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Disruptor #1 2020 - Robinhood’s disruptive force: The

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fuagf Member Level  Friday, 09/10/21 06:55:10 PM
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Disruptor #1 2020 - Robinhood’s disruptive force: The good, the bad and the controversy

"The Triumph of Dumb Money
"SANITY Quack quack. - No, Wall Street Bets is not a revolution

This post due to blackhawks' - Unsurprisingly, there are mutual funds that work the disruptive meme.

We have so many disruptor trolls the other context of the word intrigued me. And lol ol' friend Robinhood reappeared on my Gsearch.

Published Tue, May 25 20216:00 AM EDTUpdated Tue, May 25 20217:55 AM EDT

Julia Boorstin @JBoorstin

Key Points

* Robinhood and its CEO Vlad Tenev were at the center of a market and cultural phenomenon this year when conversation in Reddit’s WallStreetBets community drove trading in stocks including GameStop and AMC Entertainment.

* The brokerage app, which has gained millions of users, says its mission is to “democratize investing” and create a “source of wealth for a new generation.”

* Critics, from regulators to politicians and some of the market’s billionaire icons of investing, remain skeptical that Robinhood’s interests are truly aligned with everyday individual investors.

This illustration photo shows a person checking the three month GameStop stock graph on
a smartphone on February 17, 2021 in Los Angeles as the Reddit, Citadel, Robinhood and
Melvin Capital logos are seen on the background ahead of the virtual hearing involving
GameStop stocks.
Chris Delmas | AFP | Getty Images

Tech-driven disruption in business is rarely a force for good or bad alone. Robinhood is a good example of the rocky, disruptive force that sits between the absolutes.

The brokerage industry disruptor exemplifies the way that technology can turn an industry with gatekeepers into a more open platform and force the established giants to innovate and expand. That is why Robinhood earned the top spot .. https://www.cnbc.com/2021/05/25/robinhood-nears-biggest-trade-of-all-an-ipo-after-wild-year.html .. on this year’s CNBC Disruptor 50 list .. https://www.cnbc.com/2021/05/25/these-are-the-2021-cnbc-disruptor-50-companies.html , pressing Wall Street and investment giants to lower trading costs — in many cases, to nothing — and consolidate to better withstand an accelerating digital threat.

And this year, the company and its CEO, Vlad Tenev, were at the center of a stock market and cultural phenomenon. In January, conversation in Reddit’s WallStreetBets forum about squeezing hedge fund investors drove the seemingly irrational buying up of GameStop .. https://www.cnbc.com/quotes/GME .. and AMC Entertainment .. https://www.cnbc.com/quotes/AMC .. shares. That trading happened largely on Robinhood — and it wasn’t the only volatile trade where Robinhood was a center of the action. Between January and February, the platform reported the addition of 6 million cryptocurrency accounts.

VIDEO - 05:41 Here are the top five companies on the 2021 CNBC Disruptor 50 list

Debate over ‘democratize finance for all’

The Reddit uprising followed a year when millions of Americans stuck at home during the pandemic, many receiving stimulus checks, discovered Robinhood’s easy access to retail trading and became first-time investors. Tenev told CNBC late last year it was seeing deposits equal to, or multiples of, stimulus check amounts. Retail trading grew to 23% of total trading volume by the end of December 2020, up from 13% of trades a year earlier.

Robinhood has stuck to one message throughout the growth and tumult, telling CNBC and others: “Our mission is to democratize finance for all.”

Vlad Tenev, chief executive officer and co-founder of Robinhood Markets Inc., speaks virtually
during a House Financial Services Committee hearing on a laptop computer in Tiskilwa,
Illinois, U.S., on Thursday, Feb. 18, 2021.
Daniel Acker | Bloomberg | Getty Images

Robinhood has had some positive, and profound, implications for the market. The company has removed barriers to trading by making investing commission-free and mobile-first. It has simplified investing, and made it more accessible and personal.

Robinhood says its tools are reaching a more diverse group of investors. Citing data from a survey it conducted in December among over 98,000 Americans, it says 16% of its customers come from the Hispanic community, compared with 7% at incumbent brokerages including Schwab, E-Trade, Fidelity, TD Ameritrade and Vanguard; and 9% are African American, compared with 3% at other brokers. And it is bringing in younger investors. The company says Gen Y and Gen Z comprise 70% of its users.

However, its claims of making investing “less scary” and “easier to understand” are likely to raise eyebrows among its many critics, including the Securities and Exchange Commission, Capitol Hill and the billionaire investor Warren Buffett .. https://www.cnbc.com/2021/05/01/warren-buffett-says-robinhood-is-catering-to-the-gambling-instincts-of-investors.html , who says it is catering to a “casino aspect” in the recent market.

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more inside

The company has drawn criticism for gamifying the serious business of investing, which puts at stake individual life savings. Critics say the app is designed more like a video game than an investing tool, and until recently, it sprayed virtual celebratory confetti on the screen .. https://www.cnbc.com/2021/03/31/robinhood-gets-rid-of-confetti-feature-amid-scrutiny-over-gamification.html .. for new user accounts.

In 2020, Massachusetts regulators filed a complaint .. https://www.cnbc.com/2020/12/16/robinhood-reportedly-facing-complaint-by-massachusetts-regulators-over-targeting-young-users.html .. against the company citing “aggressive tactics to attract inexperienced investors.”

The company settled an SEC probe .. https://www.cnbc.com/2020/12/17/sec-charges-robinhood-with-misleading-customers-about-how-it-makes-money.html .. last December for $65 million, stemming from charges it misled investors about how it makes money, without admitting wrongdoing.

When the free trade is the product

Robinhood’s ability to offer free trading on the platform is enabled by a practice that continues to draw criticism after the SEC settlement, known as payment for order flow, in which brokers receive payments from dealers for routing trades to them. It is a practice used by many electronic brokers, but it has never been as closely scrutinized as during Robinhood’s rise.

Internet giants like Facebook and Google have been dogged for years by criticism that their free services rely on users being “the product.”

In Robinhood’s case, the free trade is the product, and that has sparked concern of a conflict of interest, with the broker incentivized to drive the highest number of trades possible.

New SEC Chairman Gary Gensler is watching .. https://www.cnbc.com/2021/05/06/sec-chair-gary-gensler-raises-concerns-about-robinhood-trading-gamification-and-social-media-hype.html . “These new tools, about props and leaderboards and behavioral ways to get individuals to trade more ... there is a bit of a conflict of interest. An app that says that they had zero commissions is earning revenue on your trading ... somebody is paying them for that order flow and paying them for that data,” Gensler said in a recent CNBC interview, during which he noted that payment for order flow has been blocked in the U.K. and Canada.

VIDEO - 06:12 SEC Chair Gary Gensler says SEC is looking at apps encouraging trading, payment for order flow

At one point during the Reddit WallStreetBets phenomenon, the opposite of too much trading occurred — Robinhood curtailed its customers’ ability to trade .. https://www.cnbc.com/2021/01/28/robinhood-interactive-brokers-restrict-trading-in-gamestop-s.html — but that resulted in another controversy for the company. Robinhood locked investors out of trading in some of the most contested stocks like GameStop and AMC and drew criticism for acting unfairly toward ordinary investors, including an uncommon alignment of talking points from Rep. Alexandria Ocasio-Cortez and Sen. Ted Cruz .. https://www.cnbc.com/2021/01/28/gamestop-cruz-ocasio-cortez-blast-robinhood-over-trade-freeze.html . And it led some of the app’s most fervent new investors to leave for brokerage competitors.

Tenev later explained .. https://www.cnbc.com/2021/01/28/robinhood-ceo-says-it-limited-buying-in-gamestop-to-protect-the-firm-and-protect-our-customers.html .. that Robinhood was forced to slow trading because it didn’t have enough cash to hedge against the risks. To keep the company operational, the company raised an emergency $1 billion from investors, followed by an additional $2.4 billion. In other words, at a peak of popularity and notoriety, Robinhood could have gone out of business. It was the confidence of its investors in its business model and potential that enabled the company — and its users — to trade another day.

Robinhood also faces multiple class-action lawsuits related to trading outages that occurred during the volatile market conditions of March 2020, which locked some traders out of Robinhood’s platform during key movements in stock indexes.

We kind of live in the intersection of capitalism, democracy and
innovation. And I think that it’s a very interesting place to be.

Vlad Tenev Robinhood CEO

The path to growth that Robinhood has experienced isn’t always straight, or benign. Former No. 1 CNBC Disruptor 50 companies have generated business models that have far-reaching consequences in the economy, and in people’s lives. Airbnb and Uber, in particular, have grown into giants with as much controversy as accolades. And the company that ignited the original idea for the CNBC Disruptor 50 list, Facebook, has been at the center of multiple cultural and political tugs-of-war for most of its still relatively short existence (i.e., is Facebook bringing people together or tearing them apart? Supporting democracy or undermining it?). All have benefited from laws and regulations that did not anticipate their disruptive innovations or were slow to react to it, and have ended up in prolonged battles with politicians and regulators.

In Robinhood’s case, the past year’s story is not without tragedy .. https://www.cnbc.com/2020/06/18/young-trader-dies-by-suicide-after-thinking-he-racked-up-big-losses-on-robinhood.html . A 20-year-old who thought he owed hundreds of thousands of dollars in a risky bet died by suicide after not being able to reach customer support. His family sued .. https://www.cnbc.com/2021/02/08/robinhood-sued-by-family-of-alex-kearns-20-year-old-trader-who-killed-himself-.html . The company committed to hiring hundreds of registered financial representatives to ensure customer questions are addressed quickly.

Its core model of commission-free trading is here to stay, and Robinhood continues to iterate and expand. The stocks, ETFs, options, and cryptocurrencies that its users are invested in are part of a new world where portfolios are checked on an iOS or Android device — sometimes without even opening the app.

In the first quarter of 2021, 9.5 million customers traded crypto on Robinhood Crypto, compared with 1.7 million in the fourth quarter of 2020.

During historic market volatility early in the pandemic, Robinhood added a Market Volatility page to its help center, and the company fully rolled out recurring investments and access to fractional shares.

One thing is certain: Robinhood’s appeal to a new generation of investors has forced the traditional Wall Street banks, asset managers and brokerage firms to take note. Goldman Sachs has been investing in its retail arm, Marcus, and Fidelity just launched “youth accounts .. https://www.cnbc.com/2021/05/18/now-teenagers-can-trade-stocks-with-fidelitys-new-youth-investing-accounts.html ” for teens to trade and save, commission-free, on its platform. E-Trade was acquired by Morgan Stanley, and TD Ameritrade by Charles Schwab. Even the firm synonymous with long-term buy-and-hold investing, Vanguard, now offers commission-free trading on many products.

Robinhood says it has 13 million users and its mission is “to unlock a source of wealth for a new generation.” That figure has not been updated since 2020. Some more recent industry estimates put the number closer to 20 million users, but that could include some accounts that are not funded, and the company has not confirmed it.

Regulators remain wary of where its influence over the millions of new investors it has introduced to the market will end. The SEC’s Gensler told CNBC bringing more access to the capital markets for retail investors is a good thing, as long as the core principles of protecting investors are not upended by apps that encourage active trading through behavioral prompts.

“Nobody really asks the question of, ‘Is it too easy to buy a flat screen TV with one click and get it delivered?’ But people are now asking the question of ‘Should it be this easy and low friction for people to invest in the markets?’ Tenev argued in a CNBC interview late last year.

“Our belief is, the more we lower the barriers to entry, the more we level the playing field and allow people to invest their money at a younger age, the better off our economy will be and the better off society will be because we kind of live in the intersection of capitalism, democracy and innovation,” Tenev said. “And I think that it’s a very interesting place to be.”

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It was Plato who said, “He, O men, is the wisest, who like Socrates, knows that his wisdom is in truth worth nothing”
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