We moved from Gamestop onto silver and then onto a dozen other meme stocks all over the course of the last couple of weeks, but a few of the old brokers who I used to work with at UBS back in 2000 during an eerily similar time have been texting me the last couple of weeks, saying, “Dude, you’ve got more to write about Robinhood.”
That’s a little played out at this point, though, so let’s discuss what in the world to do about social media, which is destroying lives (and livelihoods) every day at least as aggressively as Robinhood.
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Jaron Lanier has once again proven to be well before his time on this one. Frankly, Jaron, who has been called the "father of virtual reality," has been so far ahead of his time on other matters that a lot of people in Silicon Valley just plain don’t like him for making them look bad, although it’s possible their argument that Jaron is a little more philosopher than engineer may be accurate. Nevertheless, he was right about the need to correct Facebook when he first started going off about it nine years ago.
It is unlikely that Jaron would take exception if I were to characterize him as a bit of a hippy (even though it was everybody in The Valley but him who was smoking DMT with Wavy Gravy back then), and there was a cool culture around the Bay Area when he moved there in the 1980’s that was very much an extension of the now legendary Stewart Brand’s Whole Earth Catalog, which he and Larry Brilliant basically took online in 1985 as The Well, the world’s first online community.
It was a heady time, and one of the tenets of the culture was that technology should be free. Any attempt to create one final authoritative bottleneck that would serve to mete out knowledge to the rest of society would be wrong.
…Then, almost 20 years later, along came Facebook.
Jaron has become one of the tech world’s biggest proponents of pay-for-service platforms. His point is that Facebook is free because of ads, but they’re not just ads anymore. Facebook isn’t really free; we are all paying dearly. The algorithms that started out as advertising have become so clever that they have evolved into behavior modification that impedes the original intention of the technology.
In a piece Jaron wrote for Edge in 2006 entitled "Beware the Online Collective" he wrote, “What's to stop an online mass of anonymous but connected people from suddenly turning into a mean mob, just like masses of people have time and time again in the history of every human culture?”
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For more than twenty years, broker-dealer firms have competed in a race to the bottom. Robinhood was the first to get there-- completely commission-free equity trading—but Schwab, TD Ameritrade and E-Trade all caught up a couple of years ago, and then Schwab gobbled up TD outright.
Do-it-yourself investors have had low-cost trades for years, and that has already provided ample rope to hang themselves. There is little question in my mind that the advent of online discount brokerages contributed greatly to the dot com bust of 2000.
And when it comes to the current record-high valuations in the stock market, it seems reasonable to characterize the situation as already somewhat delicate. If you take that and throw in people’s ability to act without discipline or cost, it’s a recipe for disaster.
It’s a different kind of disaster than Facebook, but the root of both is that they’re “free.” Apps like Robinhood make money through interest, rebates and making customers pay for premium accounts to gain access to exclusive investment options. People are definitely paying; it’s just that their cost structure is not transparent.
According to their site, Robinhood makes money from "interest from customer cash and stocks, much like a bank collects interest on cash deposits" as well as "rebates from market makers and trading venues"--market makers like Citadel Securities, which is one of the biggest sources of Robinhood’s revenue. Citadel pays the no-fee trading app for handling its orders and fills more of them than any other firm.
How much? According to the Wall Street Journal in late 2018, "If a customer buys 100 shares of Apple for $200 each - a $20,000 purchase - Robinhood could get up to $5.20 for routing that order to electronic-trading giant Citadel Securities LLC, according to calculations based on a recent Securities and Exchange Commission filing," the article reads. According to The Journal's analysis of SEC filings, that's compared to some 9 cents that Schwab would make for the order and 16 cents that TD Ameritrade would make. Bloomberg reported in 2018 that Robinhood makes nearly half of its revenue (more than 40%) from high-frequency trading and payment for order flow.
So, Robinhood offers “free” transactions, but they’re apparently very pleased with the millions of new traders on their platform who act without any regard to spreads, prices, time of day, order routing or anything. In other words, they’ve got a lot of customers who are paying and just don’t know it, and they seem just fine with that.
Sounds a lot like Facebook. Neither one is truly free. They’re both platforms that require a third party to moderate the stated purpose, whether that’s peer-to-peer communication or stock trading, and as Jaron said in his 2018 Ted Talk (while doing his best impression of Jabba the Hutt), “We cannot have a society in which, if two people wish to communicate, the only way that can happen is if it's financed by a third person who wishes to manipulate them."
He's right; there can exist no genuine communication between platform participants when a hidden third party is paying to manipulate the dialogue. These are not social networks at all; they are behavior modification empires. Somebody better post in WallStreetBets on Reddit and let everybody know.
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Facebook is the monster, but Robinhood is equally guilty. They have gamified online trading and turned it into an addiction replete with a colorful Candy Crush interface and childish bursts of confetti to celebrate transactions. Meanwhile, a bunch of people on Reddit got manipulated and abused this month while Citadel made a grip of money simply doing their part to keep Robinhood “free.”
Just ask anybody who bought GameStop stock the last week of January or first week of February how free it is. Zero commission and a, what, 85% loss on the stock? I don’t care what you call it-- that’s downright expensive, and I don’t think Brand or Brilliant could have ever dreamed this would happen when they brought The Well online …even if they were super-high.
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