fbpx
No comments yet

Weekend reading: The economics of free share trading


What caught my eye this week.

Like most people, the first time I heard about Robinhood I underestimated the zero-commission pioneer. I put a link in Weekend Reading. But I didn’t write an article predicting it would mean the end of retail dealing fees.

Indeed, the same day I first mentioned it on Monevator – 8 March 2014 – was also the day my co-blogger was on BBC Radio 4’s Money Box to talk platform fees. The Accumulator didn’t bother the middle-classes masses by citing Robinhood over the airwaves, either.

Robinhood was then just a curious side story. And it still seemed that way even as readers started emailing me to ask if there was a UK equivalent.

Seven years later and most US brokers have cut their trading commissions fees to zero. My blog tells me I didn’t see that coming, just as surely as my trading journal reminds me of the dumb reasons I had for selling Tesla.

Perhaps if you weren’t publishing your views back then you did predict Robinhood’s success? I’m sure you’ll let us know in the comments!

Peter pays Paul

One excuse for doubting Robinhood was I knew well the finance industry’s long history of extracting money from its customers. I’ve blogged about that since 2007. So in as much as I thought about Robinhood in those early days, I feared a wolf in revolutionary stockings.

Perhaps those instincts weren’t entirely off.

Robinhood is about to float on the US stock market. It’s had to reveal the workings of its business in an S1 filing. And lots of people have digested the details.

Most striking is that on holding $80bn in assets from 18 million customers, Robinhood generated $522m in sales in the first three months of 2021.

For fun we can crudely annualize that to estimate Robinhood might make $2bn of revenues on $80bn of AUM over a full year.

That represents 2.5% generated off its customers’ wealth. Compare that to less than 0.25% levvied by a typical cheap index fund. The real-life Robin Hood’s men had every right to be merry if their economics were anything like this.

I’m not saying Robinhood shouldn’t make this money, necessarily. Crucially (though some would say arguably) much of that $2bn would not be tithed from its customers’ wealth. Much would be so-called ‘payment for order flow’, which comes from third-parties. Many commentators are adamant such payments are against the interests of Robinhood customers, but they won’t directly reduce those customers’ portfolio balances.

Other big income streams for Robinhood include crypto trading – not even Bitcoin, but Dogecoin – and option trading. One can legitimately wonder how well this will take those 18 million customers to riches. But it’s famously a free country.

Still, I’m amused by the picture that emerges from the S1. Similar to how 1970s feminists wouldn’t have imagined a million young women using their liberation to cavort for money on OnlyFans, so Robinhood surely isn’t what Vanguard’s Jack Bogle had in mind when he took the fight to Wall Street.

People gonna people, I guess.

Free share trading in the UK

Remember that as a shareholder in the UK sort-of-rival Freetrade, I’m biased (and that we will both get a free share if you sign up via that link…)

Moreover, as Freetrade co-founder Viktor Nebehaj explained in a podcast interview with Meb Faber this week, its business model is very different.

Payment for order flow is illegal here. Freetrade has also chosen not to support options trading, nor leverage. Instead it mostly makes money from currency conversion fees and – increasingly – from low-cost subscription tiers for ISAs, SIPPs, and enhanced trading features.

Freetrade now has 800,000 customers, so it’s doing something right.

Will it ever mint money like Robinhood?

Probably not.

But as a shareholder who runs an educational blog for private investors, I’m far more comfortable that its business model is aligned with its users. It also seems more sustainable.

This time next year Rodney

What I’m not, sadly, is a genius – no more than I was back in 2014 when I first heard of Robinhood.

Because despite seeing the growth of the US fee-free originator from the ground floor by covering it here, I still dithered when I first got the chance to take a stake in Freetrade.

I did invest a (small) amount of money in its subsequent crowdfunding. But in that podcast Viktor revealed some first-round investors have been made millionaires as the start-up’s valuation has grown.

Sigh. Trading options or punting on crypto on Robinhood might be a quick way to lose money. But investing has a whole panoply of other ways to make you feel like a muppet…

Enjoy the weekend – get your free share if you haven’t – and come on England!

From Monevator

The Slow and Steady passive portfolio update: Q2 2021 – Monevator

Comparing the cost of electric car ownership – Monevator

From the archive-ator: Debating whether you should count your own home in your net worth ‘number’ – Monevator

News

Note: Some links are Google search results – in PC/desktop view you can click to read the piece without being a paid subscriber. Try privacy/incognito mode to avoid cookies. Consider subscribing if you read them a lot!

Rishi Sunak hints that pension triple-lock could be scrapped – Yahoo Finance

UK house prices fell in June, says Halifax, as stamp duty holiday ended – Guardian

Swedish Coop supermarkets closed due to US ransomware cyber-attack – BBC

Covid leaves students with a bitter financial legacy [Search result] – FT

UK liable to pay EU €47.5 billion in post-Brexit financial settlement – RTE

Products and services

NS&I reveals four changes that will affect savers this year – Which

Get £100 cashback when you switch your ISA to Interactive Investor [Promotional offer, ends 31 July, terms apply] – Interactive Investor

Could you be holding onto an old mobile phone worth thousands? – ThisIsMoney

Sign-up to Freetrade via my link and we can both get a free share worth between £3 and £200 – Freetrade

HSBC launches two-year fixed mortgage with rate of just 0.94% – ThisIsMoney

Homes for military history buffs, in pictures – Guardian

Comment and opinion

Why art and sneakers usually fail to make the investment grade [Search result] – FT

The practicality of money [Malaysian but relevant!] – Mr Stingy

Rebalancing: the most ignored investing premium – Validea

Don’t run scared of pension saving savings limits [Search result] – FT

How to keep your financial accounts secure – Humble Dollar

Is downsizing to a smaller home right for you? – Which

Overcoming the frugality syndrome – Advisor Perspectives

You’re richer than you think – The Irrelevant Investor

Patient investing [in return factors] is hard – The Evidence-Based Investor

Naughty corner: Active antics

Returns from infrastructure have come from trading – Joachim Klement

Uber’s not-so-secret value – Axios

Rumpelstiltskin and meme stock investing – Albert Bridge Capital

Even the best active funds lag for long periods – Behavioural Investment

Alpha erosion and hot dogs – The Waiter’s Pad

Covid corner

Up to one in 160 people have Covid; R 1.2 to 1.5 – BBC

England’s Covid-19 gamble as society reopens despite skyrocketing cases – NBC

Children’s extremely low Covid risk confirmed by study – BBC

The most common symptoms have changed, finds Zoe study – iNews

‘Dread and anxiety’ among NHS staff as Covid cases surge again – Guardian

Concerns rise about Chinese vaccine efficacy, but poor countries have few choices – CNBC

Anti-vaxxer geniuses call for Heineken brand boycott – The Drum

Kindle book bargains

The $100 Startup by Chris Guillbeau – £0.99 on Kindle

A Colossal Failure of Common Sense: The Collapse of Lehman Brothers – £0.99 on Kindle

SAS: Leadship Secrets from the Special Forces by various authors – £0.99 on Kindle

Ultralearning: Accelerate Your Career, Master Hard Skills, and Outsmart the Competition by Scott Young – £0.99 on Kindle

Environmental factors

Investing in Chargepoint, an EV charging equipment supplier – DIY Investor

Can a heat pump really replace your gas boiler? – ThisIsMoney

Off our beat

Marina Hyde: We can’t keep politics out of sport, but please keep politicians out of football – Guardian

On the benefits of slowing down – Ness Labs

Spin machines: the curious history of video games on vinyl – Guardian

Why the Pentagon can’t identify flying objects – Slate

Is it time to give up our invisible addiction to coffee? – Guardian

And finally…

“In noisy systems, errors do not cancel out. They add up.”
– Daniel Kahneman, Noise: A Flaw in Human Judgement

Like these links? Subscribe to get them every Friday! Note this article includes affiliate links, such as from Amazon and Interactive Investor. We may be  compensated if you pursue these offers – that will not affect the price you pay.





Source link

Post a comment

%d bloggers like this: