"Do not go where the path may lead, go instead where there is no path and leave a trail."Ralph Waldo Emerson The juggernaut that is the Robinhood commission-free trading app has accumulated some dents and bruises over the year, along with a number of truly breathtaking successes. One of the more overexposed stories in a year engorged with superlatives, system outages, a customer suicide and, most recently, the hacking of thousands of accounts has challenged Robinhood's meteoric rise along the way. Together, these headwinds have delayed Alphacution's prediction of the timing of an oncoming IPO. All that said, one aspect of the Robinhood juggernaut - certainly among the more important aspects to its key stakeholders - is persistent growth in order routing revenue; the largest component of total revenue. After two quarters of blockbuster, pandemic-fueled numbers showcasing the inner workings of Robinhood's order flow firehose, the Q3 2020 order routing figures have recently been made public. The headline is that after the second quarter's monstrous $180.3 million in payments for [...]
“Study the science of art. Study the art of science. Develop your senses – especially learn how to see. Realize that everything connects to everything else.” – Leonardo da Vinci Market making in individual stocks has become so competitive that most hyperactive strategies – the ones that reside in Alphacution’s structural alpha zone – have turned to increasingly rely on some form of ETF arbitrage. This competitive dynamic is exacerbated by factors such as liquidity fragmentation, liquidity internalization, payments for order flow (PFOF), and the winner-take-all impacts of process automation (aka – scaling via technology). For those proprietary trading firms with few, if any, options positions in their portfolio, cash ETF position concentrations (based on total 13F position counts) are represented as follows: When we isolate the leading order flow wholesalers and consider aggregate cash ETF positions as a percentage of 13F gross value, one of the clues that rises to the surface (in concert with the findings in the prior chart) is the prominence G1 Execution Services (G1X), a unit of legendary derivatives powerhouse, Susquehanna [...]
“The perfect stock trading app for the videogame generation was supposed to “democratize finance” with zero-commission trades. But the primary plan was to get rich by selling customer trades to the market’s most notorious operators.” – by Forbes Staff Writers Jeff Kauflin, Antoine Gara, and Sergei Klebnikov Alphacution contributes to Forbes development of story on Robinhood, “The Inside Story Of Robinhood’s Billionaire Founders, Option Kid Cowboys And The Wall Street Sharks That Feed On Them” (August 19, 2020).
“New investors are riding the stock market’s climb during the coronavirus pandemic.” – by Matt Krantz, Personal Finance and Management Editor, IBD Alphacution contributes to Investor’s Business Daily’s development of story on Robinhood, “Beginning Investors Are Charging Into Stocks; What Could Go Wrong?” (August 14, 2020).
“Name of the game? Move the money from your client’s pocket into your pocket. Number one rule of Wall Street: Nobody knows if the stock is going up, down, sideways or in … circles. It’s all a fugazi…“ – Mr. Hanna, Wolf of Wall Street On Monday, August 10 at exactly 11am EDT (you know, after the opening bell was safely in the rearview mirror), Robinhood Markets, Inc. – the anti-incumbency insurgent trading app platform and self-proclaimed democratizer of all things financial – set out to dominate the week’s financial news cycle by enticing media powerhouse, Bloomberg, to drop a news bomb into an ecosystem already negligently over-stimulated on the topic: “Robinhood Blows Past Rivals in Record Retail Trading Year.“ One piece of data was exclusively revealed to Bloomberg at the center of this story: 4.31 million daily average revenue trades – commonly known as DARTs (and generally defined as customer orders executed divided by trading days) – were recorded in June with the additional explanation that “the firm is revealing the data for the first time, [...]
Alphacution Director of Research, Paul Rowady, joins eXponential Finance Podcast host and Tokyo FinTech founder, Norbert Gehrke, for a spirited – if not, highly-caffeinated – and entertaining discussion covering a wide range of Alphacution’s most illuminating research themes, from the genesis of its trading and asset management ecosystem map to the concept of alpha capacity to the implications of the current commission-free trading landscape and, of course, the riveting Robinhood phenomenon. Enjoy…
“The rush of armchair traders investing through Robinhood, an easy-to-use app for trading stocks, may be helping inflate a stock bubble and setting up investors for a potential bust.” – by TheHill.com Reporter Niv Elis Alphacution contributes to TheHill.com’s development of story on Robinhood, “Are trading apps propping up markets?” (August 6, 2020).
Q2 PFOF Craziness: Robinhood Becomes Parody of E*Trade Commercial, Competes with TikTok for Attention…
“There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.” – Ludwig von Mises, economist Someday, sufficiently far into the future, when we have somehow broken free of the illusion, we are going to look back on this chapter in world history and wonder how we had entered into such a collective state of insanity in parallel with such profound technological advancement… The Fed has all but said that it will prevent markets from declining (and plug whatever economic holes it needs to plug and lubricate whatever financial gears it needs to lubricate), no matter how much money it needs to print, debts and deficits be damned. This is not a characteristic of free markets, nor is it a feature of a capitalist system… And so, as if gleefully hurling itself from a trampoline [...]
"Just when I thought I was out, they pull me back in." - Michael Corleone, The Godfather: Part III Chicken or egg? For today's story, we know which one came first. However, we may never know for sure which one was the more prominent cause of the recent sustained spike in US stock volumes: A frictionless environment brought on by a zero-commission framework or a high-volatility market brought on by a once-in-a-century global pandemic? Granted, there may be additional factors at play here. Like the gamification of market interfaces as substitution for a sports apocalypse. People need something to do. And, when confined for extended periods, they will naturally choose paths of least resistance, especially those that entertain, are addictive and tickle financial desires... This is what one of those paths looks like; notably since March 2020: Now, I made a point last week, in "Robinhood's Trailing Stop Orders: Extreme Profitability, By Design," to say that we would try to avoid seeming redundant in our topical choices, at least [...]
“Robinhood’s users have been mocked endlessly for their inexperience and even blamed for a stock market many view as out of touch with reality.” – by Bloomberg Opinion Columnist, Nir Kaissar Alphacution contributes to Bloomberg Opinion’s development of story on Robinhood, “Robinhood Is Democratizing Markets, Not Disrupting Them” (July 17, 2020).