Robinhood Promises Free Trades. Did Alex Kearns Pay With His Life? – Mother Jones
aiju Bhatt and Vlad Tenev came up with the idea for Robinhood in 2012, after witnessing Occupy Wall Street. The protests, they’ve said, represented a boiling over of grievances among their generation, directed at the big banks that set off the 2008 financial crisis. Tenev and Bhatt, then in their mid-20s, friends going back to meeting as physics majors at Stanford, wanted to build something that might give their fellow millennials access to the wealth-growing power of the market. At the time brokerages charged $7 to $10 per trade. The idea for a $0 fee trading app, named after a wealth-redistributing outlaw, was born.
While the app was in development, Robinhood built up its antiestablishment identity and courted millennials with teaser videos that razzed traders on the stock exchange floor, and with a lineup of celebrity investors—eventually growing to just about everyone from Ashton Kutcher to Jay-Z—who’d all come of age in the same Y2K moment as their target audience. Online, they created a minimalist launch page where interested people could drop their email address for access to beta versions of the app—and gamified it by allowing people to move up the line by referring friends.
“The fact that we’re a brokerage leads people to think that a service like Robinhood should exist to make money,” Tenev said at the conference. “But that’s really not the case. The purpose of Robinhood is to make buying and selling stocks as frictionless as possible. If we make money as a side effect of that, that’s great.”
But Robinhood’s profitability wasn’t a side effect of being frictionless. It was very much the point. From founding, its business model was dependent on customers trading frequently, allowing the company the chance to earn a different kind of commission—known as PFOF, or “payment for order flow”—from every transaction. The payments are essentially a finder’s fee given to Robinhood by so-called market makers, the Wall Street firms who make money executing individual investors’ trades. Since launch, Robinhood has enthusiastically embraced PFOF, arranging favorable rates that eclipsed other brokerages’, making it the company’s single largest source of revenue. The money flows evoke a key lesson of the digital age: If something is free, then you’re not the customer—you’re the product being sold.
“Robinhood and the high frequency trading firms have the same incentives, which is to cause there to be as much trading as humanly possible, to create as much flow as humanly possible, which maximizes profits for the executing dealers and Robinhood,” says Dennis Kelleher, the president of Better Markets, a Wall Street reform nonprofit.
As Sen. Elizabeth Warren pointed out in a February letter to Citadel’s CEO, the practice means the “more shares they see, the more bread crumbs they take.” It can also encourage brokers to seek market makers that will give them the best PFOF, rather than the best prices for their customers—despite an Securities and Exchange Commission (SEC) mandate known as the “best execution” rule that requires brokers to always seek the best deal for customers
From its founding days, the app’s interface was overseen by Bhatt, who pushed an inviting feel in contrast to the intimidating or alienating vibe of other brokerages’ interfaces, full of analyst ratings and finance-speak. “We make use of simple colors to remove as much information as possible,” a company designer told a trade publication.
“Baiju is someone who really cares about minimalism and clean design,” an early Robinhood design staffer told me. “It was important to him to build a trading platform in the most minimal way possible.”
Robinhood also pioneered the selling of fractional shares, which Natasha Dow Schüll, an anthropology professor at NYU who wrote a book about addictive gambling design, compares to penny slots—small stakes bets that make users feel less risk and thus invite them to trade more. The app’s default settings flood users with emoji-laden push notifications that can coax customer trades. For new joiners, the notices direct them to lists of the app’s most popular stocks, or of “Daily Movers”: the 20 stocks with the biggest daily percent change in price—regardless of if the price went up or down. As Vicki Bogan, a professor and behavioral finance expert at Cornell’s business school, told a recent congressional hearing, such “cues, pushes, and rewards” work to “exploit natural human tendencies for achievement and competition…to motivate individuals to make more trades.”
Parts of the app remind Schüll of Las Vegas casinos, where carpet is installed so it never presents a right angle, a stopping point that forces walkers to make a decision. “The last thing you want to do when you’re engaging a gambler—or in this case, a trader—is to put them in a position of a rational decision maker,” she says. “You want to have the carpet smoothly and seamlessly turn into the gaming area, so that the easiest thing for the person to do is to continue moving forward. You see that absolutely in the design of this app. It’s about instantaneity, immediacy, ease of access—you just kind of flow right into it.” This March, the House Financial Services Committee echoed concerns that platforms like Robinhood “encourage behavior similar to a gambling addiction.”