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No Mercy No Malice

Robinhood and iAddiction

July 2, 2021

On Wednesday, trading app Robinhood agreed to pay $70 million in fines and customer reimbursements to settle a FINRA investigation. That followed a $60 million fine in December to the SEC for failing to properly disclose its order-flow revenue, and a separate $1.25 million fine to FINRA. These are record fines … that amount to less than 0.5% of the firm’s valuation. On Thursday, the firm responded to regulatory bodies deeming them “reckless” by filing an S-1, initiating the IPO process. In sum, these aren’t fines but a validation of the company’s business model and evidence that, each day, there is (another) insurrection in D.C. However, this mob drives Teslas and is on Clubhouse.

The S-1 reveals Robinhood’s revenue quadrupled in 2020, to nearly $1 billion, and the firm registered over a half a billion in revenue in just the first quarter of 2021. After eking out a small profit in 2020, the company incurred $1.5 billion in losses when meme-stock mania overwhelmed it.

The prospectus also discloses that Robinhood anticipates paying another $15 million fine to New York’s trading regulator, and that it’s currently under investigation by an alphabet soup of federal agencies and authorities in California, New York, and Massachusetts. Here’s a sentence you typically don’t find in an S-1: “[O]ur Co-Founder and CEO, Vladimir Tenev, among others, have received requests for information, and in some cases, subpoenas and requests for testimony, related to investigations….” And in the “surprising nobody” category, Robinhood will have a two-tier stock structure, with insiders (including Tenev) holding shares with 10x the voting power of shares sold to the public so they can continue to pursue a strategy of regulatory overrun regardless of what shareholders think.

There are a lot of great things about Robinhood and online trading, including onboarding an entire generation into equity investing. (Disclosure: I am an investor in rival investment firm Public, which does not sell order flow, but I was on record with my criticisms of Robinhood before I’d even heard of Public.) My concern with Robinhood — i.e., I believe these guys are mendacious fucks — is more fundamental. The company’s mission to “democratize finance for all,” is similar to Pablo Escobar saying his mission was to “democratize cocaine.”

Providing people access to the tools of finance is a worthwhile mission. Just this week on the Prof G Pod, I interviewed Pierpaolo Barbieri, the CEO and founder of Ualá, an Argentine attempting to reach the 50%+ of Argentines who are unbanked.

Robinhood, on the other hand, is the Sith Lord of finance — monetizing the addictive nature of day trading. Day trading is gambling. And it doesn’t pay off. I wrote about this a year ago, when a 20-year-old Robinhood customer killed himself after the app mistakenly suggested he was down $730,000. We’re reprinting that post below because this leopard has not changed its spots, only becoming bigger, bolder, and more menacing.

In response to criticism, Robinhood removed the confetti animation “celebrating” each trade. And it claimed it was increasing educational support on the app and instituting more rigorous criteria for eligibility for options trading. The company now has 2,700 customer support staff, triple the number it had in March of 2020 … underwhelming, as the company has roughly the same number of reps per account it did last March. The Wall Street Journal didn’t mince words in a recent analysis: “Robinhood Has a Customer Service Problem.” (Speaking of tech addiction, Adam Alter, who wrote the bestselling Irresistible on that topic, is teaching Section4’s next Product Psychology & Strategy Sprint.)

Our analysis of the S-1 reveals that “addict” does not appear anywhere. The filing does mention the suicide, but only as a disclosure of litigation filed against the company. (Robinhood reached a settlement with the young man’s family.) “Protect” is used 37 times, compared to 87 times for consumer lender Affirm and 65 times for crypto exchange Coinbase. The phrase “compound interest” appears exactly zero times, while “trade” shows up 191 times. And then there are all those fines and investigations. “Fine” appears 47 times in Robinhood’s S-1, vs. 28 in Coinbase’s and 30 in Affirm’s.

Robinhood traders invest overwhelmingly  in highly speculative assets: Dogecoin accounted for 34% of Robinhood’s cryptocurrency transaction-based revenue in Q1 2021, and 6% of the trading firm’s overall revenue in the same period. Dogecoin shed 30% of its value when “dogefather” Elon Musk took the SNL stage. Trades in the private market(s) reflect a valuation of $55 billion. That feels right. Pablo Escobar was believed to have amassed wealth of $64 billion.


[The following was originally published June 19, 2020.]

Addiction is the inability to stop consuming a chemical or pursuing an activity even though it’s causing harm.

I engage with almost every substance or behavior associated with addiction: alcohol, drugs, coffee, porn, sex, gambling, work, spending, devices, and social media. I’ve abused all of them, but don’t think I’m addicted. On a balanced scorecard, these substances and behaviors, abuse and all, have been a net positive in my life, even @twitter.

Most disease and hardship for our species has been a function of scarcity — too little salt, sugar, fat, approval, safety, opportunities to mate. As a result, when we find these things, our brain produces the ultimate reward, the pleasure hormone dopamine. And it makes sense. Nature rewards behaviors that ensure the propagation of the species.

The assembly line, processing power, and Amazon Prime have not only met the minimum thresholds for survival but created a new threat to our species: superabundance. Diabetes, income inequality, and fake news — all are a function of our belief that more is better. Jeff Bezos capturing and hoarding the GDP of Norway doesn’t make sense for the species, but his instincts (fear of starvation, wielding power) reign supreme.

Survival, propagation, and consumption should result in a next generation that’s smarter, faster, and stronger. Where things have come off the rails is a function of our innovation economy moving faster than our instincts. Historically, humans have engaged in activities that have natural stopping cues — the end of a chapter, the end credits. Platforms like Facebook, Instagram, and Netflix have systematically eradicated these cues. Just as casinos are deliberately laid out without hard angles: It’s all one continuous space and you keep moving through it, on to the next game.

Technological progress lapping the calibration of our instincts culminates in an endless scroll. We’re unable to find the off switch. Unlike our parents and grandparents, for us dopamine release no longer depends on sacrifice, engagement, or grit, but on sitting still, as in 15, 14, 13 seconds episode 5 of Killing Eve will begin. There are more filtered photos, more porn, more equities, more margin, more dopa — more time without the nuisance of needing to engage in … life.

The most recent crack dealers are online trading platforms (OTPs). What does endless scroll look like on a trading platform?

  • Confetti falls to celebrate transactions.
  • Candy Crush interface.
  • Gamification: Users can tap up to 1000x per day to improve their position on the waitlist for Robinhood’s cash management feature (essentially a high-yield checking account on the app).

The Ratio

Our institutions (courts, Congress, the SEC) are supposed to slow our thinking so our reflexive instincts are checked and we can decide not to discriminate, not to pour mercury into the rivers, and not to let a bankrupt car rental firm (Hertz) issue shares bound to be worthless. You lose, they win.

Technological change is vastly outpacing our species’ ability to adapt to an endless barrage of stimuli. This discrepancy in modulation has exploded our levels of teen depression and social chaos. We’re in a Supermarine Spitfire, accelerating every day, hoping the fuselage holds together as we approach the sound barrier — streaming 31 seasons of The Simpsons, lifelike video games, ubiquitous porn of increasing extremes, high-def documentation in real time of the party your 15-year-old daughter wasn’t invited to, social media algorithms fueled on emotion vs. veracity, and immediate approval of margin for a “bull put spread.”

A Mess

I was a fu**ing mess yesterday after learning of the suicide of Alexander Kearns, a 20-year-old from Naperville, Illinois, who was interested in the markets and began trading stocks. Alex mistakenly believed he was down $730,000 after trading options on the Robinhood app and took his own life. We don’t know what other factors were at play here, and young men taking their own lives after losing money in the market is not a new phenomenon.

Facebook and Twitter do what CNN and Fox have been doing for decades, but better. I’m afraid Robinhood might become an addictive platform — Instagram for trading. Robinhood users skew young (32% of visitors are between 25 and 34). The firm reported 3 million new accounts in Q1 2020. Half were first-time traders. In addition, with Vegas and sports wagering all but shut down, OTPs have become the place where an emerging gambling addiction can take root and/or a rehab facility where your sponsor is a dealer.

Learning to invest and understanding the markets are good things, as is connecting with friends online … to a point. Social media and gambling have the same addictive psychological mechanism: variable rewards — when you keep performing an action in hopes of getting a possible but unlikely reward. This is the type of behavior that’s the most addictive and hardest to stop. Robinhood’s management and investors have taken cues from Big Tech and made a conscious decision to disregard the well-being of our youth for personal enrichment.

Some additional data on the surge in online trading:

  • Excessive trading may be triggered by an addictive process.
  • 12% of all trading activity is from day traders, yet day traders are only 1.6% of all profitable traders.
  • Men trade more than women, and unmarried men trade more than married men.
  • Stock market crashes have been linked to upticks in suicide.
  • Investors with a large differential between their existing economic conditions and their aspiration levels hold riskier stocks in their portfolios.

Most articles will focus on what we, Americans, view as the profound risk with the surge in rookie online traders … that the markets might go down. Most market tops coincide with retail investors entering. We haven’t, to my knowledge, seen the scale of a market crash driven by twentysomethings investing government rescue funds, levered up via preapproval on their smartphones.

Our elected officials and gross idolatry of money and innovators have overrun the institutions charged with slowing our thinking and keeping our kids safe. Joe Scarborough put it well: “Mark, Sheryl, and Jack, you have revealed yourselves to be vapid vulgarians who put at risk Americans’ health, racial justice, fair elections, and basic truths.”

Where do we turn? The bulk of the pressure to protect kids from device addiction falls on parents — limiting use (severely) and getting other parents at school to limit use as well, so kids don’t feel they’re an exception. It’s difficult, and it needs to be done. An “electronics fast,” perhaps for the whole family, can allow the nervous system to reset. Lowering your dopamine threshold allows a smaller amount of pleasure to be satisfying.

The threat of addiction has been slowing our household down. One of our sons demonstrates behavior consistent with device addiction. It’s terrifying. Everything he does, says, and works toward, is in pursuit of the dopa hit waiting on his iPad. His mom and I are doing what most parents would do — reading, seeking outside help, limiting use. But more than anything, we’re trying to slow things down. Time with him, especially outdoors or with books. Time in bed with him telling him stories about his grandfather becoming a frogman in the Royal Navy. Slowing everything down. It appears to be working.

I see Alex Kearns, and I see my oldest son. A nerd, with a big smile, fascinated by the markets and seeking dopa hits. I can’t imagine the pain of that family. I can’t imagine how we’ve lost the script, letting the meaningful, innovation and money, trump the profound, our kids. The youth suicide rate has increased 56% in a decade. Girls between 10 and 14 had a tripling of self-harm episodes between 2009 and 2015. Teens who are on social media for 5+ hrs a day are twice as likely to be depressed than those who are on for less than an hour.

Is it any wonder Tim Cook doesn’t want his nephew on social media? If he wasn’t Tim Cook, would he also say, I don’t want him to have an iPad either?

The weapons are our phones and tablets, and the bullets are social media firms headed by sociopathic oligarchs. And now, we may have a new menace preying on young men: online trading platforms.

We are a virus-ravaged nation where curfew alerts are sent to our phones. Innovation has become synonymous with exploitation. We find solace in the market being high. But the market is not a reflection of the economy or progress — it is increasingly driven by a few firms’ ability to arbitrage the gap between the pace of technology and regulation. It’s depressing. What to do? I’ll check my likes, mentions, and stocks.

Life is so rich,

P.S. My latest startup, Section4, is hiring a Consumer Acquisition and Growth Marketing Lead. Read the job description, and if you say to yourself “That’s me!” please apply.

P.P.S. For your career to survive (and thrive) in a disruptive economy, you need skills that allow you to collect data and analyze it strategically to make sound business decisions. In the upcoming Data & Analytics course at Section4, Babson College Professor Tom Davenport equips students with the framework to identify opportunities, challenge conventional thinking, and implement strategies to evolve their data and analytics playbook. Sign up for early access.

22 comments

  1. Tina Barton says:

    Stop pissing and moaning because he was able to do something you can’t. Christa MacAuliffe is hailed as an astronaut and she died in the atmosphere with the Challenger. Big money has paid for every space flight, regardless of the sourc….. http://www.smartcash1.com

  2. Greg Levinson says:

    Before it is too late, take a look at the latest unicorn Pacaso that rolled over all timeshare regulations and preys on the gullible. Great example of vulture crony billionaire club with political powers in action. Visit stoppacasonow.com

  3. Tim R says:

    Ultimately, doesn’t the business model catch up with them. Successful investment firms want “sticky” assets that accumulate over time. The RH model and dark patterns in their UI encourage frequent trading, trading on margin and option trades. Long-term these strategies don’t work out well for investors. Given their customer’s leveraged strategies (which they encourage as it’s linked to their profitability), I suspect a 10% downturn will dampen their market enthusiasm.

  4. Andrew D Ellis says:

    Zuckerberg’s genius was to understand, very early on, that people didn’t really care about their privacy. Free functionality plus a modicum of public visibility was more than enough to justify the surrender of privacy.

    Similarly, Vlad Tenev of Robinhood had a similar insight: gamers and traders (now virtually synomous) don’t care how Robinhood makes money if there is zero transactional costs to playing/trading. All the disclosures in the world will not change the consumer’s value assessment. The only thing that would pull gamers/traders away from Robinhood would a non-profit that would offer free trading AND cost benefit analysis, especially when the “benefit” — i.e., the value of order flow — will never be accessible to the retail trader.

  5. Jeffrey Isaac says:

    Society progresses and people adjust. In other words, if you take a longer look at history you might reach a different conclusion.

    Your intentions are noble, but misguided. Businesses have always tried to make their products addicting- so good that the customer wants more. Yes, some addicting products might require warnings (and in extreme examples- adult age limits). More than that and you are crossing the line- liberty much?

    We live in a capitalist society in which the individual is held accountable for his actions not businesses for making their products too desirable. Gambling and addictive physical substances are very different than streaming shows, social media and iPhones and iPads. People will learn to moderate their behavior. How do I know? They always have. We have heard this through prior economic revolutions and we will hear it through future ones.

    Capitalism will continue to improve the lives of the poor along with everyone else. No socioeconomic system has done more to reduce poverty and raise aggregate standards of living. An unequal sharing of abundance is always better than an equal sharing of misery.

  6. Tracie says:

    I have sons that are 21. They tell me all their friends are on Robinhood and are trading and buying crypto telling him to jump in and “only stupid people lose in this market”. At the same time, my son tells me most of his friends report they are not dating and, more interestingly, quite say they have never kissed a girl. This won’t end well.

  7. Steve Johnson says:

    The 1% (people like Scott) want nothing more than to ensure that the lower/middle class does not even have a chance to join their ranks. Absolutely shameful

  8. Patrick says:

    “Founded by two graduates from Stanford” Robinhood’s story likes to repeat, just like the founders of JUUL, the flavored vaping pusher who also successfully addicted millions of teens yet managed to cash out before everyone woke up to the dangers.

  9. DanL says:

    Spot-on article written with passion, conviction and intelligence. Bravo!

  10. John Zac says:

    This was wonderful and thank you Scott, the only I’m worrying about is our children. This technologically innovative era has unfortunately also ushered in newfangled confusion as to what traits need to be propagated. Social systems will almost certainly need to be redesigned. So, if the Fed, courts, institutions failed to respond in a responsible manner, at some point the people will.

  11. Neil says:

    A great piece Scott that I have shared on Facebook and linked jn (excuse the irony) …..having traded forex for 20 years I have never been so ashamed of the industry as I am now ….I am a small voice in a crowded space but will continue to try to educate traders on the inherent risks involved…..cheers N

  12. Randy says:

    What is more destructive to our young people? Seeking social media approval, drugs/alcohol, Robinhood/sports betting, or the state of politics as determined by left media. Yet, in College and on-line learning, the techniques of manipulation and control ‘design the site to get profitable ADD-ONs’ is based on the RH/Gameboy/Left news outrage model. Bots that follow you around the Internet, constantly showing you those shoes you cannot afford, but are in a Shopping Cart somewhere. I don’t know you Scott, and you seem to be an upstanding citizen, and hope you not contributing to these social ills in your marketing classes. I know first hand that other Profs have fully embraced.

    • Mark Everest says:

      Almost all media is biased, left and right alike. Do your own unbiased research and think for yourself, otherwise you are only fed “news” from your “news” sources advertisers

  13. Paul says:

    I think this may be another signal of a looming market correction. Aside, addiction to electronic devices is a real problem.

  14. slambino says:

    one of your best posts Scott. Especially the mendacious fucks and pablo escobar references. Spot on.

  15. Walt says:

    Hey Scott. Repeating what I posted on Twitter several months ago re RobinHood: “We make money the old-fashioned way. We exploit the living shit out of our customer data.“

  16. Michael Baughan says:

    May be a generational addiction. Serves a nice purpose for Buy & Hold Ol Farts like myself for buying fractional shares/stock bits on a recurring basis. Works for me-maybe not for those with less patience & self discipline. RIP John Bogle.

    • Eric J Fusselman says:

      But fractional share investing is widely available. No reason to disadvantage yourself with RH, its trade selling, and lack of account ownership options (ie. no ira).

  17. zack porter says:

    We need Pick Axe Scott more than ever to expose these menaces to society and cut their heads off. 🙂

  18. Frans says:

    It makes sense that limiting device exposure is good for your emotional state. But, it would be useful to know is device use is causative or a result of depression. Either way I enjoyed the message of this piece.

  19. Jim says:

    Word search has no value as an analytic process. You have wisely attached yourself to strategy of selective outrage, which has certainly enhanced your Q score and enabled “Galloway University”. Are Galloway steaks next? I know, not fair 🙂 If I am going to compare Robinhood with Goldman Sachs, I guess the biggest difference is that Goldman Sachs has had a century to fail at doing the right thing, whereas Robinhood has a few years under its belt. But I guess easy targets are just too tempting.

  20. Kenneth Goldman says:

    Lots of hyperbole but does represent a real issue. Not sure I see creative suggestions