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Weekend reading: The economics of free share trading

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What caught my eye this week.

Like most people, the first time I heard about Robinhood I underestimated the zero-commission pioneer. I put a link in Weekend Reading. But I didn’t write an article predicting it would mean the end of retail dealing fees.

Indeed, the same day I first mentioned it on Monevator – 8 March 2014 – was also the day my co-blogger was on BBC Radio 4’s Money Box to talk platform fees. The Accumulator didn’t bother the middle-classes masses by citing Robinhood over the airwaves, either.

Robinhood was then just a curious side story. And it still seemed that way even as readers started emailing me to ask if there was a UK equivalent.

Seven years later and most US brokers have cut their trading commissions fees to zero. My blog tells me I didn’t see that coming, just as surely as my trading journal reminds me of the dumb reasons I had for selling Tesla.

Perhaps if you weren’t publishing your views back then you did predict Robinhood’s success? I’m sure you’ll let us know in the comments!

Peter pays Paul

One excuse for doubting Robinhood was I knew well the finance industry’s long history of extracting money from its customers. I’ve blogged about that since 2007. So in as much as I thought about Robinhood in those early days, I feared a wolf in revolutionary stockings.

Perhaps those instincts weren’t entirely off.

Robinhood is about to float on the US stock market. It’s had to reveal the workings of its business in an S1 filing. And lots of people have digested the details.

Most striking is that on holding $80bn in assets from 18 million customers, Robinhood generated $522m in sales in the first three months of 2021.

For fun we can crudely1 annualize that to estimate Robinhood might make $2bn of revenues on $80bn of AUM over a full year.

That represents 2.5% generated off its customers’ wealth. Compare that to less than 0.25% levvied by a typical cheap index fund. The real-life Robin Hood’s men had every right to be merry if their economics were anything like this.

I’m not saying Robinhood shouldn’t make this money, necessarily. Crucially (though some would say arguably) much of that $2bn would not be tithed from its customers’ wealth. Much would be so-called ‘payment for order flow’, which comes from third-parties. Many commentators are adamant such payments are against the interests of Robinhood customers, but they won’t directly reduce those customers’ portfolio balances.

Other big income streams for Robinhood include crypto trading – not even Bitcoin, but Dogecoin – and option trading. One can legitimately wonder how well this will take those 18 million customers to riches. But it’s famously a free country.

Still, I’m amused by the picture that emerges from the S1. Similar to how 1970s feminists wouldn’t have imagined a million young women using their liberation to cavort for money on OnlyFans, so Robinhood surely isn’t what Vanguard’s Jack Bogle had in mind when he took the fight to Wall Street.

People gonna people, I guess.

Free share trading in the UK

Remember that as a shareholder in the UK sort-of-rival Freetrade, I’m biased (and that we will both get a free share if you sign up via that link…)

Moreover, as Freetrade co-founder Viktor Nebehaj explained in a podcast interview with Meb Faber this week, its business model is very different.

Payment for order flow is illegal here. Freetrade has also chosen not to support options trading, nor leverage. Instead it mostly makes money from currency conversion fees and – increasingly – from low-cost subscription tiers for ISAs, SIPPs, and enhanced trading features.

Freetrade now has 800,000 customers, so it’s doing something right.

Will it ever mint money like Robinhood?

Probably not.

But as a shareholder who runs an educational blog for private investors, I’m far more comfortable that its business model is aligned with its users. It also seems more sustainable.

This time next year Rodney

What I’m not, sadly, is a genius – no more than I was back in 2014 when I first heard of Robinhood.

Because despite seeing the growth of the US fee-free originator from the ground floor by covering it here, I still dithered when I first got the chance to take a stake in Freetrade.

I did invest a (small) amount of money in its subsequent crowdfunding. But in that podcast Viktor revealed some first-round investors have been made millionaires as the start-up’s valuation has grown.

Sigh. Trading options or punting on crypto on Robinhood might be a quick way to lose money. But investing has a whole panoply of other ways to make you feel like a muppet…

Enjoy the weekend – get your free share if you haven’t – and come on England!

From Monevator

The Slow and Steady passive portfolio update: Q2 2021 – Monevator

Comparing the cost of electric car ownership – Monevator

From the archive-ator: Debating whether you should count your own home in your net worth ‘number’ – Monevator


Note: Some links are Google search results – in PC/desktop view you can click to read the piece without being a paid subscriber. Try privacy/incognito mode to avoid cookies. Consider subscribing if you read them a lot!2

Rishi Sunak hints that pension triple-lock could be scrapped – Yahoo Finance

UK house prices fell in June, says Halifax, as stamp duty holiday ended – Guardian

Swedish Coop supermarkets closed due to US ransomware cyber-attack – BBC

Covid leaves students with a bitter financial legacy [Search result]FT

UK liable to pay EU €47.5 billion in post-Brexit financial settlement – RTE

Products and services

NS&I reveals four changes that will affect savers this year – Which

Get £100 cashback when you switch your ISA to Interactive Investor [Promotional offer, ends 31 July, terms apply]Interactive Investor

Could you be holding onto an old mobile phone worth thousands? – ThisIsMoney

Sign-up to Freetrade via my link and we can both get a free share worth between £3 and £200 – Freetrade

HSBC launches two-year fixed mortgage with rate of just 0.94% – ThisIsMoney

Homes for military history buffs, in pictures – Guardian

Comment and opinion

Why art and sneakers usually fail to make the investment grade [Search result]FT

The practicality of money [Malaysian but relevant!]Mr Stingy

Rebalancing: the most ignored investing premium – Validea

Don’t run scared of pension saving savings limits [Search result]FT

How to keep your financial accounts secure – Humble Dollar

Is downsizing to a smaller home right for you? – Which

Overcoming the frugality syndrome – Advisor Perspectives

You’re richer than you think – The Irrelevant Investor

Patient investing [in return factors] is hard – The Evidence-Based Investor

Naughty corner: Active antics

Returns from infrastructure have come from trading – Joachim Klement

Uber’s not-so-secret value – Axios

Rumpelstiltskin and meme stock investing – Albert Bridge Capital

Even the best active funds lag for long periods – Behavioural Investment

Alpha erosion and hot dogs – The Waiter’s Pad

Covid corner

Up to one in 160 people have Covid; R 1.2 to 1.5 – BBC

England’s Covid-19 gamble as society reopens despite skyrocketing cases – NBC

Children’s extremely low Covid risk confirmed by study – BBC

The most common symptoms have changed, finds Zoe study – iNews

‘Dread and anxiety’ among NHS staff as Covid cases surge again – Guardian

Concerns rise about Chinese vaccine efficacy, but poor countries have few choices – CNBC

Anti-vaxxer geniuses call for Heineken brand boycott – The Drum

Kindle book bargains

The $100 Startup by Chris Guillbeau – £0.99 on Kindle

A Colossal Failure of Common Sense: The Collapse of Lehman Brothers – £0.99 on Kindle

SAS: Leadship Secrets from the Special Forces by various authors – £0.99 on Kindle

Ultralearning: Accelerate Your Career, Master Hard Skills, and Outsmart the Competition by Scott Young – £0.99 on Kindle

Environmental factors

Investing in Chargepoint, an EV charging equipment supplier – DIY Investor

Can a heat pump really replace your gas boiler? – ThisIsMoney

Off our beat

Marina Hyde: We can’t keep politics out of sport, but please keep politicians out of football – Guardian

On the benefits of slowing down – Ness Labs

Spin machines: the curious history of video games on vinyl – Guardian

Why the Pentagon can’t identify flying objects – Slate

Is it time to give up our invisible addiction to coffee? – Guardian

And finally…

“In noisy systems, errors do not cancel out. They add up.”
– Daniel Kahneman, Noise: A Flaw in Human Judgement

Like these links? Subscribe to get them every Friday! Note this article includes affiliate links, such as from Amazon and Interactive Investor. We may be  compensated if you pursue these offers – that will not affect the price you pay.

  1. The exact timings don’t align with respect to those historical numbers, and Robinhood is still growing fast in terms of future numbers. So this is just the gist. []
  2. Note some articles can only be accessed through the search results if you’re using PC/desktop view (from mobile/tablet view they bring up the firewall/subscription page). To circumvent, switch your mobile browser to use the desktop view. On Chrome for Android: press the menu button followed by “Request Desktop Site”. []
{ 23 comments… add one }
  • 1 Matthew July 10, 2021, 1:29 pm

    Robinhood shouldn’t claim to be zero commission if ultimately they have worse execution. Charges by stealth – daylight robbery by robinhood!

    Hard to see it ever being cheaper than a fixed fee broker for holding ETFs especially once you factor in lost growth compounding of the initial loss through bad execution as if it were a fee, and also bad execution when you sell.

  • 2 Adrian July 10, 2021, 2:35 pm

    What is ‘payment for order flow’ ?

  • 3 DevonshireDozer July 10, 2021, 2:36 pm

    As usual, an interesting post.

    Looked at Freetrade but couldn’t find answers to obvious questions – like is it a ‘flexible’ ISA, any plans for a web based interface (old coots with arthritic fingers find proper screens & keyboards better than phones) & availability of tax information for filing returns etc… Opened an account so I could reply to the inevitable ‘welcome’ letter with those questions & went on with the intention of putting a few quid in. Gave up when I found I couldn’t just use a debit card to do so.

    So far, not enough incentive to draw me away from AJB or management from HL. In my case savings aren’t huge – although the missis would benefit considerably. That said, she has found their customer service to be outstanding over the years. Will that survive the covid malarkey? Who knows. Because covid.

  • 4 Alex Palcuie July 10, 2021, 2:55 pm

    Matthew, your statement is wrong. Robinhood customers get better price execution. Matt Levine has explained a dozen times what payment for order flow is and what it is not.


  • 5 xeny July 10, 2021, 4:01 pm

    @Alex Palcuie:

    from the article you link:”A few years back, Robinhood Markets Inc. had a crucial insight: Instead of charging a $5 commission and passing along 80% of the wholesaler’s discount to customers in the form of price improvement, it could charge no commission and pass along 20%, keeping the other 80% for itself. ”

    If the difference between the customer getting a 20% wholesaler discount and an 80% wholesaler discount is greater than $5 then surely the customer is overall getting a worse deal?

  • 6 Krunch July 10, 2021, 4:38 pm

    I believe this person predicted the zero commission future in 2019: https://kalzumeus.com/2019/6/26/how-brokerages-make-money/
    Mentioned in Monevator weekend reading of 2019-06-28.

    IIRC their analysis claims the money is not so much in the order flows but in the interest rate of all the cash that is waiting to be invested.

  • 7 Matthew July 10, 2021, 7:51 pm

    @Alex – To get a better price for execution, the person at the other side of the trade must be getting a worse price – the person who is presumably paying robinhood for order flow data? The article seems to mention a trading advantage – so are you saying we’re being paid to receive an advantage at the expense of the person paying us?
    If they are making a cut it arguably has to derive from somewhere.

    Maybe we’re willing to have a slower transaction to seek a price on the limits of what they will take and I can understand that, as in simply redefining what “best excecution” is.

  • 8 BillD July 11, 2021, 1:49 am

    The FT article “Don’t run scared of pension saving savings limits” on the pensions Lifetime Allowance and comments was worth a read, thanks. Got me thinking about the LTA again and all the frustrations around that and the possibility of it being lowered. Not a bad problem to have but in the next few years I may well have to consider crystallising my SIPPs into drawdown and taking all the tax free cash then cycling what is unspent into ISAs for a few years. I was going to UFPLS to drawdown SIPPs keeping below income tax thresholds but each one of those will be tested against the LTA and use some of it up and I will eventually breach it with even modest growth. I only recently realised that if I crystallise the whole lot into a drawdown account within the LTA there is no further LTA test until 75 – I think that is correct? I should go back and read the previous Monevator article and comments on this subject!

  • 9 Jonathan July 11, 2021, 8:33 am

    The funny thing about the FT’s pension-contribution-limits article is that it doesn’t really mention the evil one, the annual allowance.

    Intuitively one should avoid breaching that limit: are there any edge cases where the converse is true?

  • 10 Max Sheridan July 11, 2021, 9:25 am

    I might have missed the links but Ben from Wealth of Common Sense has a couple of good posts on Robinhood.

  • 11 Naeclue July 11, 2021, 10:53 am

    @BillD, if you fully crystallise before reaching the LTA you are tested again at age 75 on any growth. There is another test though if you buy an annuity.

    If you crystallise before reaching the LTA you maximise the tax free pension commencement lump sum as this is capped at 25% of the LTA, so usually well worth doing.

    Investing the LTA can give rise to income and capital gains headaches though. We fully crystallised our SIPPs several years ago and subsequently had a lot of cash to invest from the disposal of shares in my former company. The unsheltered income is of course taxable but so far we have avoided CGT. This year though I think we will have to pay some CGT as we try to make best use of our ISAs.

  • 12 SemiPassive July 11, 2021, 11:10 am

    As BillD says the LTA article is just another nudge towards taking your maximum available 25% PCLS at 55. Then reinvesting it into ISAs over a few/several years, with the remainder sat in a GIA using up your £2000 dividend allowance and capital gains tax allowances if that is suitable for your circumstances. Pretty darn tax efficient.

    If still working and contributing to your pension you don’t even trigger MPAA rules as long as you don’t draw any income from your pension.

  • 13 weenie July 11, 2021, 1:47 pm

    I too wish I had invested in Freetrade at the start. However, I had never heard of them until they were doing round 3 of crowdfunding (stumbled upon it by accident) so I got in then with a small investment. Still, it always felt more like a punt than an investment so am of course glad with the progress the company has made.

    Hopefully, they will get their web based app sorted soon.

  • 14 ZXSpectrum48k July 11, 2021, 4:00 pm

    Sorry but the idea that the retail investor is paying nothing but somehow it’s the guy on the other side who is paying the 2.5% is laughable. That spread exists, it’s very very wide, and both sides are paying.

    This is the equivalent of what we saw in P2P lending where platforms would tell retail lenders that there were “no fees”. Except the platform was charging the borrower 10% and giving the lender 5% (for 100% of the risk). The retail investors swallowed that nonsense aswell.

  • 15 Factor July 11, 2021, 4:46 pm

    @TI “….. and come on England!”

    Mentioning the footie if I may, and as a battle-hardened supporter of an EFL club myself, I have a rating scale which I always apply when assessing the likelihood of a favourable result for my team in an upcoming fixture viz (in ascending order): philosophical, hopeful, optimistic, confident, certain.

    For this evening I can’t get past “hopeful” but I shall put myself through the agony of watching, because you do, don’t you? If it gets to penalties though, it’s hide behind the sofa time!

  • 16 reckless saving July 11, 2021, 6:33 pm

    idealing uk for a long time have been wanting to switch to a commission-free model, they’ve managed it with euronext securities but with other markets the low interest world we’ve been in for some time has put pause to it for the moment.

    When the interest rates were higher their comm-free model was to setup all the services in-house that they were paying 3rd parties to reduce costs and to not pay clients interest on money sitting in client account and instead that pays for the service.

    With these commission-free providers available in a low interest world we as customers pay for it one way or another, some things maybe better, some not. Like I use T212 and know not to expect a dividend paid into my account on the day it’s due.

  • 17 Andrew July 12, 2021, 9:29 am

    @ZXSpectrum48k If you think P2P lending models are nonsense, you should look in to see what’s going on in the P2P cryptocurrency lending space. There are people taking what amount to pawn loans against their cryptocurrency holdings and, on the other side, people depositing fiat for “up to 12%/year interest”.

    Personally I’ve had some pretty good runs with (classic, not crypto) P2P. I think the business model of borrowing cheaply (from savers) and lending high (to borrowers) is something people can easily understand and get behind.

  • 18 The Investor July 12, 2021, 9:34 am

    Cheers for the comments all, plenty to chew through.

    @Krunch — Um, to be honest the zero commission future was pretty nailed-on by 2019 🙂 (Though the article is a good read, in itself). Interest on cash balances has indeed long been a mainstay of broker commission. I’ve been reading Hargreaves Lansdown’s accounts for the best part of a decade, and it’s been pretty painful (as an on/off) shareholder seeing that source of income dry up. Their recent-ish ‘Active Savings’ product is an attempt to garner more income from that customer cash again, though I don’t think they’ve achieved any meaningful scale yet.

    (To tie the circle here, Active Savings was originally going to be a P2P product! But wiser regulator-minded heads (I presume!) prevailed).

  • 19 BillD July 12, 2021, 9:51 am

    @Naeclue Thanks on the LTA feedback, good to hear your experience. If I take the whole PCLS I will also have issues with it adding to unsheltered investments. They get you one way or another, but somehow the potential CGT / income tax seems easier to deal with than the potential LTA tax related issues especially as I have no other income currently.

  • 20 ZXSpectrum48k July 12, 2021, 12:37 pm

    @Andrew. P2P isn’t inherently bad. It’s the way that the P2P fintech startups have marketed it to retail investors. This idea that somehow you are replacing the bank lending to SMEs, property developers, consumers. That is simply not true. Banks don’t intermediate between depositers and borrowers. It’s also that these fintech platforms are poorly run, with terrible credit risk management, inexperienced staff and (most funny) rubbish technology.

    There is then this idea that lenders pay no fees. The actual reality is the spread between lender and borrower is huge. Always multiple percentage points; in some cases far more. That spread matters because borrowers pay these rates to compensate for default risk. If you, the lender, don’t get that income, it destroys the economics of the transaction.

    I remember pointing out to lenders on a P2P forum that the P2P platform Lendy was charging property developers over 30% IRR and paying them <13%. They were getting 42% participation in the yield but taking 100% of the default risk. Yet everyone loved this platform because they paid 12%. They were paying a management fee of 18% ffs!

    Honestly, many retail investors really do deserve to get ripped off.

  • 21 CMF July 13, 2021, 2:12 pm

    Hi all, any thoughts on the appropriateness or methods of implementing a ‘tail risk strategy’ in addition to stocks and bonds for rebalancing purposing as mentioned in the Validea article to get better returns? I understood until now that _in general_ bonds were negatively correlated to equity therefore negating the requirement for another specific hedge but would be keen to learn more or be pointed in the right direction. Thanks, Cal

  • 22 Pete L July 23, 2021, 6:04 pm

    FreeTrade is an app only service. They entirely rely on security of user’s email and don’t have any password or PIN. User receives a link the email and clicking on it will login user to the app. Also they use email communication for change of address, email etc. I don’t think I will transfer my main portfolio to them. A webapp and more secure way to login as well change personal detail will help. Thanks

  • 23 Pete L July 23, 2021, 6:07 pm

    Freetrade has done really good job in offering commission free and fixed fee platform. I really appreciate their effort. Waiting for their webapp.

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