21st Century Business Herald reporter Li Yu reported
Recently, the online trading platform Robinhood has been pushed to the cusp of the storm.
On May 1, Berkshire Hathaway's 2022 annual general meeting of shareholders was held as scheduled in Omaha, Nebraska, USA, and Buffett, 91, and Munger, 98, once again appeared together.
During the Q&A session, Buffett expressed his disgust at speculation and targeted Wall Street investment banks and brokers, "Unless people do trade, they don't make money." Everyone makes more money gambling in the stock market, which is why the market has become so crazy. ”
Munger criticized robinhood, a "retail base camp", Munger said that the brokerage's business model is full of problems, full of short-term gambling, large commissions, hidden kickbacks and other issues, he even pointed out that it is "being punished".
In fact, Robinhood's stock price has suffered an avalanche, after listing on the NASDAQ last July, Robinhood's market value was once close to $80 billion, but as of the close of May 3, EST, its stock price was $10.1 per share, compared with the issue price of $38, down more than 73%, compared with the highest stock price, has fallen by 90%.
So why did Robinhood's performance plummet by 43% in the first quarter of 2022, and who did the company's zero-commission business model reap? What impact will it have on the domestic brokerage industry?
Retail base camp encounters Waterloo
Founded in 2013, Robinhood is an internet financial services company that provides online investment and trading platforms.
Robinhood has grown with the introduction of a zero-commission model for online investment trading, which means investors can use its app to trade stocks, ETFs, options and even cryptocurrencies without paying a commission.
Robinhood's valuation in 2014 was just $75 million. After raising $360 million in a Series D investment led by DST Global on May 10, 2018, the company's post-financing valuation reached $5.7 billion.
On July 29, 2021, Eastern Time, Robinhood was officially listed on the NASDAQ with an issue price of $38, and as of the close of the first day of listing, Robinhood's stock price fell by 8.37% from the issue price, with a market capitalization of $29.098 billion. In August 2021, Robinhood's market capitalization reached a high of nearly $80 billion.
Behind the rising market capitalization is the surge in the number of users of Robinhood's app. Currently, the users of the Robinhood platform are mainly millennials between the ages of 18 and 35.
According to a 2018 survey conducted by Charles Schwab, a traditional financial management company, 31% of investors will compare the level of fees when choosing an intermediary. Millennials are more likely to be stimulated by the "zero fee" selling point, and more than 50% of millennials will fall to the latter between traditional financial institutions and "zero fee" institutions.
As a result, Robinhood's low-cost investment trading platform attracts a wide user base, especially millennial investors aged 18-35.
Especially after 2020, under the impact of the U.S. economy, millions of newbies with $1200 economic stimulus checks began trading through Robinhood, Silicon Valley's emerging free stock trading app. In more than half a year, Robinhood has added more than 3 million accounts, an increase of 30%.
As of the end of the second quarter of 2021 before the listing, Robinhood had 22.5 million app users.
In response, Munger said at the shareholder meeting that it is an unbelievable and crazy situation that we see many people who know nothing about stocks enter the market and then advise them on "investment advisors" who are even inferior to them.
At the close of trading on April 28, 2022, Robinhood released its first quarter 2022 financial report showing that Robinhood's first-quarter revenue fell 43% year-on-year to $299 million, and monthly active users fell 10% year-on-year to 15.9 million. A few days ago, the company's CEO Vladimir Tenev announced in an open letter released on its official website that it would lay off 9% of its regular employees.
Zero commission model
As we all know, the main source of income for traditional brokers is trading commissions, why can Robinhood push the zero commission model?
According to a person from a listed securities company in the United States, the ability of American securities companies to implement zero commissions is mainly because of the difference in trading mechanisms. Simply put, the stock markets in Asia are all single-exchange transactions, while the United States is multi-exchange/market center-traded.
According to public information, there are 13 national transactions in the United States, in addition to more than 50 high-frequency traders, as well as alternative trading systems (ATS) and broker-dealer internal matching platforms, forming a trading center for hundreds of listed stocks.
At the same time, U.S. exchanges have positive, zero, and negative fees, as shown in the nasdaq PSX Exchange below, if the liquidity is reduced by 100 shares, the fee is $0.3, and if the liquidity is increased by 100 shares, it pays $0.2.
Since the U.S. stock market is multi-platform bidding at the same time, there will be price differences and lags, and if investors only consider commission costs when choosing a platform, then the execution and improvement of prices will be ignored.
For example, at the same time, the ideal car U.S. stocks are bought and sold at $20/share and $21/share, if the investor directly places a $20/share sell order, if the immediate transaction is at $20.8/share, the investor's income is $20.8, the transaction price has improved, and the investor has gained 80 cents more.
However, if the order flow is sold to a high-frequency market maker, if the high-frequency merchant does not make any price improvement, the order will still be directly traded at 20 US dollars / share, and then sold for 20.8 US dollars / share, and the risk-free spread arbitrage between them is 80 cents.
Although it does not violate the trading rules of the NBBO (National Best bid and offer is the national best price), high-frequency traders may optimize the transaction price slightly and achieve a good arbitrage.
Therefore, investors should consider which platform their trading orders, that is, the buy and sell orders flow, and the improvement of their price execution, and then comprehensively calculate the commission level of U.S. stock transactions, which is the overall cost accounting of U.S. stock transactions.
The so-called zero commission is to generate revenue through other back-end modules, including order flow income, stock loans, interest on cash balances in the account, or commissions charged to market makers or exchanges through the market maker system.
Robinhood is exactly that, and while transactions are free for users, Robinhood earns its revenue by sending orders to market makers. This order-flow-based payment model, which essentially adds liquidity to the market, relies on more active users on the platform.
Driven by interests, brokers hope to get more order flows, and at the same time, they do not go directly to the exchange to find NBBOs, but transfer hands to high-frequency trading companies and let these high-frequency trading companies conduct matching transactions. Middlemen make money through the spread between buyers and sellers while providing liquidity to the market.
The above-mentioned US listed brokerage said that in such a long-term development, investors' buy and sell orders are actually commodities, and Robinhood needs to obtain commissions through these order streams.
Controversial
In fact, in the United States, zero commissions have been controversial.
For Robinhood, Buffett said that after its listing, everyone joined the "short-term speculation", "I think this is a very disgusting behavior", "we are seeing their retribution", and said that he "can't help but criticize this speculation".
The 21st Century Business Herald reporter also learned that the focus of the dispute is whether investors can get the best offer after their trading instructions are sold to high-frequency traders.
People familiar with the matter also said that as long as it is not inferior to the transaction rules of the NBBO's national best bid and sell price, high-frequency market makers can stabilize arbitrage. At the same time, a single limit order placed by an investor can be repeatedly arbitraged by market makers, so the rebate given by market makers to some traditional Internet brokers in the United States is three times that of market orders: non-market limit orders are 30 cents per 100 shares, while market orders are only 10 cents per 100 shares.
Xiaomi's participation in the investment of MicroNiu Securities is exactly like this, Weiniu Securities is also the main zero commission, the first quarter of 2022 data show that the order flow mainly to Virtu, CITADEL, Jane Street, Dash, Cboe EDGX and the well-known high-frequency trader Two Sigma.
The latest data shows that in the first quarter of 2022, Jane Street's non-market pending orders have reached a whopping 422 cents per 100 shares.
Industry insiders said that the commission/rebate that will be paid after the market maker makes a profit, and the zero commission is actually arbitrage in the order flow trading market, and whether to give investors the "best transaction price" can be imagined.
People in the US securities industry also said that the continuous expansion of the scope of the buying and selling order flow will make the stock market, if it is a market price order, the transaction price is not optimal, if it is a lower limit order, the transaction needs to wait for a longer time.
In addition, Robinhood has received hefty fines from the SEC of up to $65 million. According to the SEC, Robinhood's practice of selling client orders to other traders and deriving revenue from them was repetitive and false disclosures, failing to fulfill the platform's obligation to find the best order execution price for the client.
Even in the zero-commission model, robinhood's "non-optimal deal price" cost investors a total of $34.1 million. In the end, Robinhood agreed to pay a $65 million fine.
However, there are also brokers such as Interactive Brokers that have clearly stated that they will not sell order streams and do not intend to implement zero commissions extensively. Interactive Brokers related people said that US retail investors can apply for zero commission, but the proportion is very low, about 1-2%.
For the overseas zero commission model, many domestic brokers said that due to different trading mechanisms, it is not applicable to the domestic market.
Wang Fangchao, an analyst at Cinda Securities, believes that internet securities companies represented by Charles Schwab Wealth Management have rapidly expanded the scale of customers through low commission acquisition and mergers and acquisitions in the early stage, enriched the product and service system in the medium term, met the needs of multi-level customers, continuously optimized the income structure, and further improved profitability driven by efficiency in the later stage.
For more information, please download the 21 Finance APP