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Last week, Robinhood announced that the app-based brokerage will now be providing customers with access to 24 hour trading. While more established online brokerages like TD Ameritrade and E-Trade allow some form of 24-hour trading in select ETFs, Robinhood will be the very first to do so on individual stocks.
Quick tip for safe interwebbing—if it sounds like a scam, it probably is.
Now, if it sounds like a scam and Robinhood is behind it…our attorneys have advised us not to finish that sentence.
Before we give you the capsule history on why you shouldn’t trust Robinhood, let’s take one big step backwards.
24 hour trading? Let’s examine this idea for just a second.
Gonna Wait Til the Midnight Hour
I know we like to talk about a lot of complicated stuff around here. But we can keep this one pretty simple. There’s no such thing as 24 hour trading. It literally doesn’t exist.
The way the stock market works is—there are regular trading hours, Monday through Friday. In the U.S., the market opens at 9:30AM EST and it closes at 4:00PM EST. During the hours in between, live trading takes place, price discovery occurs, and liquidity ensues. Most importantly, we can all watch it happening in real time.
Some exchanges allow for extended trading through an “after hours” market. Some trading may occur before regular trading hours–typically starting at around 8AM EST; and after regular trading hours–typically ending around 6:30PM EST.
These after hours markets are characterized by low liquidity and high volatility. There’s really no good reason for the average retail investor to mess with this stuff.
Why?
Because real trading happens by the light of day. I can’t put too fine a point on that. It sounds like a metaphor, but it’s also an actual thing.
The National Best Bid and Offer (NBBO)--the mechanism that allows for meaningful, accurate, real-time price discovery and which leads to best execution for everyday investors–only functions during regular trading hours. This means that you, as an everyday investor, can only get the highest bid price and lowest ask price in a security during regular trading hours.
Right, so…
24 Hour Party People
If stock exchanges are literally only open and trading during these hours, what might Robinhood do to execute your trades in the hours in between, and how might this impact price discovery, and what are you actually paying for it?
Who the hell knows? And that’s kind of the whole point.
We have no way of seeing what happens in the shadow of night. We know it will be taking place in a dark pool called Blue Ocean ATS. Certainly, there can be nothing insidious about trading your money in the middle of the night using dark pools like some kind of boiler room vampire, right?
Ok. Now’s probably a good time to revisit the Robinhood capsule history.
Money For Nothing and Your Clicks For Free
In 2015, Robinhood Markets burst onto the trading scene with a commission-free stock trading mobile app aimed at individual investors. Formed by HFT players Vladimir Tenev and Baiju Bhatt, the financial services group claimed its goal was to level the playing field, and to ultimately make the world of trading widely accessible to non-institutional investors.
They spent the next five years convincing users of this ambition. As of 2022, Robinhood claimed to have more than 15.9 million active monthly users sharing more than 22 million funded accounts. The vast majority of users fall into the Millennial bracket, including Tenev, who is the firm’s sole CEO today.
Stop, Collaborate, and Short Squeeze
Not sure if you know this, but back in the day, GameStop was best known as the leading retail outlet for video games—that is, before it became a symbol of the resistance.
Last week, we talked about short selling, where—in brief—investors bet on stock prices to go down. For a deeper dive, check out last week’s episode of Let’s Talk Markets.
Otherwise, just dig back in your memory to those heady days of January 2021 when subreddit community r/wallstreetbets started buzzing about a 140% short sale on an array of securities, most particularly the beleaguered video game vendor.
Gamestop’s valuation stood at a paltry $17.25 per share at the beginning of the month. That’s when the Reddit community started buying up cheap shares. The cost was particularly low thanks to commission-free brokerages like Robinhood.
The surge of unforeseen action forced institutional investors to rush back into the market and begin buying back shares to cover their positions. This only drove the value of GameStop’s shares higher.
In the midst of this frenzy, individual investors collectively profited by millions. Hedge fund managers lost billions on their short sale bets. It was a refreshing role reversal.
This first wave in the so-called meme-stock frenzy peaked on January 28th, when GameStop’s price reached more than $500 per share. It represented a 30-fold increase for the security. And best of all, it was at the expense of institutional short-sellers.
Individual investors were pummeling institutional investors into the canvas…so naturally, the ref rang the bell.
Turned out Robinhood was that self-appointed ref.
Hoodwinked
As the GameStop short squeeze spiraled outside the control of institutional investors, Robinhood literally pulled the plug. Without explanation, on January 28th, the app halted buy orders on GameStop and other meme securities.
Outrage ensued as Robinhood silently snuffed out the organic market events unfolding in markets. Only the next day did Robinhood cite its inability to post sufficient collateral to execute client orders as an explanation for the shutdown. Widespread allegations of market manipulation and an array of lawsuits and investigations have followed.
From here on out, the best way to understand Robinhood is to peruse its rap sheet:
Of course, all of this begs the question–just what does it take to actually lose your license as a brokerage? The jury is still out on that one, not to mention on a handful of fun class action suits.
We’ll keep you posted on how it all plays out. We know you’ll take special interest in the GameStop proceedings.
Won’t Get Fooled Again
But while we’re waiting for the main course, here’s a little amuse bouche.
Two weeks ago, Robinhood accidentally declared AMC bankrupt for a period of three minutes in the middle of a trading day. The news came as a surprise to the theater chain. CEO Adam Aron promptly responded, tweeting that claims of his company’s financial death were greatly exaggerated:
“What the DUCK !!!!! I am getting multiple reports that Robinhood briefly posted today that AMC filed for bankruptcy. How can companies like Robinhood do this? So ludicrous, so wrong, so irresponsible. On Friday, we report Q1 earnings, and will announce our sizable cash position.”
We’ll also keep you posted on the lawsuits that come from this one.
And You Wanna Be My Latex Salesman?
On May 10th, Robinhood announced that it will be unveiling round-the-clock trading in select individual exchange traded securities.
“Using 24 Hour Market,” says Robinhood, “people can place limit orders to buy whole shares of 43 of the most traded ETFs and individual stocks– such as TSLA, AMZN and AAPL– 24 hours a day, five days a week. 24 Hour Market lets customers invest when they want, on their schedule. Trading hours will run from 8:00 pm ET on Sunday to 8:00 pm ET on Friday.”
Again, while competitors like TD Ameritrade and E-Trade allow 24-hour trading on select ETFs, Robinhood promises to gear its individual stock offerings toward younger (read: more economically vulnerable) users.
Robinhood would become the first brokerage to allow 24 hour trading on individual stocks, opening up a whole new set of options for individual investors who just have to get their action in during the hours when liquidity and transparency are at their lowest.
Robinhood boasts that the pioneering service will accommodate the busy, round-the-clock lives of today’s diverse individual investors.
Unrelated, on Monday, May 15th, Robinhood tweeted, “We are currently experiencing a system issue that may affect the display of your portfolio value. We are working on a solution.”
I’m bursting with confidence.
These dudes literally can’t not fuck it up during the daytime. But yeah, not…you should totally trust them with your money overnight.
You don’t think very much of us, Robinhood…do you?
***
Robinhood plans to make its 24 Hour Market available to all users by June of this year. And yet again, we will keep you in the loop on any lawsuits that may follow.
For a deeper look at Robinhood, join Dave and Pink for this week’s episode of Let’s Talk Markets.
Dave Lauer is a co-founder and CEO of Urvin Finance, where he leads the team in building Urvin Terminal. Prior to founding Urvin Finance, Dave spent over a decade advocating for financial market reform after quitting his job as a high-frequency-trader.