How Robinhood Lures Traders

More and more young investors and traders are coming into the markets courtesy of the Robinhood trading app. These folks have made it easy (too easy) to place trades from a mobile device and to make things even more attractive they do not charge annual fees or commissions with stock or options trades. This is how Robinhood lures traders. What (usually) young people do not understand is that if you are not paying for a product you typically are the product. Robinhood runs a profitable business because they route client orders in such a way as to make money, money which their clients do not make on trades.

How Much Does Robinhood Make from Client Accounts?

The New York Times did a piece on Robinhood on how they lure traders and in which they looked at how much Robinhood made per dollar in a client’s account versus how much brokers like E-Trade, TD Ameritrade, or Charles Schwab made. Total payments or what retail brokers make from selling customer orders based on dollars in the average account came to this:

  • Robinhood, $18,955
  • TD Ameritrade, $1,881
  • E-Trade, $1,326
  • Charles Schwab, $195

The point of this example is that for the privilege of trading from your cell phone at times when you are distracted and not thinking clearly, you are letting Robinhood route your orders in such a way that they make obscene profits while you may or may not lose your shirt.

If You Are Not Paying for the Product Then You Are the Product

This is an old saying in the world of investing and trading. Nothing is free and Robinhood is not in business to provide charitable services. Talking about how they make trading democratic and available to everyone is how Robinhood lures traders along with their “not charging” for their services when they really are. At Top Gun Options we do free market briefs lasting for several days. If you like what we offer, you sign up and pay for our services. This is transparent. Robinhood is not transparent and actually offers a service that is addicting as noted in the article in The Times.

Choosing a Retail Broker

Basic considerations when picking a broker include the account minimum as well as account fees and commissions. And, look for a breakdown of commissions for trading options versus buying and selling stocks directly. How are ETFs treated in their commission structure? But, price is not everything. You need a trading platform that gives you the best and most up to date market information and the ability to fill trades when desired. And, unlike with Robinhood, you would like your trades to be routed in such a way as to benefit you instead of the broker! You want a reliable broker whose pricing and execution are both fair and efficient.

Who Do You Get Your Trading and Investing Advice From?

When investing for the long haul or when scouting out a profitable options trade, beware of trading advice. Too many of the folks brought into trading by the ease of using a handheld device and the Robinhood app get their trading advice (tips) from online sources like Reddit. A good rule of thumb is that when you are getting free trading advice you should assume that half or more of what you are hearing is a lie.  The reason that you pay for services in the trading world is that you want accurate information, sound advice, competent trade execution, and someone who wants to keep you as a client. At Top Gun Options we let you come in, walk around, kick the tires, and decide if we are for you. Then we work hard every day to make sure that you profit from the experience of working with us.