I read through the testimony for today’s @FSCDems hearing on GameStop while I drank my morning coffee, and I feel a thread coming on. https://financialservices.house.gov/calendar/eventsingle.aspx?EventID=407107

2/ The testimony from Robinhood CEO Vlad Tenev in particular caught my eye. https://financialservices.house.gov/uploadedfiles/hhrg-117-ba00-wstate-tenevv-20210218.pdf

3/ Tenev starts his testimony with a bold claim, that “Robinhood has changed the investing world for the better.” Let’s look at that claim.

4/ There were a number of low-cost ways for small investors to access the markets before Robinhood came along with its promise of commission free trading and its flashy app.

5/ Many of those earlier low-cost options encouraged a buy-and-hold approach to investing that is likely to be far more profitable in the long run than the active trading, including options trading, that Robinhood enables.

6/ Tenev mentions the ability to trade fractional shares as one such benefit. And it certainly does benefit Robinhood by making it harder for customers to exit the platform (if they tire of recurrent platform outages for example)since fractional shares aren’t easily transferable

7/ Side note: Lots of trading in fractional shares would also presumably make it far more difficult for the SEC and SIPC to wind down a brokerage firm if it were to fail, for the same reason.

8/ And, while it might not take any money down to open a Robinhood account, it does cost $75 to transfer stocks out of your account. That’s a pretty big hit when the median account size is just $240. https://robinhood.com/us/en/support/articles/transfer-stocks-out-of-your-robinhood-account/

9/ Because its profits depend on payment for order flow, Robinhood benefits from providing easy access to trading strategies, like trading options, that it could never recommend to the typical RH customer under broker-dealer sales practice rules.

10/ But Robinhood avoids those rules by claiming that it doesn’t make recommendations. The Massachusetts Securities Commission respectfully disagrees. https://www.sec.state.ma.us/sct/current/sctrobinhood/MSD-Robinhood-Financial-LLC-Complaint-E-2020-0047.pdf

11/ Tenev notes in his testimony that “only” about 13% of Robinhood customers trade options, which still strikes us as a pretty high percentage when you consider the characteristics of Robinhood’s customer base (disproportionately young, first-time investors with small accounts).

12/ Meanwhile, payment for order flow from options trading appears to account for well over half the revenue Robinhood received from payment for order flow last year. https://www.theblockcrypto.com/post/93321/robinhood-payment-for-order-flow-2020

13/ Tenev also argues that payment for order flow benefits its customers, who Tenev says received $1 billion in price improvement in the first half of 2020.

14/ But, as @TylerGellasch likes to point out, “price improvement stats are total garbage.” You can read more about that in this Healthy Markets letter. https://healthymarkets.org/wp-content/uploads/2021/02/Letter-to-HFSC-Hearing-2-17-21.pdf

15/ Meanwhile, Robinhood settled a recent enforcement action with the SEC which identified problems with its trade execution practices that resulted in customers’ paying more than they would have if they’d traded at another firm that charged commissions. https://www.sec.gov/litigation/admin/2020/33-10906.pdf

16/ Another question that deserves scrutiny from Congress and the SEC, how does Robinhood handle its very valuable customer order information, now that it has shut down Robintrack which used to make that information publicly available? https://robintrack.net/ 

17/ Is it selling that material, non-public information? Are market makers that pay to execute Robinhood’s customer orders able to use that information to their own benefit, and to the disadvantage of customers?

18/ Tenev is unquestionably correct when he notes that Robinhood has developed an app that is appealing to a younger, more diverse set of customers, and that many of those customers use the app responsibly.

19/ But I’d feel better if I saw a little more self-reflection about how they can do better, a clear acknowledgement that some of the things they enabled may not be healthy, and less crowing about all they’ve done to make the investing world better.