Occasionally there is an article that captures very well so many of the themes impacting banking and finance today. A recent New Yorker article covering Robinhood, an online trading platform is such an article. And the story is told using the lives of real people who faced real consequences from their involvement with finance – including a suicide.
Robinhood is a “zero-commission” trading firm that according to its own publicity has a mission to “democratize finance for all.” As noted in the article: “A Robinhood spokesperson said that attracting users who had previously been excluded from the financial system is a ‘profoundly positive change,’ and that ‘suggesting otherwise represents an élitist, old way of thinking.’ As noted in the article by the CEO of a competitor, Robinhood is “. . . the first company that introduced premier user experience and design in a mobile application to finance, and they also dramatically lowered the cost of investing,”
The mission of a democratic financial system is one held by many banks that practice values-based banking. Therefore it would seem that Robinhood’s actions would be supportive of values-based banking. But as one digs deeper into the practices of Robinhood a different story emerges. A story that aligns more with the traditional “greed is good” associated with Wall Street.
Although appearing to be commission free, as everyone knows there is no free lunch. So how does Robinhood generate revenues if not by charging commissions for trading? They do so by a practice called Payment for Order Flow (“pfof”). The trades made with Robinhood are directed to brokers who pay Robinhood a fee for that activity. As noted in the article: “Payment for order flow is common among brokers, but it is controversial, because it appears to create an incentive for them to send their customer orders to whichever market maker is willing to pay them the most.” The article further notes: “In exchange for access to the orders, the firms pay rebates to the brokerage company that routed the orders to them. The rebates and the skimming are invisible to the customer placing the trade order.” So it would appear that the commission free trading is funded through execution at prices that are not the best in the market for the buyer or seller of shares. As noted in the article even after controversy, “in the first quarter of 2021 Robinhood’s pfof revenue was three hundred and thirty-one million dollars.”
But the motivation of the users of Robinhood is also of interest. Their motivation seems to be often related to the issues that arose from the financial crisis of 2008 so many years ago but sill impacting banking, finance and politics. Some of the users of Robinhood see it as a means to get revenge for a financial crisis that impacted their families very personally. Those stories as reported in the article surfaced on chat sites focused on trading. As one individual wrote: “I remember when the housing collapse sent a torpedo through my family. My father’s concrete company collapsed almost overnight. My father lost his home.” Around the same time, the author claimed to have seen “hedge funders literally drinking champagne as they looked down on the Occupy Wall Street protesters.” The poster said that, as a result of the loss, his father had descended into alcoholism, and existed as only “a shell of his former self, waiting for death.”
This theme was taken up by one of the key characters in The New Yorker article had a similar family experience. He wrote in response to that post his reasoning for holding a position in Game Stop: “This is about more than just money, it’s about fucking these hedge fund managers until they understand what we’ve all gone through because of them. I am holding to ensure my parents can live comfortable lives at the expense of the assholes that almost cost them their lives. This is for you, Dad.”
But underlying all of this story is a fundamental misuse of the financial system. No where in the story is there a discussion of how Robinhood, various other institutional investors or the individual investors were thinking about how money should be used to finance productive assets. Rather the focus is on finance as a casino. And as we all know, betting in casinos is a losing proposition for everyone except the casino owners. Or in this case the financial companies that are running a casino and not investing in addressing the needs of society.
