Robinhood App: Unlimited Free Stock Trades… But Will It Work?

Is the endgame for stock commissions really free trades? Silicon Valley startup Robinhood.io wants to try, this time in smartphone app form. Recently approved by finance regulatory agency FINRA to become a broker-dealer, this comparison chart shows their ambitious plan to offer unlimited free trades with no minimum balance requirement.

 
This has been tried before. Zecco stood for Zero Cost Commissions. They had no physical branches, free trades had to be placed online. They had a “lean engineering team”. They used social media. They tried to make enough money from margin interest and order flow to cover everything else. But it wasn’t enough, and they gradually had to raise commissions.

I have my theories why. If your main selling point is “free commissions”, you’re going to get a lot of inexperienced “newbie” investors. Being a broker-dealer has a lot of compliance and regulatory overhead, so together you’ll need a lot of call center workers to provide good customer service. Skilled employees cost a lot of money. (Sometimes I think it was actually efficient for Scottrade to spread these people out in physical branches.) Plus, newbies with low balances won’t generate much order flow and are unlikely to pay much margin interest.

Many free online services and apps can get away with minimal staff because they can effectively just ignore the high-maintenance customers and hope they go away. Robinhood won’t be able to do that.

I want Robinhood to succeed. I signed up on their early access waitlist (use my link and supposedly I’ll move up in line) and I’ll likely open an account to try them out. But I just don’t see where the alternative revenue will come from.

Added 12/26: Their fee schedule includes a $50 account closure fee. This is not a common fee and hopefully some public pressure will get them to remove it?

Added 1/8/14: The $50 account closure fee is no longer shown on the fee schedule.

Comments

  1. Free is only for self directed trades,, it’s $10 if it is broker assisted, I think that’s how they are going to keep costs down.

  2. Vanguard brokerage doesn’t charge for its ETFs, and considering their prices are lowest and indexes reliable I don’t see why most investors need anything else.

    • Jonathan Ping says:

      While it is true that you could do quite fine with just Vanguard, there will always be those that want to venture outside just index funds. I actually prefer the mutual funds within Vanguard for the highest level of simplicity and the guarantee of paying NAV and not a penny more.

  3. The reason I keep reading your site and have kept reading it since 2007, is because I always learn something new there. I learned about this thing here, I was also really really inspired from the quote about Charlie Munger selling an hour of his time to himself, from your review of “The Snowball”.

    This app may or may not work. It could be the next Zecco, or not. But I know one thing for sure – I would keep reading MMB ;-)

    Happy Holidays man!

  4. Any clue whether this RobinHood.io service will be just stocks or if it will also support options trades?

  5. Sounds cool. Hope it doesnt fail like finance bank tech-firm PerkStreet. $3M in December and $250k August 2012 may not last long. Anyone know if they’ll offer other investments like futures and currencies (like Zecco/Trade King)? Wierd, they’re only favoring people who live in CA?!? Is that for just early bird access? They are approved by FINRA; so they could offer stock, corporate bonds, and options. There Commisions and Fees Schedule says ACAT out is $75, Account Closure Fee is $50, Trading Activity Fee of at least $0.01 upto $5.95 ($0.000119 per share sells). ACH deposits take 3 business days to clear for trading. Bummers. Besides making money off the fees, charging API access, and margin trading, they will earn compensation for routing orders to dealers or certain market centers, and get monetary rebates per executed share and or aggregate exchange fees. Rhfv1.1 20131101

    • Jonathan Ping says:

      Yeah that $50 account closure fee isn’t very common and doesn’t seem to fit in with their free for all theme. Hopefully some social media pressure will convince to get rid of that fee.

      • Regarding the $50 account closure fee that is pretty common from my recent experiences. ShareBuilder just charged me $75 to transfer my Roth IRA to TradeKing. And TradeKing charges $50 for a transfer out plus $50 to close an account.

        • Jonathan Ping says:

          ACAT Transfer out fees are common, but in my experience account closure fees for taxable accounts are not. I mean, you’re just liquidating your account by selling your positions and withdrawing your cash. I could not find an account closing fee for Scottrade, E-Trade, Schwab, or TD Ameritrade. Fidelity and TradeKing charge closure fees only for IRAs.

  6. Maybe I’m missing the point, but why would someone pay for an account closure? Since there are no minimum balances, is there any reason why someone couldn’t just transfer out (or sell and transfer) and then leave a 0-balance account, thus avoiding the fee?

    • If you request a full ACAT, the closure is implied and automatic. The account gets coded so that for the next few months, any residual dividend, interest, and shares, are automatically swept to the contra account. To avoid account closure – and the resulting closure fee – you can try asking for a partial transfer and just move most of your cash and positions (if you select all cash and positions, the processor will deem it a full ACAT).

  7. Jonathan Ping says:

    Looks like the $50 account closure fee is gone now. Hopefully it stays that way!

  8. Luke Duncan says:

    API access will crank up the most of their revenue.

  9. I got these three Robinhood invites 12/17/14. They will allow you to open an account without waiting in line. Each one is good only once so maybe comment if you use it. I don’t know when they expire.

    https://www.robinhood.com/signup?invite_code=G2FYEZDU

    https://www.robinhood.com/signup?invite_code=JYECTCKQ

    https://www.robinhood.com/signup?invite_code=AYA9DZ4F

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