Journalist Logan Kane of Seeking Alpha conducted a deep dive on the practices of popular stock and cryptocurrency trading smartphone application Robinhood. According to Mr. Kane, “it seems that today’s Robinhood takes from the millennial and gives to the high-frequency trader. Not only does Robinhood accept payment for order flow, but on a back-of-the-envelope calculation, they appear to be selling their customers’ orders for over ten times as much as other brokers who engage in the practice.”
Robinhood has taken both the legacy retail stock exchange market and the cryptocurrency exchange market by storm, offering commission-free trades. In just a short time, the startup has earned a multi-billion dollar valuation. These basic facts have brought the firm a lot of very positive media coverage, including, on balance, these pages. However, with success comes greater scrutiny, and especially when a so-called loss leader business model is paramount to its product adoption.
“It appears from recent SEC filings that high-frequency trading firms are paying Robinhood over 10 times as much as they pay to other discount brokerages for the same volume,” claims financial journalist Logan Kane in a recent, long form post on Seeking Alpha.
Mr. Kane is accusing Robinhood of being less than transparent. His curiosity was flamed while encountering the company’s marketing of commission-free trades. “After digging through their SEC filings, it seems that today’s Robinhood takes from the millennial and gives to the high-frequency trader,” he asserted. Furthermore, not only “does Robinhood accept payment for order flow, but on a back-of-the-envelope calculation, they appear to be selling their customers’ orders for over ten times as much as other brokers who engage in the practice. It’s a conflict of interest and is bad for you as a customer.”
After pointing out industry skepticism regarding high-frequency trading, whereby some companies allow customers to choose how orders are routed, he insists, “Robinhood not only engages in selling customer orders but seems to be making far more than their competitors from it. Among brokers that receive payment for order flow, it’s typically a small percentage of their revenue but a big chunk of change nonetheless. Robinhood appears to be operating differently,” he continued.