How They’re Really Making Money On Your Free Robinhood Trades

Joe Weisenthal (0:11)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Joe Weisenthal.

Tracy Alloway (0:15)

And I'm Tracy Alloway.

Joe Weisenthal (0:17)

Tracy, I have a question about things in Hong Kong, which is, are people going crazy for stock trading there the way they are here?

Tracy Alloway (0:25)

That's a good question. I'm not sure if this is reflected in Hong Kong, but definitely in mainland China, we've had this massive rally in Chinese shares. So yeah, over there, we're having like a similar retail boom to what we have seen in the US.

Joe Weisenthal (0:41)

Yeah, I mean, it's pretty crazy. I mean, there's a lot of subplots to this crisis. In fact, that's sort of the theme of our podcast over the last several months is just exploring all of the subplots. But the incredible boom that we've seen in retail trading activity has to be one of the more surprising ones. And of course, the whole Robinhood phenomenon, all these people are home, they're not at their jobs, there's no sports betting going on. And so it's like, all right, well, I got a few bucks laying around. Maybe I'll bet on some Tesla shares for free on Robinhood.

Tracy Alloway (1:17)

Yeah, I think that's it, isn't it? It's not necessarily that retail investors are jumping into the stock market. It's the way in which they're doing that, because we have commission free trading now.

You can kind of take a punt on a bunch of stuff without necessarily losing that much money, at least upfront. I guess, and like the punts that we are seeing, Tesla, Hertz, which declared bankruptcy, everyone's been talking about those. And I think that really stands out right now.

Joe Weisenthal (1:49)

Yeah, absolutely. I remember like last year, I think it was last year, and Charles Schwab announced that it was going to cut commissions to zero and a bunch of other online brokerages followed suit. And my first thought was like, oh, boy, like people are going to lose a ton of money because they're going to overtrade. And some people probably are. But the weird thing is that a bunch of people who jumped into the market over the last several months have actually participated in one of the most extraordinary rallies we've seen of all time. So for now, some people are clearly winning.

Tracy Alloway (2:20)

Yeah, but the other part of the story is, I guess, the downsides of retail participation, or not the downsides, but the criticism that comes along with it. So obviously, a lot of people have been making fun of people who are buying Tesla stock or bankrupt company stock. We've also had some criticism of some of the trading platforms, but particularly Robinhood, which seems to be at the forefront of commission free trading.

Joe Weisenthal (2:49)

Right. Robinhood has sort of become, it's kind of like become like the Band-Aid or Kleenex. It's like this brand, but it also is synonymous with a phenomenon or an industry where lots of people are getting into trading and this whole commission free retail craze. It also, you know, raises some questions in addition to just sort of the retail side about how the industry is making money and who is really the big winner here. Because sure, there are some people that have probably turned a little bit of money into, you know, millions, thanks to investing in buying call options on Tesla.

But also a lot of people are just are making a lot of money just handling this incredible order flow, this incredible activity. And obviously, with commissions having gone to zero, the business model has changed a little bit, say, from the late 90s when the online brokers, say, like, charged just $14 a trade or whatever it was.

Tracy Alloway (3:46)

Right. So there's no free lunch in economics. There's supposed to be no free lunch when it comes to trading. But clearly, retail investors are getting, you know, commission free trades.

And yet someone must be making money off of those. So how are they doing it exactly? And again, that kind of feeds into some of the criticism that we've seen around the Robinhood platform.

Joe Weisenthal (4:07)

Yeah, exactly right. So that's what we're going to dive into today. Like, who's really making money off of all this activity? How sustainable it is?

What the new business models of online brokerage really look like? And so we're going to be talking to a great guest. He's actually with us at Bloomberg. He's the head of market structure research at Bloomberg Intelligence.

Larry Tabb is joining us to explain the sort of the new retail online broken landscape. Who's making money out? Larry, thank you very much for joining us.