors making a fast buck. This is the complete antithesis of the trend among millennials – the largest group of Robinhood users – to have sustainability at the heart of their investments.
This does not mean, per se, that Robinhood cannot act the part of folk hero and "democratise" financial services. It does offer small-scale investors an attractive opportunity for investing their savings, since interest rates are now so diabolically low. But the big question is how trading platforms are going to take the responsibility for supporting investors to make properly thought-out financial choices?