The global pandemic triggered an explosion in retail investing. This was due to several factors including (but not limited to) people receiving US Government stimulus checks, lockdown boredom, or simply the perception of making a slow, steady buck is no longer a viable option in the current economy. And with the rise of retail investing came the proliferation of gamification; that on-screen “reward” of fireworks or ticker tape dropping from the ceiling after you make your first trade. Almost all smartphone apps are engineered to keep you coming back for more screen time, and in the case of investing apps, that screen time can often come with putting your money on the line.
Robinhood is one of the more popular commission-free stock trading platforms in the United States that was used heavily during the GameStop short squeeze. Like many trading apps and robo investor services, Robinhood makes it easier than ever to begin trading your wealth and savings. But that accessibility can be a double-edged sword with risks that few people profit from.
Dr. Terrance Odean is on the Matson Money Academic Advisory Board and was a guest speaker at the 2021 Advanced Advisor Conference. His presentation titled “Robinhood: Investing, Trading or Playing a Game?” explored the ecosystem of online retail trading, how the platforms make their money, and most alarming, the percentage of people who did poorly on their trades.
Mark Matson revisited the topic at this year’s 2022 Advanced Advisor Conference. These dangerous technologies can destroy dreams. They use slogans to promote their platforms that appeal to the “every-day” investor and market themselves as “cheaper and easier” than the traditional financial advisor..Advisors should be here to help make people’s lives better. We want them to have their dream. Not speculate on their money and gamble. He also reminded us that there’s no such thing as a free lunch, and to remember that when it comes to trades.
Follow the Money
When trading apps such as Robinhood advertise “commission-free” trades, where does the platform make its money? According to Dr. Terrance Odean’s research, payment for order flow which is defined by Investopedia as “compensation and benefit a brokerage firm receives for directing orders to different parties for trade execution. The brokerage firm receives a small payment, usually fractions of a penny per share, as compensation for directing the order to a particular market maker.” Robinhood is effectively taking payment from high-speed trading firms to feature a particular stock. It’s a system where Robinhood and its client trading firms profit most (if not all) of the time and statistically, the average investor profits rarely.
The Biggest Loser
Adding to the gamification of Robinhood are the hyper-connected communities on social media platforms such as Reddit. Information is shared so fast that users are compelled to buy in fear of missing out on what appears to be a profitable trade based on speculation. The resulting surge of buyers pushes up the stock price, but as Dr. Odean’s statistical evidence shows, the spike is only temporary. Those that are “late to the party” with buying the stock typically ended up losing.
Information has never been more readily available and accessing retail investing platforms has never been easier. It is now possible for investors to take more risks, more often that have potentially dangerous outcomes. This exists with a potential marketing message of “democratizing investing for all,” when in reality, people may be gambling with their wealth in a gamified environment.
Academic Advisory Board Members receive compensation from Matson Money for their services, and in exchange, provide independent consulting services to Matson Money leadership, co-author white papers, appear on Matson Money webcasts, and make speeches at Matson Money conferences.
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PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS
“Attention-Induced Trading and Returns: Evidence from Robinhood”
Barber, Huang, Odean, & Schwarz, 2021