Robinhood is in the news again…
This time, the brokerage company announced plans to help traders pick ETFs.
The app’s algorithm will just identify ETFs that have low expense ratios for you and arrange them into a portfolio.
At first glance, there’s nothing really concerning here. Robinhood’s legal disclosures are similar to those of other brokers who do this sort of thing.
Robinhood won’t make recommendations based on what’s in your best interest. But no broker really does that.
What’s more concerning is Robinhood’s past behavior, and how it reflects on their actions today.
You might recall, the SEC fined the firm $65 million in late 2020 for misleading investors about its fees.
According to the SEC, “Robinhood provided misleading information to customers about the true costs of choosing to trade with the firm. Robinhood failed to seek to obtain the best reasonably available terms when executing customers’ orders, causing customers to lose tens of millions of dollars.”
As all SEC actions do, this one included puffery from the SEC about how tough they are: “Today’s action sends a clear message that the Commission will not allow brokers to ignore their obligations to customers.”
What’s interesting about this is that Robinhood’s actions only cost some of its customers money.
Even though Robinhood did mislead its customers, many of them actually benefitted from its actions.
The SEC order is much longer than the press release and focuses solely on facts. In that dry legal document, we learn that orders for less than 100 shares were usually filled at prices better than what was available from other brokers.
Confirming this, an internal study at Robinhood showed “that the larger the order, the more significant the price improvement losses for Robinhood customers — for orders over 500 shares, the average Robinhood customer order lost over $15 in price improvement compared to Robinhood’s competitors, with that comparative loss rising to more than $23 per order for orders over 2,000 shares.”
Robinhood could have honestly said they were great for small traders but if you generally buy and sell more than 100 shares at a time, you’re better off at other firms.
Considering they targeted small accounts, that probably wouldn’t have hurt them. It might have even been a great marketing angle because it keeps the bigger accounts out.
Either way, it would have avoided a $65 million fine.
Now, as Robinhood adds new services like advice on ETFs, customers should be suspicious. They should wonder what they aren’t being told.
You can’t blame Robinhood for trying. These ETF recommendations are for the long term and Robinhood is trying to get its customers to stick around.
However, as an account grows, traders buy and sell more shares. They need to ask Robinhood if it still costs more to trade in quantity through their app.
Unfortunately, the SEC documented that Robinhood lied to traders in the past. So if you do ask that question, be sure to follow up with a question about whether or not it’s telling the truth now.
Michael Carr, CMT, CFTe
Editor, One Trade
Chart of the Day:
Robinhood is a hard stock to love.
The company is clearly a shiny target for regulators, it’s losing money, and for once the stock price actually reflects both of these realities.
HOOD has been absolutely rinsed since its IPO. It’s down about 60% from its listing and over 80% from its all-time high. Buying the stock is a knife-catching exercise where buyers seem always just early enough to grab the blade.
But when I look at this chart, the bottom-fisher in me can’t help but see it as an opportunity.
If you put any stock into momentum indicators, we’re seeing a huge divergence in price and both the MACD and RSI — maybe the biggest I’ve ever seen.
Divergences like this tend to signal bottoms, especially when price action gets this bad.
So if you think HOOD is going to be around in 5 years, 10 years, maybe even longer… And you treat this like a speculation and don’t bet the farm on it… Well, you clearly could’ve done a lot worse than buying it here.
Despite everything Mike said above and will likely continue to say, I wouldn’t be surprised to see HOOD turn around and surprise everyone in the years to come.
Managing Editor, True Options Masters