At the beginning (i.e. around a 10-15 years ago), it was institutional investors who realised that they were no longer dependant on broker research – technology now allowed them to access information & expertise easily and at low cost. The rise of Direct Market Access trading gave institutional investors unfettered access to the order books of exchanges when they needed the exchange order book (often they didn’t because they had created their own pools of liquidity).
Then came the social media revolution which allowed people to access news, both about the world at large and about each others’ personal lives – via Facebook, Twitter, Instagram. The rise of social media alongside the related rise of the internet undermined not just the business models of conventional media giants, it also broke the establishment’s monopoly on controlling news/information.
The rise of zero commission brokerages like Robinhood, social news aggregation platforms like Reddit and index fund giants like Vanguard and State Street now looks like the confluence of the two preceding trends. It is early days yet, but the impact of this – on financial markets, on how people save & invest, how financial news is generated & consumed – promises to be far reaching. To understand this phenomenon, this piece and the associated podcast by Ben Carlson – easily the most astute observer of trends in personal finance in the US – is worth consuming because India too is going through a similar cycle (just see the results that ICICI Securities, the country’s largest cash equities broker by market share, and a constituent of Marcellus’ Kings of Capital portfolio, is generating).
At a time when downloads of the Robinhood app are going through the roof in the US, Ben, a Robinhood customer himself, says that, for better and for worse, Robinhood is going through a Facebook-type cycle of ‘the users love you, then hate and then love you again’ cycle: “Robinhood is also a technology company that has grown its user base at an exceptionally high rate by pioneering zero-commission trading. The company seems to care more about its source of revenue (payment for order flow from Citadel) than its users but those users don’t mind because they love the app. Every so often Robinhood finds itself in a crisis that angers a lot of people, those people angrily complain online, eventually the crisis dies down and people keep right on using it.”
At a time when Robinhood has restricted the ability of its customers to trade certain stocks, customers are angry with Robinhood. Yet, simultaneously the company has raised $3.4 billion of fresh equity funding and has become, according to Ben Carlson, “too big to fail”.
Ben says that whilst Robinhood’s app is “clean, simple and easy to use”, its real test will now be around can it help educate its customers (many of whom are first timers to the stockmarket): “I think it’s great Robinhood has signed up so many new, young investors to its platform. We need more people involved with the stock market.
But they need to do a better job of educating their customers. It’s easier to open up a margin account and trade using leverage or options than it is to open a checking account. If you’re going to make it easy for people to use these potential weapons of mass destruction, you need to do a better job of educating them on the risks involved.
Help people understand the potential range of outcomes when making these types of trades. Set the right expectations. Use the wonderful technology built into your app to nudge people in the right direction instead of pressuring them to turn day-trading into a video game…Many Robinhood users know exactly what they’re doing. Others are never going to seek out helpful advice. But what if you could save, oh I don’t know, 10-15% of customers from potentially blowing up their accounts?…Robinhood should go out of their way to ensure everyone on their app has a better understanding of the pros and cons of day-trading and speculative behavior.”

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Note: the above material is neither investment research, nor financial advice. Marcellus does not seek payment for or business from this publication in any shape or form. Marcellus Investment Managers is regulated by the Securities and Exchange Board of India as a provider of Portfolio Management Services. Marcellus Investment Managers is also regulated in the United States as an Investment Advisor.

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