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Is Robinhood’s Disruption a Good Thing?


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Robinhood has made stock trading fun, cheap and appealing to young people who aren’t rich — not the crowd that the finance industry typically caters to.

But the app also has a track record of grievous mistakes, and it may not be good for people’s wallets if investing feels like a game.

Ahead of Robinhood’s (highly unusual) initial public offering planned for this week, my colleague Erin Griffith spoke to me about the app’s ups and downs and how the company fits in the financial technology revolution.

Shira: Let’s start with you explaining to us why Robinhood is getting so much attention.

Erin: Robinhood has delivered on the Silicon Valley trope of disrupting what came before it. Many start-ups aim for this, but few have actually pulled it off. The company made stock trading as easy as playing Candy Crush. It made trades free, and it brought a lot of young people into stock investing. It forced other online brokers like Charles Schwab, Fidelity and E-Trade to change more than they had in years.

But in the same way that people are discussing the trade-offs of companies like Google and Facebook, people are also pointing out that Robinhood has created dangerous downsides.

What are those downsides?

Robinhood can feel to users more like a video game or a casino than an investment account, and that can sometimes compel inexperienced investors to take big risks, especially when doing a type of trading that involves borrowing money. The investment managers Warren Buffett and Charlie Munger recently discussed Robinhood, with Munger calling it “beneath contempt” and “a ​​sleazy, disreputable operation.”

Robinhood also makes more money when its users trade more, but a lot of research has found that such behavior doesn’t generate the best investment returns. (The company’s financial documents say that a “vast majority” of its customers don’t fit the definition of “day traders” who do a lot of rapid-fire trades.)

Professional investors can be reckless, too, and what they do sometimes is indistinguishable from gambling. Is the criticism of Robinhood just an elitist attitude that most people can’t be trusted to invest their own money?

That’s what Robinhood believes, as evidenced by a defiant letter that the company’s founder wrote to potential IPO investors. But people who follow the company have also asked whether Robinhood’s zeal for growth and shaking up the system has led to a pattern of serious errors.

What kinds of errors?

The app has crashed at some crucial moments. It recently paid a record amount to the securities industry’s self-regulatory body for that and other mistakes including not doing enough to screen out customers that weren’t suited for a type of higher-risk trading.

Last year, a young man killed himself after a misunderstanding that led him to believe that he was in the hole by more than $700,000 from Robinhood trades, and he couldn’t reach the company to sort it out. A traditional broker might not have allowed that type of investment without guidance, or it might have been easier for a customer to find help.

You’ve written that we’re in a golden age for new types of financial companies including Robinhood, the payments start-up Stripe and semi-automated financial advisers. What’s going on?

Many people have wanted something other than big, traditional financial institutions, but they didn’t have many good or reliable alternatives. When Simple, one of the first mobile banking companies, crashed all the time, the attitude nearly a decade ago was: This is what happens when your bank is just an app.

Fast forward a few years and now the technology building blocks for newer financial companies have become more solid, and trust in them is building among the public and regulators. It’s great for people to have more choices for banking and finance, but again there are trade-offs.

A number of these companies have struggled with repeated outages, frozen accounts, hacks and other major issues. Conventional financial institutions have many problems, but they’re also not likely to lock you out of your money without recourse.

  • Words fail to capture how rich these companies are. The combined profits of Apple, Microsoft and Google for three months were four times Walmart’s profit for a whole year. Yeah, they’re rich.

  • Kids use the internet. How do we keep them safe? Facebook’s Instagram outlined new measures to keep teenagers from unwelcome interactions with adults in the app, and it won’t allow advertising targeted to kids’ interests or online activity, my colleague Erin Woo reported. But as the company was touting its new protection measures, The Wall Street Journal found automated Instagram recommendations of horrifying sexualized hashtags and comments about children.

  • Look, we NEED mindless TV: The HBO Max streaming video app has been glitchy, particularly on the Roku streaming gadget for TVs. Bloomberg News spoke to frustrated customers, some of whom have left 37 pages of HBO app gripes or workarounds on Roku’s website. (The root cause of all this is a streaming TV business model that replicated all of the old TV habits.)

You gotta watch the TikTok star James “Bear” Bailey enchanting people at a convenience store by singing the R&B song “All My Life.” (Bailey regularly posts videos of himself singing in a gas station store near his home.)

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