Is Robinhood’s Disruption a Good Factor?

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Robinhood’s stock trading was fun, cheap, and attractive to young people who are not rich – not the crowd that the financial industry normally caters to.

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

Ahead of Robinhood’s (very unusual) IPO slated for this week, my colleague Erin Griffith spoke to me about the ups and downs of the app and how the company fits into the financial technology revolution.

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

Erin: Robinhood implemented the tropics of Silicon Valley to disrupt what was before. Many startups aim to do this, but few have actually made it. The company made stock trading as easy as playing Candy Crush. It cleared trading and got a lot of young people to invest in stocks. It forced other online brokers like Charles Schwab, Fidelity and E-Trade to change more than it had in years.

But just as people debate the tradeoffs made by companies like Google and Facebook, it is also pointed out that Robinhood has created dangerous drawbacks.

What are the disadvantages?

Robinhood can feel more like a video game or casino than an investment account to users, and that can sometimes force inexperienced investors to take huge risks, especially when engaging in some type of trade that involves borrowing money. Investment managers Warren Buffett and Charlie Munger recently spoke about Robinhood, with Munger calling it “under disdain” and “a seedy, disreputable company.”

Robinhood also makes more money when its users trade more, but research has shown that such behavior does not generate the best investment returns. (The company’s financial documents state that an “overwhelming majority” of its customers do not fit the definition of “day traders” who do a lot of quick trades.)

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

Robinhood believes in this, as evidenced by a defiant letter from the company founder to potential IPO investors. But people following the company have also asked if Robinhood’s zest for growth and shaking up the system has led to a pattern of fatal errors.

What types of errors?

The app crashed at a few crucial moments. For this and other flaws, it recently paid a record amount to the securities industry self-regulator, including not enough to weed out clients unsuitable for some type of higher risk trade.

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

You wrote that we were there a golden age for new types of financial companies Including Robinhood, the payment start-up Stripe and semi-automatic financial advisors. What’s wrong?

Many people wanted something different from large, traditional financial institutions, but they didn’t have many good or reliable alternatives. Almost a decade ago when Simple, one of the earliest mobile banking companies, kept collapsing, the setting was: This is what happens when your bank is just an app.

A few years later, the technology building blocks for newer financial firms have become more solid, and trust is building in them with the public and regulators. It’s great for people to have more choices in banking and finance, but there are tradeoffs here too.

A number of these companies have faced repeated outages, frozen accounts, hacks, and other major issues. Traditional financial institutions have many problems, but they probably won’t lock you out of your money without recourse.

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You have to watch TikTok star James “Bear” Bailey charm people in a supermarket by singing the R&B song “All My Life”. (Bailey regularly posts videos of him singing in a gas station shop near his home.)

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