This is what has me musing. Obviously George Soros can move the market if he wants to. SNL did a comedy sketch on that once if I recall correctly - or maybe it was Colbert. Someone did and we liked it.
But can 31 million smaller users too, esp if they have a different mindset in what they are trying to do with the market? It’s interesting to think about and could answer a few things we’ve been seeing. Then one has to wonder if they will give up at some point, or is this the new normal?
Are they coat-tailing off the Soros’ of the world or are they causing some of the swings themselves? I had thought the former, but now I’m not sure.
These so-called retail traders definitely move the markets. It is a group that is easily manipulated by big wig traders and hedgies who have access to much more sophisticated tools than a regular robinhooder does. Just like in the good old 1999… there is a lot of froth in the markets.
@ucbalumnus: See post #179 by @emilybee above for a new source of money being injected into the stock market due to the unavailability of sports betting.
In addition to sports gambling money, the federal government has injected substantial sums of money into the economy & into the bond market.
A bit surprised that the Five Thirty Eight article missed these additional injections of cash into the stock & bond market.
Also, RobinHood accounts have introduced stock market speculation & investing to a new generation of investors. My understanding is that RobinHood even provides interest free margin funds to these small investors.
It is never a free lunch for retail clients. No commissions, but lose on the trade execution. Robinhood will easily make $100 million this year from selling their order flow to HFT trading firms who obviously wouldn’t pay if they weren’t making more than that off the retail punters by market making (many say frontrunning) the trades.
Can you explain this in plain English? Do they charge for trade executions? What’s frontrunning/market making?
We’re with Schwab, but youngest loves Robinhood and always sings their praises. I’m just trying to learn about it. I suppose I could google, but sometimes it’s easier just to ask here.
A High Frequency Trading (HFT) firm pays Robinhood to place your youngest’s buy order for 100 shares of ABC stock through the HFT firm and acts as a market maker.
Assume ABC stock bid is $0.96 and ask is $1.00 on an exchange somewhere. Immediately, HFT buys at $1.00 on the exchange and nearly instantaneously sells to your youngest at $1.03 pocketing 3 cents a share or $3 = 3% on a $100 ‘commission free’ trade. Repeat thousands of times per day.
Tell your youngest to alway use a limit order below the current ‘bid’ price on a buy order).
e.g. Buy 100 ABC limit $0.95. Will take longer, but most likely filled later. Similarly, place a limit above the ask on a sell order.
“Market makers” are typically financial firms that continuously put out offers to buy or sell securities that they make markets in. This provides more liquidity in the markets for those securities; the market makers themselves profit from the bid-ask spread between what they are willing to buy versus sell securities for.
“Payment for order flow” is a practice where market makers offer commissions to retail brokers to direct orders to them if the market maker matches the existing best price at the time. It is controversial because market makers may have less incentive to beat (as opposed to match) the best prices that they see on the market.
@bloomfield88 and @ucbalumnus Thank you very much for the explanations. I always wondered how they made money on “free” trades. Those make a bit of sense - a built in commission.
Robinhood (and other brokers) also charge a hefty margin interest rate. They let you borrow money against your account holdings to buy more stock (or to sell short). Robinhood will give you $1,000 at 5% annual to begin trading right off the bat so no $$ deposit needed. Schwabs and Etrades etc. want you to have cash or securities in your account before you can begin trading. Also, it looks like RH has very lax margin requirements… can be a recipe for financial disaster. This froth in the markets definitely smells like the “dot bomb” of 1999.
My 21 year old started with Robinhood when the crash happened with some money of his. He likes it and its the cool thing to do I guess. Even though our Merril/ Bank of Amercia app didn’t go down like his did…HMMMM.
But I had a long talk with him about that 20 year old kid that committed suicide, thinking he lost like $750,000. He would never do something like that he said. I am sure this kids parents felt the same way till this happened. So sad
@Knowsstuff - I know a couple of people who were badly burned by the crash of 2000. It took years for one of them to pay his six-digit tax bill (yes, there are taxes and there are so called wash sales…). The other could not bear the situation and left behind devastated family and friends. So sad.
Please tell your kids to mind margin, wash sales, and stay away from options trading.
He bought everything at over 52 week lows with dividends. All known companies. He just has like $3,000 invested so this is all very long term and just to learn about stocks for him. He has an IRA also that we started years ago to get both of them started.
He “did” make some money as of like last week…LOL…again he is just learning. but @BunsenBurner I will drive that home to him. Thx. He again is just learning and not doing anything crazy. He is in it for the “long” term. We also have a broker at his disposal and he has talked with him last year.
Here’s an article about Dave Portnoy founder of Barstool Sports who is trying day trading as a substitute for gambling. He was featured on a podcast last week from the Wall Street Journal
Since I’ve been home from school I’ve been doing what my son told me is swing trading to keep my mind amused. So far I’ve made more than I did at school. H asked if I want to trade jobs. If I don’t return to school, maybe, but I know right now I’m just “playing” patterns. I don’t feel I know enough to actually be an investor under normal circumstances. I certainly don’t get into the fancier things like margins, selling short, or wash sales. I “play” with money we have already in Schwab. It’s in a traditional IRA, so hopefully I don’t have to worry about taxes from my profits. Even if I did, they never tax 100% of profits.
Do they charge for trade executions? What’s frontrunning/market making?