Insight into the SEC's Investigation of Robinhood
Tuesday, December 22nd
Catch Up Quick
Facebook says it would help a new social network get off the ground by licensing its own code to another company in wake of anticompetitive criticism
Total inflows to cryptocurrency funds and products hit $5.6B this year, representing a > 600% increase from 2019
Lockheed Martin ($LMT) agreed to buy Aerojet Rocketdyne ($AJRD) for $4.4B in cash (including assumed debt)
SoftBank will file today to raise between $500M and $600M in an IPO of its first SPAC, while reportedly preparing at least two more
The new coronavirus strain that was first detected in the United Kingdom could already be in the United States, according to the CDC
Apple ($AAPL) plans to make self-driving passenger vehicles in 2024 using its own proprietary battery technology
The FDA approved Moderna's coronavirus vaccine for emergency use
Ripple is expecting an SEC lawsuit over the sale of the cryptocurrency it created
The Pfizer-BioNTech coronavirus vaccine has been cleared for use in Europe
Private equity vanguard Thoma Bravo announced a $10.2B leverage buyout of property management software maker RealPage
MGM Holdings, the Hollywood home of James Bond, is seeking a buyer at around a $5.5B valuation (including assumed debt)
U.S. trade and current deficits are at its highest level since 2008 (Axios)
Russian hackers recently targeted the Treasury Department's senior leadership by using internal software keys
Alaska Airlines orders the first Boeing 737s since the flight ban was lifted
Thought of the Day
Robinhood, the trading platform, was recently fined by the SEC
This is a result of a broader investigation into the company by authorities for potentially misleading customers about how it generates revenue while failing to execute customer trades at the best possible prices
In a previous newsletter (here), we attempted to simplify exactly how Robinhood makes money
In summary, it sells user order flow to institutions that arbitrage micro differences between 1) what Robinhood users are (often unknowingly) set to to pay for a stock and 2) the price that high frequency traders using extremely fast computers and fiber optics can sell it for before the trade is actually executed
Order flow: a digital ledger of buyer or seller-initiated transactions facilitated by electronic exchanges
In fact, the SEC recently revealed that Robinhood received $180M in return for order flow sales in Q2 2020 alone (we will soon have full insight into what % of total revenue this was when IPO filings are approved)
Additionally, despite advertising itself as an utterly free platform, it surfaced that inferior trade prices cost customers ~$34M even after factoring in savings from zero commission trading
While fining Robinhood for selling out its users to high frequency traders without full transparency is a step in the right direction, SEC and FINRA definitions of “front-running” have yet to evolve to accommodate newer trading infrastructure technology
Front running: an illegal practice by market makers of dealing on private information (order flow), at the expense (worse execution price) of another buyer (Robinhood users)
Furthermore, while the Menlo Park-based company claims to “democratize investing,” many argue that it oversimplifies the stock market, leveraging behavioral psychology to gamify investing & encourage excessive trading
But unbeknownst to the user, blurring the lines between investing and trading fosters exorbitant risk taking, permanently distorting younger generations understanding of how to invest and subsequently compound wealth
The Bottom Lines
The primary objective for consumer facing digital platforms is often to maximize daily active users (DAU), as doing so translates into greater sales growth and profitability, given the zero-marginal cost structure of the internet
Whether it's approving ~15K people with no investing experience at all for options trading (a highly speculative and risky activity) in the state of Massachusetts alone, raining confetti when users buy/sell a stock, or sending out push notifications on the day’s biggest winners and losers, Robinhood encourages users to trade the most volatile companies
It's clear that the company’s casino-like depiction of financial markets ought to be investigated further, especially given the record number of young, impressionable, new market entrants we have seen in 2020!