Early last year, I wanted to learn more about what was going on with the day trading crowd — meme stocks, YOLO, Reddit, etc. — so I opened a Robinhood account.
It was an eye-opening experience to see how trading had become “gamified.” (I entered less than a dozen orders and got executed on fewer than half of them).
Keep in mind, my career began on a trading desk, where we used everything from Instinet to Bloomberg to SOES to Nasdaq Level III. I’ve traded stocks, options, ETFs, mutual funds, and bonds (I know my way around trading programs). In terms of interface and user experience, Robinhood was less like those professional products — it was closer to CandyCrush than it was NQDS.
It was obvious to see what was coming; as we discussed before the market began to roll over, too many people began to think trading was easy: “How do we make money day trading from home? We only buy stocks that are going up; if they don’t go up, we won’t buy them.”
Understanding what is “Luck” and what is “Skill” is challenging. Indeed, as Dunning-Kruger showed, metacognition — the ability to self-evaluate your own skill set — is itself a discrete skill. Your metacognition in a specific ability improves as your abilities in that particular field improves.
The good news is that these sorts of trading apps never presented the kind of systemic risk we saw in the 2008-09 GFC; the bad news is that lots of folks traded too much and lost some money. Some traded large amounts and lost a lot of money, while a few traded everything and lost it all.
Despite the ironclad economic rule “There is no such thing as a free lunch,” people tend to forget.
While I might not be the experience level1 or the generation that RobinHood is targeting, it is easy to see how addictive this could become. On the desk, you had to learn to recognize when you were trading for profits or for the adrenaline or dopamine rush. It was easy to see how the algorithms behind phone trading apps were targeting this same limbic system response. That could become a problem for some people.
I have nothing against Robinhood,2 but they were yet another compliance report I had to fill out, and it is simpler to maintain a personal account with one of RWM’s custodians (Schwab, Fidelity, or TD) than a third-party app.
One other thought comes to mind: You end up with a very different product when financial people deploy technology than when technology people roll into finance.
UPDATE: August 3, 2022
Robinhood Lays Off 23% of Staff as Retail Investors Fade From Platform
One-Sided Markets (September 29, 2021)
Wrong Side of the Trade (April 15, 2022)
My Worst Trades (September 7, 2021)
1. It has become legendary how easy it was to game the options trading approval algo, but rather than do that I filled the RH Options application honestly. Trading experience: 30 Years; Options experience: 25 Years. Assets: $3 billion dollars. Amusingly, I was not approved for RH option trading.
2. Other than missing their seed round in 2014 or 15. At the time I passed on RH, I called it “The dumbest investment idea I have ever heard.”