He Needs No Defending
It struck me somehow when I saw the response that Robinhood had for Warren Buffets comment about Robinhoods business model.
To cover it quickly, Warren Buffet, at his annual shareholder event on Saturday, made some comments when asked about Robinhood and the Democratization of investing. As usual, he was blunt and honest and spot on. He did not favor platforms like Robinhoods, that turn investing almost into some game and accepts payment for order flow. Buffet’s fear of putting inexperienced investors in a marketplace that has risks seen and unseen is very accurate and should be heeded by the powers that be in Washington.
Robinhood’s response was disrespectful and cheeky. While they may feel that Buffet and Munger’s time has come and it is time for a new breed of investor, they have just shown their immaturity and that new breed of cockiness that is becoming more and more pervasive in society.
I get it. Someone attacks your business model and you are compelled to defend it. Defend it then, don’t disparage people that have proven time and time again how to invest for the long term. There is a way to defend yourself without looking childish and petulant and maybe, if you stop and think before you speak, people will listen.
While I do believe people should have access to equity markets at a reasonable cost, I believe that investors also should be educated regarding the risks and the cause and effect of certain actions. Every investor who uses one of these apps should be accredited before they make a single trade. Listening to some moron in Boston is not accreditation by the way. There should be a test, like the Series 7, that every investor should take. It doesn’t have to be that all inclusive, but there should be some minimum knowledge you go out and invest.
Before I go on, I want people to think of something about Robinhood and its business model. It generates it’s income from directing all that order flow to High Frequency Traders like Citadel for example. Imagine, if they have been paid over three hundred million dollars for that order flow, how much money did those HFT’s make off of that order flow? Maybe two times perhaps? Perhaps more. Interesting point no? The bigger point and I am not really sure any of the traders on Robinhood understand or care but HFT’s are not “buying” this order flow out of the kindness of their hearts. No, they trade off of it and that trading, while per trade it may seem negligible, over the time adds up to a substantial sum.
I will give a very short example: A trader wants to buy 500 shares of Gamestop at 145.00. The stock may be offered at 144.995 and through the magic of High Speed trading, the company that bought that order flow will buy the 500 shares at 144.995 and sell those shares back to the Robinhood investor at 145, thus pocketing .005 cent per share profit on the trade. While it is only a $2.50 profit for the HFT, they will do this thousands and thousands of times a day. That $2.50 should have been the savings the investor was entitled to but he/she pretty much gave away the right for best price execution when he/she signed up for Robinhood. Now the HFT will pay Robinhood maybe .001 mil per share and still pocket a profit of .004 per share on almost every trade. I do understand that my numbers might be off a touch but trust me, everyone is making money off of this trading. Money that should be in the pockets of the investors.
Back to my point, which is simply, until you have had the long term career success like Warren Buffet and Charlie Munger you probably should pipe down and continue to build out your business. I also firmly believe that Buffet and Munger did it the right way. Their investors, their legacy companies, their competitors and their associates over the years have always been dealt with fairly and honestly. You can’t go back to any point in time where there were any question marks as to their dealings. Ever. The people at Robinhood certainly can’t say that, now can they?