Free stock-trading smartphone apps like Robinhood are attracting a wave of new investors, and are helping to prop up U.S. stock markets despite the headwinds of the coronavirus.
Alongside such familiar software-based stocks as Amazon, Facebook, and Google, their investments have boosted shares of some obscure and money-losing companies, trading records show.
“It’s educational, it’s affordable — you can buy fractions of shares for just a few dollars —- and it’s a good time,” said Karen Hartley-Nagle, president of New Castle County Council in Delaware, who says she has recommended Robinhood and Stockpile to her four young-adult children as a way to learn about investments.
But investment professionals like Matt Topley, president of Lansing Street Investment Advisers in Ambler, warn that neophyte app investors are riding an artificial high. They’re jumping into markets that are stimulated by record government spending on subsidized loans to businesses, extra unemployment checks, and Federal Reserve purchases of trillions of dollars in investor debt.
He compared the rush of new investors through free apps like Robinhood to the day traders who fed the dot.com boom of the late 1990s, before the market’s 2001 collapse. “This will not last long,” he predicted.
Of course, free trading apps are a threat to pros. Buying investments used to mean hiring advisers — like Topley’s local practice, or Wall Street giants such as Goldman Sachs, or big discounters like Vanguard Group. How can apps trade for free?
Robinhood says it gets paid by referring customers to a bank so they borrow to buy more. It also collects interest on clients’ uninvested cash even at today’s very low rates, and it sells their trade orders to big wholesale trading firms like Virtu Financial and Citadel Securities, which make money on the spread between what buyers and sellers pay. (Corrected: That’s Citadel Securities, not Citadel Investments)
During the coronavirus shutdowns, with “a vast preponderance of folks are working from home or are at home, there’s more opportunity to trade during the day,” and orders have “increased substantially,” said Douglas Cifu, chief executive of Virtu, in an investor conference call after posting record sales and profits last month. “When you can do something for free, I guess people do it more often.”
Robinhood, started by a pair of Stanford grads in 2013 and backed by more than $700 million from Silicon Valley venture capital giant New Enterprise Associates and other investors, has become a special focus of market watchers. It claims over 13 million users, and its data are tracked and posted by another start-up, Robintrack, whose popular tracking page was founded by an undergraduate at Valparaiso University in Indiana in 2018.
In December, Robinhood agreed to pay $1.25 million to settle accusations by the Financial Industry Regulatory Authority that it had violated industry rules in 2016 and 2017 by failing to help customers trade stocks for better prices than offered by the trading firms paying Robinhood for business. The company denied wrongdoing but agreed to pay the fine to end the dispute.
On Monday, Robinhood agreed to beef up the information it provides options investors after a 20-year-old customer received an options accounting statement he thought showed a loss and ended his life.
A list of the top trades by Robinhood users for the week ending June 18 includes market-leading stocks such as Apple and Amazon — but also less-known and money-losing firms such as Urban One, which operates radio stations targeting African Americans, and Ideanomics, which sells electric vehicle systems in China and has invested in the Delaware Board of Trade in Wilmington.
While Apple’s and Amazon’s popularity with Robinhood users mirrors their long popularity with investors generally, Robinhood users have logged more than 10,000 trades each in early June in Urban One and Ideanomics, which have not shown the stronger profits associated with higher stock values.
It is a sign of “full FOMO” -- showing a “fear of missing out” that might not be related to intrinsic company value, wrote Matthew Fox in Business Insider in a review of recent Robintrack data.
Urban One traded at between $1 and $2 a share earlier this year until this month, when the spread of the Black Lives Matter protests following the death in police custody of George Floyd in Minneapolis sparked a rush of investor interest in African American-focused companies, according to Barron’s magazine.
The stock, first traded in 1999, hit an all-time high above $48 on June 19 — the Juneteenth holiday marking the end of slavery in 1865 in Texas — at trading volume far above its usual level. The high was brief: It had lost half its value by June 24 though it remained far above earlier 2020 levels.
Urban One, which owns 100.3 WRNB, 107.9 WPPZ (classic R&B and gospel), and Hip-Hop 103.9 WPHI in Philadelphia among its other stations, was for several days worth more than the nation’s second-largest radio company, Philadelphia-based Entercom, owner of KYW news radio, WIP talk radio, and others. This was so even though Entercom had more than three times Urban One’s total sales last year, in an industry suffering a collapse in advertising revenues.
Ideanomics had been what traders call a “penny stock,” because its value has been less than $1 for most of this year. But after the New York company made a flurry of announcements that it had arranged to sell electric car systems in China and was making other asset purchases and sales, its stock was picked up by Robinhood users, and a surge of “buy” orders drove its shares above $3 for the first time since 2018.
That surprised Hartley-Nagle, the council president. Having reviewed the company’s financial reports since the previous county government lent $3 million to the Delaware Board of Trade in 2015 (which Ideanomics later acquired), she knew Ideanomics has not been profitable despite previous flurries of new-business announcements.