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Ultimate Resource On Robinhood And It’s Impact On Crypto-Currencies And Stocks

Investors are piling into stocks of companies in bankruptcy, wagering against a court process that routinely wipes out shareholders. Ultimate Resource On Robinhood And It’s Impact On Crypto-Currencies And Stocks

 

Car renter Hertz Global Holdings Inc., oil driller Whiting Petroleum Corp. and retailer J.C. Penney Co. are among companies that have seen their shares more than double in recent trading sessions despite being in Chapter 11 bankruptcy, a process that allows companies to keep operating while working out a plan to repay creditors.

One investor who missed out on the massive rally is billionaire Carl Icahn, who has been invested in Hertz since 2014.

In a Securities and Exchange Commission filing, Icahn detailed why he sold his Hertz position at an average price of 72 cents, representing a loss of more than $1.8 billion.

Taking the other side of Icahn’s Hertz trade are retail investors, as evidenced by a surge in Robinhood accounts that own the stock.

Prior to the bankruptcy filing, roughly 43,000 Robinhood accounts owned shares of Hertz. That number has nearly doubled to 73,000 as of Friday.

“I have always thought people have a psychological urge to buy stocks at a low price,” said Kirk Ruddy, a former bankruptcy claims trader. Retail investors may be buying big names they recognize without realizing how rare it is for shareholders to get anything back in bankruptcy, he said.

“If you look at the markets in general, people don’t know where to put their money. They are like, ‘Hey, I’m going to try that $1 stock,’” said Ruddy, who now works in sales for SC Lowy Financial HK Ltd.

On Tuesday, J.C. Penney shareholders will press a federal judge to appoint a court-approved committee to represent them in the bankruptcy case. Getting official status would mean forcing the retailer to pay for lawyers and financial advisors who would work on behalf of shareholders. Judges rarely grant such requests for two reasons: The legal fees can be high and under the so-called absolute priority rule, all the debt of a company must be paid before shareholders can collect anything.

Some of the rally in insolvent companies’ shares might be attributable to short covering, when traders who have bet against a company close their positions by re-buying shares, lifting prices. But the rally could also be fueled by amateur traders, bored in lockdown and looking for a quick buck, using platforms such as Robinhood. The number of Robinhood users holding both Hertz and Whiting Petroleum shares surged after the companies filed for bankruptcy, according to Robintrack, a website unaffiliated with the stock trading platform that uses data to show trends.

“No one ever loses equity in a bankruptcy case,” U.S. Bankruptcy Judge David Jones said during a status conference in the J.C. Penney case last month. “Equity gets lost long before the case is filed.”

Under U.S. bankruptcy law, shareholders are last in line for any kind of payout — behind the lawyers, lenders and vendors — making a recovery for shares unusual. The size and scope of payouts are usually determined by a so-called Chapter 11 plan, which creditors vote on and send to a federal judge for approval. Those plans often leave even high-ranking creditors getting less than they’re owed.

The Price Gains Among The Insolvent Include:

* Hertz, Which Climbed 95% Since It Filed For Bankruptcy Protection May 22
* J.C. Penney, Up 167% Since May 15
* Whiting Petroleum, Up 835% Since April 1
* Pier 1 Imports Inc., Which More Than Doubled In The Last Two Trading Sessions, Though It’s Still Down 97% Since Filing For Bankruptcy Feb. 17

Companies That Have Begun Planning For Bankruptcy Also Saw Their Shares Surge Monday, Including:

* Chesapeake Energy Corp. Jumped 181%
* GNC Holdings Inc. Rose 106%

Representatives for Chesapeake, Hertz and Whiting did not reply to a request for comment. GNC and J.C. Penney declined to comment.

Meanwhile, debt securities tied to the companies continue to trade below par, implying expectations of a less-than-full recovery for creditors who are ranked well ahead of shareholders.

Whiting Petroleum does have a plan on file that calls for a payout to current stockholders in the form of new shares. But as with most everything in bankruptcy, the plan is subject to court approval and could face challenges from higher-ranking creditors.

Robinhood Traders Are Betting Against Veteran Billionaire Investors Like Warren Buffett And Carl Icahn – And They’re Winning

* There has been a surge in retail trading activity since the COVID-19 stay-at-home orders swept across the nation.

* The increase in trading activity by retail investors has in part been chalked up to sports bettors speculating on stocks due to the shut down of all professional sports leagues amid the pandemic.

* David Portnoy, aka Davey Day Trader, of Barstool Sports, has led the charge of introducing a brand new audience to stocks, with his trading videos often garnering up to one million views on Twitter.

* This group of traders has been betting on beaten-down stocks that have been abandoned by veteran billionaire investors like Warren Buffett and Carl Icahn, and they’re starting to win.

Robinhood traders have been placing big bets against veteran billionaire investors, and now they’re starting to win.

Since the start of the COVID-19 stay-at-home orders swept across the nation, there has been a surge in retail brokerage trading. This surge has in part been fueled by a new group of investors who are looking for excitement as professional sports leagues are temporarily shuttered.

David Portnoy of Barstool Sports, also known as Davey Day Trader on Twitter, has led the charge in introducing a new audience to investing through the videos he posts on Twitter. Portnoy often talks about the stocks he’s trading, and why he’s trading them, before going on impassioned rants about the current market and political environment.

Recently, this new group of traders has been betting against the likes of veteran billionaire investors including Warren Buffett, Carl Icahn, and Stanley Druckenmiller, and they’re starting to win.

First up is Warren Buffett and the airline stocks. In early May, Buffett revealed that Berkshire Hathaway had fully liquidated its stake in the big four airlines. Around the same time, Robinhood investors and Portnoy started to pile into airline stocks, as evidenced by a surge in assets in the US Global JETS ETF.

Since Buffett revealed that he sold his airline stocks, the JETS ETF has surged 55%. Robinhood traders: 1. Veteran billionaire investors: 0.

Next up is Carl Icahn and Hertz.

In Late May, Icahn revealed in an SEC filing that he liquidated his entire position in Hertz at an average price of 72 cents per share, representing a loss of more than $1.8 billion. Hertz had recently filed for bankruptcy, sending its shares into a tailspin.

But retail traders, not scared of Hertz’s equity potentially being wiped out by its bankruptcy proceedings, have piled into the stock. Robinhood accounts that own Hertz nearly doubled since the start of its bankruptcy proceedings to 73,000 as of Friday.

Since Icahn liquidated his position at 72 a share, Hertz has skyrocketed more than 400%. Robinhood traders: 2. Veteran billionaire investors: 0.

Last up are Stanley Druckenmiller, David Tepper, and Chamath Palihapitiya. In mid-May, the trio said in individual interviews with CNBC and the Economic Club of New York that stocks are too high.

Druckenmiller called the market setup at the time one of the worst risk-reward profiles he’d ever seen. Tepper called the stock market the second most overvalued in history. And Palihapitiya said that the markets were “too damn high.”

Despite the comments from some high-profile billionaire investors, retail traders continued to pile into the market. According to data from Robintrack, more than 12,000 Robinhood accounts bought the S&P 500 ETF SPY since the mid-May comments, bringing the total to nearly 100,000.

Since then, the S&P 500 index has rallied 15% and Druckenmiller said on Monday that he was “humbled” by the recent rally in the stock market. Robinhood traders: 3. Veteran billionaire investors: 0.

While retail traders have been on the winning side of trades against billionaire investors in the short term, what happens in the long term is still up in the air.

A recent economist survey showed that a second wave of COVID-19 infections poses the biggest threat to the US economy this year. If a second wave of COVID-19 does in fact hit the US, retail traders would be wise to book some profits after such a strong and quick rally.

Order Types, Explained

1. Why Do We Need Different Order Types?

Order types exist so that a person who submits an order to buy or sell assets retains some control over their order after it has entered the marketplace.

Ultimately, they exist so that a person who is buying or selling stock, commodities or currencies can embed in a single simple instruction a lot of other smaller instructions.

When trading cryptocurrencies or other assets, all orders on an exchange fall into one of a variety of types that determine how an order is processed and when it is executed. On top of this, orders can be given special instructions that augment their parameters, often aimed at controlling the timing of execution. Nasdaq once had 136 order types that were devised by individuals with Ph.D.s in computer science, physics and mathematics who were specialized in high-frequency trading and implemented mind-bending logic into their mechanics; however, all of these orders were only derivatives of the basic “limit” and “market” orders.

Understanding the fundamental order types is essential if you want to be an informed trader. In what follows, we’ve compiled a list of all the major types and time-in-force instructions that can be found on various exchanges.

2. What Is A Market Order?

A market order is essentially the most basic form of order type and is simply an instruction to purchase an asset at the best price currently available.

This type of order is the buyer saying, “I want this now at the best price available.” This guarantees the order will be executed, but it is not concerned with its price. Common among beginners, this order type is often considered the simplest, and it can be handy when you just want to quickly enter or exit a position and liquidity is abundant. Know that users placing market orders are considered “takers” because these orders are matched instantly and as a result “take” liquidity from the order book. This is as opposed to “makers,” which we will discuss now.

3. What Is A Limit Order?

A limit order places a specific price that a trader wants to buy or sell at and is only executed if the market hits that price.

Whereas market orders are executed immediately, limit orders are executed at a predefined price, which is generally better than the current market price. For example, you believe Bitcoin (BTC) is about to dip. Implementing a limit order will allow you to set an execution price at, for example, $500 below the current market price by submitting an order to the order book. If Bitcoin drops to that price, the limit order sitting in the book will be executed and the trade will be concluded at your desirable price.

This process allows traders to set limits and control their risks. As such, traders are afforded the luxury of knowing their price limits are set and that they will not be forced to constantly watch the market in order to execute the trades they want. The reason limit orders are seen as “makers” is that they are placed into the order book, which is literally what “makes” the market.

It should be noted that there is a chance that a limit order won’t be executed even when the market price reaches the limit price.

This can happen when there are many limit orders set at a given price, and in most cases, these are going to be filled based on “price-time priority.” This means orders are first ranked by price, and orders at the same price are filled on a “first in, first out” basis. Hence, there is a chance that even if an order’s price is met, there may be too many other orders ahead of yours and the price may change before your order is executed. This is generally why it is encouraged to set limit prices a little above (for asks) or below (for bids) major psychological levels; for example, $10,100 (for asks) instead of $10,000. Of course, other traders are aware of this tactic as well, so it is sometimes helpful to look at the order book for prices that aren’t already inundated with orders, as these “psychological” levels may shift depending on the type of market participants.

4. What Are Stop Orders?

Stop orders are similar to, but distinct from, limit orders. Where limit orders are actually on the order book, stop orders are only placed when the predefined price is reached, and they can be used in conjunction with market or limit orders.

The distinction is subtle, but the key difference is that limit orders are already placed on the order book and can be seen by anyone, while stop orders aren’t even submitted until the conditions are met. They can be set up to place a market or limit order, which can give traders increased flexibility.

Basically, a stop market order says, “If the price reaches X, buy/sell immediately.” This doesn’t mean you will necessarily get the price of X, but when that price is reached, a market order is immediately placed to buy at the best current price. Alternatively, a stop-limit order says, “If the price hits X, place an order to buy/sell at Y.” Note that X and Y can be the same price, but they don’t have to be. So, you could theoretically have a trade that goes, “If Bitcoin hits $10,000, place an order to buy it, but only at the price of $10,000.” Alternatively, you could set it up as follows: “If Bitcoin hits $10,000, place an order to buy it, but only at $10,100.” By combining these layers of instruction, traders can create complex strategies and manage risk more effectively.

5. What Are Scaled Orders?

Scaled orders use several limit orders in order to buy or sell incrementally. This can help average out the impact of market fluctuations over time as well as mitigate the effect caused by a large order.

Sometimes, a trader wants to make several smaller purchases over a range of prices as opposed to a larger one at a fixed price. There can be a couple of reasons to do this, and one is “dollar-cost averaging.” Basically, traders often stand to get better value on their trades if they “average” their purchase or sale with trades that only are executed if and when the market moves in the desired direction. This tends to smooth over market volatility and can, on average, yield better results as traders buy into or sell out of positions.

The other reason is not to reveal to the market that a single large order is pending execution. This is done to minimize the effect of your trade on the market. Not only can large orders have a significant impact on the market by moving prices, but they can also have psychological effects by influencing other traders. In order to avoid this, a massive buy or sell could be split up into, for example, 10 smaller orders placed across a range of price levels. And for the most part, this would just look like regular activity on the order book.

6. What Are Time-In-Force Instructions?

Time-in-force instructions can modify limit orders by placing time constraints on when they are executed or canceled. This again increases the degree of control a trader has and takes away the chance of forgetting about an older order that they may no longer want.

Let’s say a trader has an old order on the books from weeks ago that is no longer desirable based upon current conditions. If unchecked, that order could end up being executed and be a costly mistake for the person who placed it. To account for this, traders can tune the “time-in-force” instructions on orders to limit how long they stay active without being executed.

The most straightforward instruction is “good till canceled,” which is simply saying, “Leave it on the books until it’s executed or I cancel it.” This is obviously the default for many trades, as it doesn’t give much instruction at all. There are also “immediate-or-cancel” orders, which are automatically canceled if they cannot be filled as soon as they are placed on the order book. Similarly, the “fill-or-kill” instruction will cancel the order if not fully filled by another order after it has been placed on the book.

Then there’s the “day” order instruction. This simply cancels the order if it is not executed by the end of the trading day. For even more flexibility, traders can use the “good-till-date/time” instruction, which simply means an order will stay active until either filled or a predetermined time is reached.

7. What Are Post-Only Orders?

One last type of instruction that can be embedded into the logic of an order is the “post-only” option, which makes sure that an order is placed if and only if it cannot be immediately filled.

If a buy (or sell) immediately matches an opposite sell (or buy), the orders are crossed, resulting in a trade. Many times, a trader actually does not want to place an order if it will be filled immediately by another resting order — the trader wants to avoid paying the taker fee when placing limit orders.

This is tied to the nature of makers and takers that we previously discussed. Generally speaking, exchanges will have notably lower fees attached to limit orders than they will for market orders, as they are the ones providing liquidity. Hence, post-only orders basically say, “Only place this order if it is going into the order book and not being immediately filled, avoiding the possibility of paying a taker fee.”

As you can imagine, by stringing together these various order types and instructions, traders can have significant control over how and when trades are executed. This becomes the basis for increasingly complex strategies when combined with the right indicators and other tools. Note that not every exchange will support every order type or instruction, but major ones such as Binance or CrossTower will have everything outlined here. Now that you understand the differences, you should be able to begin placing orders with the increased confidence of understanding how they are going to play out, which is essential for any trader.

Updated: 6-16-2020

Robinhood Traders Could Learn From This Growth-Stock Investor Who’s Beaten Indexes By A Wide Margin For Years

Don’t let beginner’s luck fool you into making a painful mistake. John Malooly of Wasatch Ultra Growth explains how to pick winners and prevent your portfolio from blowing up.

If you’re hitting a lot of trades right on the Robinhood trading platform, be careful of hubris.

Overconfidence kills returns.

If you need a little something to spark your humility, consider this investor’s record. John Malooly, who manages the Wasatch Ultra Growth fund , has beaten his small-growth category and the Russell 2000 Growth Index RUO, by an annual average of 11.5 to 19.5 percentage points over the past three to five years, according to Morningstar. The fund is ranked No. 1 in its category for total returns over the past three years, per Morningstar.

If you’re new to investing, let me tell you: You don’t often see such a good long-term record. Few people consistently beat broad indexes, such as the S&P 500 Index, the Dow Jones Industrial Average or Nasdaq Composite Index COMP,.

I always wonder what I can learn from performers like these, so I recently talked with Malooly to find out. Here are the key takeaways.

Go For Big Growth

Malooly likes to have an average revenue growth of 20% in his portfolio. This looks risky because it’s about 8 percentage points higher than his benchmark index, according to Morningstar. But his portfolio is a deliberate mix of supercharged growth names in areas like tech and sectors you don’t normally associate with growth to offset the risk.

In supercharged tech, he favors plays on the “digitization of businesses,” like Zendesk Inc. ZEN, in customer-service software. Others here include DocuSign Inc. DOCU, in digital-signature documents, Five9 Inc. FIVN, in cloud-based call-center software, and HubSpot Inc. HUBS, which helps smaller companies use the internet and digital marketing.

Meanwhile, he also goes with “safer” companies that have lower growth, but less propensity to blow up. For example, you rarely see grocery stores in growth portfolios, but he holds Grocery Outlet Holding Corp.. The off-price grocery chain posts 10% sales growth, in part, by enticing entrepreneurial store managers with generous profit splits and lots of operational freedom.

Favor Defensive Growth

“Just buying fast-growing companies is high risk,” says Malooly. They can get hurt even on a small misstep. One way to cut risk: Avoid debt. “With faster-growing companies, leverage is not an asset,” he says. “They should be self-funding. Fast-growing companies with leverage tend to blow up, and you are not going to see the signs of stress until they blow up.”

He also looks for recurring revenue. About half the stocks in his portfolio have this. “When you get hit in companies that have recurring revenue, you are down 20% to 30%, not completely blown up,” he says.

This can come in the form of subscription revenue like at Paylocity Holding Corp., which offers cloud-based human-resource-management software. Paylocity serves small businesses hit hard by the lockdown. “But even if they don’t grow next quarter, I’m not looking at them being down 90%,” he says, because of the subscription revenue.

Repeat revenue also comes from follow-up maintenance and supply sales. Here he cites Kornit Digital Ltd. KRNT, which sells printers and ink used for “fast fashion” and sports team apparel.

He even finds repeat revenue in biotechnology. The DNA-based cancer-screening tests of Exact Sciences Corp. EXAS, get re-administered every few years. “The hurdle to grow is a lot lower than it appears,” he says. Another is Tandem Diabetes Care Inc. Its insulin pumps have to be replaced every few years.

Otherwise, cut risk by resisting the temptation to chase stocks. And buy when temporary issues knock a good stock down. For example, in May 2019 Trex Co. reported manufacturing issues in a new line of decks. That seemed like a fixable problem at an otherwise good company, so Malooly bought the weakness. It is now “a double,” meaning the price rose 100%.

Invest For The Long Haul

Malooly buys names he thinks he can stick with for years. His portfolio turnover is typically a low 17%. To find buy and hold names, Malooly looks for “long duration,” sustainable growth. How to identify this?

Malooly likes companies that can take market share. Here, he cites Silk Road Medical SILK, in specialized cardiovascular surgical equipment, and Inspire Medical Systems Inc., which sells devices that help manage sleep apnea. Another is Esperion Therapeutics Inc. ESPR, , which is on the cusp of launching a non-statin therapy for elevated cholesterol.

Malooly also spends lots of time getting to know management. He even hires a private investigator to do background checks and interview former colleagues, bosses and employees. About 10% of the time they yield important results — negative or positive.

Reports on FreshPet Inc. management helped boost returns.

“The reports on the CEO were ridiculously glowing. Everybody said he is no-nonsense and a winner.” This stock is up 800% since Malooly’s first Morningstar-reported purchases in the last quarter of 2015. (It’s up 635% since I suggested it in my stock letter, Brush Up on Stocks, in April 2017.)

Malooly emphasizes meeting management in person.

“It’s like the difference between going to a restaurant with someone and eating in their house. It is just a different experience.”

On-site meetings also let him witness company culture and how management interacts with others. “We rank all our companies by management team,” he says. “Our best teams tend to do the best over time.”

Malooly also looks for good track records, signs that a management team isn’t a slave to quarterly results so it has the freedom to invest long term, and pay incentives that favor shareholders.

Shop For Covid-19 Plays

Malooly believes a vaccine will be key to getting the economy back to normal. He expects vaccine approval for emergency use by the end of the year. But since he’s loath to chase stocks, he avoids the coronavirus-vaccine plays. He’s skeptical of Moderna Inc., pointing out that early data were based on only a few patients.

“I wouldn’t bet against Moderna, but I am not betting with them,” he says.

Instead, for Covid-19 plays he likes companies that benefit from lasting behavioral change because of the virus. For example, people normally don’t shop for furniture online. But during the lockdown, they had to. And they got used to it. So while Malooly generally avoids companies that compete with Amazon.com Inc., he likes Wayfair Inc., which sells furniture online. He thinks people will now buy furniture online more often.

“There will be a sustained change in behavior,” he says.

He thinks Wayfair does a great job of creating its own designs and brands, which makes it harder for customers to comparison shop.

Experience Pays

Market commentators on Twitter post lots of snarky comments about young people trading on the Robinhood platform. I think this is great, because it’s nice to see people getting into the industry, and experience is the best teacher in investing.

Another Malooly maxim supports my take. He attributes his fund’s success to experience — and lots of it.

“Two or three of us will go into a meeting and there might 40 to 60 years of small-cap investing experience,” he says.

Malooly contributes 24 of those years.

Updated: 6-19-2020

Robinhood Vows To Improve Platform Following Customer Tragedy

The suicide of Alexander Kearns prompted Robinhood to take additional measures to improve its platform.

Alexander Kearns, a 20-year-old customer of stock and cryptocurrency trading platform, Robinhood, committed suicide on June 12. This tragedy reportedly occurred after an erroneous negative balance of more than $730,000 appeared in Kearns’ account. This error has prompted the platform to take measures in order to improve the platform’s offering.

According to the official announcement, Robinhood is considering additional criteria and education for customers seeking level 3 options authorization.

They state that this may help ensure customers understand the platform’s sophisticated options trading features.

They note that they will also be expanding educational content related to options trading within their website, while also rolling out improvements to in-app messages and emails sent customers about their multi-leg options spreads.

The company also announced a $250,000 donation to the American Foundation for Suicide Prevention.

Updated: 7-26-2020

Everyone’s A Day Trader Now

Bored, isolated and out of work amid the pandemic, millions of Americans are chasing stock-market glory—and bragging about it online. Not everyone’s a winner though.

Stuck at home in lockdown, millions of Americans are trading the markets like never before.

Investors Using Robinhood App Flout Logic, Buying Up Hertz And Other Bankrupt Companies’ Stocks

When The Pandemic Hit, Real-Estate Agent Sharmila Viswasam Started Reading ‘Trading For Dummies’ And Watching Youtube Videos On Investing. She Now Trades Thousands Of Dollars In Stocks Each Day.

At E*Trade Financial Corp., investors opened roughly 260,500 retail accounts just in March, more than any full year on record. Newer rival Robinhood Markets Inc., maker of a wildly popular trading app, logged a record three million new accounts in the first quarter.

Individual investors’ last big binge was for dot-com stocks in the late 1990s. That era saw money-losing technology companies vaulted into the stratosphere and spawned a culture of day traders who played the markets as a full-time job.

It appears even bigger—and broader—this time around, amplified by digital communities on Twitter and Discord, a popular online chat hangout. Investors have transformed those social-media platforms into virtual trading desks, a place to swap tips, hype stocks and talk trash as they attempt to trade their way to a quick fortune.

The market’s extreme moves this year have made trading especially enticing. With professional sports largely on pause and group gatherings discouraged, users have flocked to day-trading apps to cure isolation and boredom from lockdown.

“I feel like Sonic the Hedgehog, collecting my coins,” said real-estate agent Sharmila Viswasam, 38 years old, of Lake Linganore, Md., referring to a videogame where the character collects gold rings.

Before the pandemic, she hadn’t considered investing beyond the money she had put aside in her 401(k) retirement account, much less day trading. Now, she says, she trades thousands of dollars in stocks every day.

Ms. Viswasam’s identity had been so entwined with her real-estate job that she named her dog Sold, and made him an Instagram account under the name SoldTheRealEstateDoodle. But when she couldn’t work, her unemployment checks weren’t enough to pay her bills. Her boss suggested she try day trading. She read “Trading for Dummies,” watched YouTube videos, opened an E*Trade account and dove in.

Ms. Viswasam embraces a risky trading style. “Scared money makes no money,” Ms. Viswasam said.

She mostly buys blocks of stocks that trade for less than $5 a share and sells many of them within a day or two. She doesn’t ever consider other more conventional stock picks, such as Amazon.com Inc., because shares of those companies are pricier and tend to be less volatile day to day.

The potential for big gains—increases of mere pennies per share in some cases—outweighs the risks, she said. Starting with $25,000, Ms. Viswasam said she had played price swings on penny stocks to a $65,000 profit through early July all on her phone.

Gaining Influence

Retail traders like Ms. Viswasam are gaining influence in financial markets.

Trades this year by individual investors more than doubled the usual level of retail activity, said Joseph Mecane, head of execution services at market maker Citadel Securities. Individuals now account for a fifth of all stock-market activity and a quarter during the busiest sessions, he added.

The influx of traders has increased the demand for most stocks and sent shares of some individual companies soaring, analysts say. As the benchmark S&P 500 has climbed more than 40% from its March lows, Goldman Sachs Group Inc. said stocks popular with individuals have generally outperformed those held mostly by hedge funds and mutual funds.

But there are reasons for concern about the overall performance of individual investors. For one thing, some academic studies have demonstrated the challenges individuals have in trying to beat the market.

Barclays examined trades by Robinhood customers between March and early June and concluded that the more they bought a specific stock, the worse that stock performed.

It’s never been cheaper to trade. Robinhood pushed commissions to zero, a move Charles Schwab Corp. and other brokeragesfollowed last year. To lure new customers, brokerages are now offering incentives including free shares of stock and free access to riskier financial trading tools.

“How much of this is a permanent or temporary change? My best sense is it’s a little bit of both,” said Mr. Mecane, referring to the impact the elimination of trading commissions has had on retail activity.

Brokerages make money on free trades by sending customer orders to trading firms in exchange for cash, a controversial but legal practice in the brokerage industry called payment for order flow. While customer orders must be executed at the best available price, trading firms have numerous ways to use the trades to their advantage, including to mask larger buying and selling by the firm or its clients.

Brokerages also can profit from cash that sits idle in customers’ accounts.

‘I Don’t Know Much About That’

Enticed by Robinhood’s offer of free stock, Granit Selimaj opened an account on his 18th birthday in December 2018. He received one share of gaming company Zynga and sold it shortly after, he says.

Mr. Selimaj has mostly traded stocks since then. For a time, he considered options trading as a way to amplify his gains, and filled out an application to do so on the Robinhood app.

Moments after applying to trade them, Mr. Selimaj found himself approved by Robinhood for an options-trading account that allows him to transact puts and calls, or contracts that give investors the right to buy or sell stocks at a specific price, later in time. But he has avoided such trades so far, saying he doesn’t really understand how it works.

“I’m a Level 2, and I don’t know much about that,” Mr. Selimaj said, referring to the trading tier Robinhood had approved for him.

Still, Mr. Selimaj, who is now 19 and is attending Manhattan College in New York, credits the app’s user-friendly interface and simplicity with getting him into investing, as well as turning him on to a potential career in finance after college.

Big Gains, Big Losses

Amid the volatile markets of the past few months, traders’ gains have sometimes been huge, and so have their losses. Retail investors suffered deep routs when a popular oil-futures contract fell swiftly negative in April. Others lost thousands of dollars on penny stocks and bankrupt companies, such as car-rental company Hertz Global Holdings Inc.

Many also have been burned by bad bets in options, where it’s sometimes possible to lose more than you put in with some complicated trading strategies. Selling so-called naked calls, for example, can saddle investors with theoretically unlimited losses.

Those losses have reanimated a long debate among financial-industry executives and regulators about whether novice investors should be protected from riskier corners of the markets. One flashpoint was the suicide in June of a 20-year-old trader, Alex Kearns.

Mr. Kearns had made a sophisticated options trade. When his bet soured, his Robinhood account’s cash balance showed a loss of three-quarters of a million dollars, according to a screenshot of his account Mr. Kearns included with his suicide note, his family says. But Mr. Kearns likely didn’t actually lose that much, a relative says, and the negative balance Robinhood showed him may have been a figure representing one leg of the trade that was losing money, but not the opposing leg that was gaining value and would have capped his losses.

In a note written just before his death, Mr. Kearns asked how someone his age, with no income, had access to a trade that exposed him to such deep losses. When he ended his life, Mr. Kearns may not have understood that he likely never owed that money, his relative says.

“How was a 20 year old with no income able to get assigned almost a million dollar’s worth of leverage?” Mr. Kearns wrote in his note to his family. “I also have no clue what I was doing now in hindsight…A painful lesson.”

The death moved U.S. Securities and Exchange Commission Chairman Jay Clayton to explore action to prevent a repeat of Mr. Kearns’s tragedy. He said the agency, along with Wall Street watchdog the Financial Industry Regulatory Authority, would closely examine how Robinhood and other self-directed brokerages grant access to more-sophisticated trading strategies, such as options.

“We need to make sure these kinds of things don’t happen,” he said at a House Financial Services Committee hearing late last month.

In a blog post on Robinhood’s website, co-founders Vlad Tenev and Baiju Bhatt wrote that they were “personally devastated by this tragedy.” Robinhood said it now provides investors with more educational resources and customer support.

Prior to Mr. Kearns’s death, Robinhood employees had raised concerns about the easy access to sophisticated options-trading strategies, several former employees said. Engineers, many of whom had little to no experience in the financial industry, were among those leveling questions about the ethics of providing easy-to-use tools rather than creating more investor guardrails, people familiar with the matter said.

And Robinhood employees based at a facility outside Orlando, Fla., who worked in back-office brokerage roles, questioned higher-ups about how easy it was for inexperienced investors to trade options on the platform, other people said.

Often, Messrs. Tenev and Bhatt deflected those concerns at weekly all-hands meetings with passionate arguments about the company’s goal of democratizing investing and growing its customer base, people familiar said.

A Robinhood spokesman said the company disagreed with that characterization.

Updated: 7-30-2020

Robinhood FOMO Potential? Bitcoin Pulling A ‘Kodak’ Means 6 Figures

If Bitcoin sees similar FOMO rallies like KODK in recent days, BTC price could quickly soar to six figures, as some analysts have previously predicted.

Retail traders on Robinhood have been increasingly seeing “fear of missing out” or FOMO rallies around certain stocks. The latest beneficiary has been the stock price of the renowned camera manufacturer Kodak (KODK) whose stock surged from $2 to $60 in one day.

Therefore, given the current climate of economic uncertainty and “infinite QE,” if the optimism around risk-assets flows over to Bitcoin, chances of a similar rally for BTC price — as some analysts are currently predicting — certainly increase.

Moreover, following the Federal Reserve’s FOMC meeting on July 29, strategists expect the overall sentiment of investors to recover, which is good news for Bitcoin bulls given the recent correlation between Bitcoin and stocks.

Why Kodak Saw A Parabolic Rally And Why Some BTC Investors Expect The Same

On July 28, U.S. President Donald Trump said Kodak would receive a $765 million loan to create Kodak Pharmaceuticals. Kodak has been producing materials and chemical products for quite some time.

Kodak shifted away from the camera industry in 2013, and President Trump’s message further solidified Kodak’s presence in pharmaceutics. It came after the government decided to decrease the dependence of the U.S. on drug manufacturers in overseas markets.

Consequently, Kodak saw a rally that even outperformed the 2017 parabolic uptrend of Bitcoin. In a single trading session, the Eastman Kodak Company stock rose by 318%. It broke through 20 circuit breakers, securing a $1.45 billion market capitalization. At its peak, Kodak surged by 2,198% in 2 days.

Considering the sudden surge of KODK price from $2 to $60, a similar rally would translate into BTC prices well over six figures, vindicating quite a few $100K price predictions for 2020 from some notable industry experts.

KODK price and Bitcoin also saw some correlation in early 2018 along with other cryptocurrencies. As Bitcoin rallied to all-time highs of nearly $20,000, KODK surged from $3 to over $13 during the same period.

Meanwhile, Robintrack.net reports that more than 100,000 Robinhood users now hold the Kodak stock. Before the announcement, less than 10,000 users were invested in KODK.

Kodak and Bitcoin have no glaring similarities. But the overnight rally of the stock and the sudden inflow of capital from retail investors show how fast the trend could change.

It also demonstrates the effect favorable market conditions are having on stocks and alternative assets. The Fed emphasized in the formal FOMC statement that it will do anything that it takes to revive economic growth.

Market FOMO Comes At A Good Time For BTC

The price of Bitcoin has increased from $3,600 to over $11,400 within five months. The rally comes after a block reward halving on May 11, which occurs every four years.

As Cointelegraph reported on Wednesday, high-profile investors are expressing enthusiasm towards the ongoing Bitcoin uptrend. Cameron Winklevoss, the billionaire founder of cryptocurrency exchange Gemini, said the next Bitcoin bull run would be “dramatically different.”

Among the three reasons Winklevoss laid out, he pinpointed the involvement of substantially bigger capital in the crypto market. The market cap of Tether and the AUM of Grayscale show significantly more capital is sitting in crypto than in previous years. For that reason, investors believe that when an uptrend kickstarts, it could trigger a FOMO rally among retail investors.

Based on various metrics, Jason Williams, the co-founder of Morgan Creek Digital, said he foresees Bitcoin achieving a new all-time high within 2020.

Updated: 8-4-2020

‘Robinhood Influencer’ Wants The Winklevoss Twins To Explain Bitcoin To Him

Dave Portnoy, also known as Davey Day Trader, now wants to learn how to buy Bitcoin from the Winklevoss twins.

Popular Twitter personality Dave Portnoy, famous for his motto “stocks only go up,” now wants to learn about Bitcoin (BTC) from Gemini co-founders Tyler and Cameron Winklevoss.

In a Twitter clip extracted from his latest daily show on August 4, Portnoy tells the Winklevoss twins he’d like them to “explain Bitcoin in a way that I would understand,” he said.

Portnoy stressed that he wants them to come in “their little rowing outfits,” in a reference to the movie The Social Network, where they were shown competing in Harvard’s rowing team.

Both Tyler and Cameron accepted the invite shortly after.

Bitcoin In The Ether

Portnoy recounted how he once bought BTC in “that original Bitcoin age” but lost all access to it. “I’ve spent 20 grand, it’s just sitting in the ether,” he lamented in what appeared to be an accidental pun.

He said that he does not know how to buy Bitcoin or how to maintain self custody of the asset once acquired, which is why he wants the Winklevoss twins to come and explain it to him. He also revealed in passing that he had already talked to them about this, but “they wanted a free ad.” Portnoy on the other hand wants “to get rich” by learning about it.

A viewer appears to have suggested he buys Chainlink (LINK) as well, though he immediately replied “I don’t know how, I’ve already explained.”

An Irreverent Persona

Portnoy is the founder of Barstool Sports, a sports news website. Since the coronavirus lockdowns, he has immersed himself in the world of daily stock trading, reportedly to make up for the closure of sports betting.

He makes daily videos about his fortunes and misfortunes in the stock market, famously saying phrases like “stocks only go up” or “I have as much experience as Joe Dick Tom Warren Buffet.”

He reportedly inspired his followers to enter the stock market through retail platforms like Robinhood, though he is known for using E*Trade.

Portnoy and the Davey Day Trader persona are considered the poster child of irrational exuberance that led to events like Hertz’s post-bankruptcy rally or Dogecoin’s TikTok-fueled Rally.

The sudden interest in Bitcoin could be due to plunging profits in the stock market, as the latest rally is primarily led by a few very large stocks like Apple, Facebook and Microsoft. Earlier in the Tuesday show, he complained of a $40,000 loss on Shopify.

While the latest events could result in publicity for Bitcoin among stock traders who follow Portnoy, the interest is unlikely to last longer than the current rally.

Updated: 8-13-2020

Learn To Profit From Bitcoin’s Growing Correlation With Traditional Assets

Veteran crypto traders Scott Melker and Michaël van de Poppe will be discussing Bitcoin’s different types of correlation with traditional assets and how to best profit from them.

Bitcoin’s correlation with traditional assets has grown in the last few months, mainly due to the ongoing, unprecedented macro-economic situation.

How strong are these correlations and how are they changing the way that users trade crypto in general?

Veteran traders Scott Melker and Michaël van de Poppe will be discussing how to correctly read traditional markets to trade Bitcoin in this week’s episode of Crypto Markets Live.

As usual, viewers will be able to interact with our guests by submitting questions to the chat.

The Crypto Market Show Live is hosted every Thursday by Cointelegraph. It brings together the best traders and market analysts to discuss all things related to crypto trading.

Remember to stay up to date with the Crypto Market Live show by subscribing to our Youtube channel!

Updated: 8-14-2020

TradingView Confirms It: People Love Bitcoin And Tesla

Bitcoin and Tesla are the talk of the town throughout the USA.

All eyes are on Bitcoin (BTC), crypto’s largest coin by market cap, and Tesla, a future-centric car company run by eccentric billionaire Elon Musk, thanks to a standout year for both assets.

Tradable equity in Tesla, under the ticker TSLA, has captured more of the American public’s attention than any other investable asset, according to July figures from financial charting platform TradingView, posted on Aug. 13. Bitcoin held the spotlight as the second most popular asset charted on the platform.

TradingView also pointed out that Bitcoin interest is on the rise specifically in Washington, California and Oregon. “The west coast loves crypto the most,” the article said. “Boeing was the third most viewed stock and American Airlines the 10th,” the article added, detailing the airline sector — an industry that saw the brunt of COVID-19 restriction consequences.

Bitcoin and Tesla earned their spots in the limelight as both have rallied tremendously in price over 2020. Bitcoin hit a low near $3,800 back in March as COVID-19 fears were ramping up. The asset recovered fast, however, flying up past $12,000 in the following months, tallying a radical comeback.

Looking back on a similar story, TSLA’s price fell down near $350 in March before flying up past $1,750 by July, as if riding one of its CEO’s SpaceX rockets.

Tesla CEO and SpaceX founder Elon Musk is no stranger to the crypto space, although he reportedly only owns 0.25 BTC as of May.

Updated: 8-20-2020

Robinhood’s “Payment-For-Order Flow” Model Might Be Allowing For Front-Running By The Firm Or It’s Clients

Ultimate Resource On Robinhood And It's Impact On Crypto-Currencies And Stocks

Few brokerage apps have captured people’s attention like Robinhood Markets Inc. The Silicon Valley company has turned the complex process of trading stocks into a simple, free swipe across a screen.

But some behavioral researchers contend that that simplicity is turning investing into a game, and nudging inexperienced investors to take bigger risks.

Robinhood and other newer trading apps such as eToro USA LLC and Webull Financial LLC inherit design elements from tech companies that influence user behavior to desired outcomes: Buy a product, use a service, view advertising.

Traditional brokerage apps are stodgy. Robinhood blasts users’ screens with digital confetti and makes Netflix-style recommendations for stocks to buy. Buttons tapped to buy a stock are bigger and brighter than those for canceling a trade.

Such cues can exacerbate humans’ behavioral biases and can affect investing behavior, said Thomas Ramsøy, a neuropsychologist who is chief executive of Neurons Inc., an applied neuroscience company.

“If it feels right, we tend to go for it,” he said.

The Robinhood app is set in vivid colors. Its behavior incentives include giving users a trial run with free stock and making money instantly available to trade. Some cues nudge users to repeat certain behaviors and buy stocks based on what other people purchased.

Robinhood Chief Operating Officer Gretchen Howard said the app doesn’t gamify trading or encourage risky behavior. The company was founded with the purpose of erasing barriers to investing and provides a range of educational content on trading through its website, she added.

“We believe that broader participation in the markets is more democratic and can bring opportunities to many. Those who dismiss retail investors as gamblers or gamers perpetuate the myth that investing is only for the wealthy and highly educated,” Ms. Howard said.

“We built Robinhood to be a platform for customers to learn and invest responsibly, and most of our customers use a buy-and-hold strategy with their investments.”

A Robinhood spokeswoman added the brokerage doesn’t make recommendations to buy and sell securities.

The app shows users related stocks that other Robinhood users also own.

Robinhood’s minimal interface has proved to be a draw for younger investors. The brokerage boasts of having 13 million users who have a median age of 31, and was recently valued at $11.2 billion through a new fundraising round disclosed on Monday. The company doesn’t specify how many accounts are active.

Mr. Ramsøy, the neuropsychologist, said the simplified interface can have benefits: Reducing the amount of information visible on the screen can lower the amount of mental stress that can otherwise overload users, and help users make smarter decisions. Yet, he said, the nudges can work in the other direction to prod users into less rational decisions.

Lisa Silva started trading on Robinhood the way many people do: Her friend texted her a referral link. She and her referring friend received a free share for her efforts, choosing among three stocks displayed on what looks like a virtual lottery scratch card.

“Robinhood is the gateway,” said Ms. Silva, who is 35 years old and lives in Ponte Vedra Beach, Fla., with her son.

Ms. Silva received a share of department store Macy’s Inc., and she sold it soon after.

“I knew nothing about trading or the stock market. It really simplified it and was user-friendly from the beginning.”

Now, Ms. Silva spends as much as five hours a day researching and trading penny stocks on her iPhone.

For self-directed brokerages like Robinhood, user trading generates money for the companies even when trades are free.

Marshini Chetty, an assistant professor of computer science at the University of Chicago specializing in human-computer interaction, said Robinhood’s interface shares characteristics of what the software industry calls “dark patterns”—a design choice that steers users down a desired path.

For instance, once you start a trade on Robinhood, it is easier to move forward than to back out of it.

While confirming the purchase requires a swipe up, there is no clear cancel button. To back out of a trade, the user has to press a link labeled “edit” on the top-left corner and then press an X button.

At rival Webull, users are presented with a “confirm” button to proceed with a trade and an X above that would cancel it. Webull also shows users a toggle to skip confirmations in the future.

But on apps from more traditional brokerages, such as Charles Schwab Corp. and E*Trade Financial Corp., trade confirmations include labeled options to either place the order or cancel it.

Robinhood prompts users to transfer money from their bank accounts and ensures deposits of as much as $1,000 are immediately available for trading—a feature also available on Webull. Schwab, by contrast, takes at least one business day to clear funds and allow users to start trading.

“It’s important to distinguish between accessible, modern design and gamification,” Ms. Howard said. “The incentives we offer, such as free stock, give people a chance to learn about investing and companies.”

All brokerages are incentivized to encourage users to trade. They earn money by sending customer orders to trading firms, which execute them.

The practice, called payment for order flow, is controversial but legal in the brokerage industry, helping make commission-free trading possible. While customer orders must be executed at the best-available price, trading firms have many ways to use the trades to their advantage, including to mask larger buying and selling by the firm or its clients.

Robinhood made more than $270 million from selling order flow in the first six months of the year, according to securities filings that were compiled by Piper Sandler analyst Richard Repetto. Schwab made roughly $120 million, while E*Trade pulled in about $190 million. TD AmeriTrade Holding Corp. topped those three, earning more than $525 million.

“Receipt for order flow is a common, legal and regulated industry business practice,” the Robinhood spokeswoman said.

After Ms. Silva’s initial Robinhood deposit, confetti rained down across her screen, congratulating her.

“It makes people think they’re winning,” Ms. Silva said of the graphic.

The confetti graphic has become a Robinhood signature, finding its way into company advertising. “The animation marks a milestone moment,” said Robinhood’s Ms. Howard, who added that confetti isn’t displayed on every trade or deposit.

Getting into Robinhood is far easier than getting out. Transferring accounts to another brokerage takes as long as a week, which is common in the brokerage industry. Ms. Silva, who moved most of her activity to rival Webull, still keeps trading penny stocks in her Robinhood account because she fears their prices could swing too much during the time it takes to transfer them.

Webull, founded in 2017 and based in New York, features a more sophisticated interface and more trading options than Robinhood, including data on short sellers, wider trading windows and a social-media feed similar to Twitter. It also employs bright colors and graphics touting promotions to its roughly 750,000 daily active users, who are mostly in the U.S.

A recent promotion, Webull’s Summer Referral Competition, pits users in a referral race for free shares in technology stocks Facebook Inc., Amazon. com Inc., Apple Inc., Netflix Inc. or Google parent Alphabet Inc. A leaderboard, similar to what people see in videogames and contests, shows users where they stand.

“We are successfully utilizing peer marketing that is extremely popular with our millennial user demographic,” a Webull spokesperson said.

Another rival, eToro, offers cryptocurrency trading in the U.S. and plans to start trading stocks next year. It gives $50 for each referral and to new users.

The platform, which has 14 million users around the world, gives users the option to copy trades made by other people, said Guy Hirsch, eToro’s U.S. managing director. About one-eighth of its U.S. users use the service, which is aimed at traders who don’t have the time to do their own research or are new to investing.

Users with enough copycats are eligible to earn 2% of the total money that is copying them, he added.

“Behavioral research and design elements can also play a positive role in educating retail investors about investing and risks,” an eToro spokeswoman added, “as well as preventing undesired outcomes such as losing more than one has.”

Updated: 9-11-2020

The Tax Moves Day Traders Need To Make Now

New, inexperienced investors are rushing into the market thanks to no-commission trades and the popular Robinhood trading app. What many don’t know is that they could owe Uncle Sam taxes on those trades.

If you’re one of the millions of day traders who have jumped in and out of markets this year, check your taxes now. Being a taxpayer may not be top of mind, but not paying attention could dent your bottom line next April.

Trading by individuals has surged in 2020, fueled by no-commission trades, a rising market from March through August and free time provided by pandemic lockdowns. At Charles Schwab Corp.,  the average of 1.6 million daily trades for the second quarter was more than twice the year-earlier average of 716,000.

Easy-to-use mobile apps have contributed to the surge by attracting new, inexperienced traders. According to Robinhood Markets Inc., which offers the popular Robinhood trading app, first-time investors accounted for 1.5 million of its 3 million funded accounts opened in the first four months of 2020.

Many new traders likely aren’t aware they are trading in taxable accounts, where each sale has tax effects. (Robinhood customers can’t trade within retirement accounts such as traditional or Roth IRAs, where sales aren’t taxable.) Next year, many will be surprised to receive long tax forms for 2020.

Ultimate Resource On Robinhood And It's Impact On Crypto-Currencies And Stocks

Manessa Lormejuste Didn’t Know What A Capital Gain Was When She Received Her First Tax Form From Robinhood, Which Ran To A Dozen Pages. Now She Monitors Her Gains And Losses Weekly.

In 2017, college student Manessa Lormejuste was a little shocked to receive her first tax form from Robinhood, which ran to a dozen pages. She had no idea she could owe capital-gains tax on her trades.

Now 25, the cosmetic chemist from Linden, N.J., has since revised her strategies, monitoring gains and losses weekly, and she often holds positions for longer than a year to avoid the higher rates on short-term gains. “I try my best to minimize my taxes,” she says.

With 2020 waning and the recent market selloff raising losses, frequent traders need to plan tax moves now. Here’s what to keep in mind.

•Know The Basics. The tax rules for investment income are very different from those for earned income such as wages. No Social Security or Medicare taxes are due on it, and there is no automatic withholding to set aside cash for income taxes. Estimated quarterly tax payments may be due.

In taxable accounts such as those offered by Robinhood, each trade can generate either a taxable gain or a loss that can offset a taxable gain. Savvy traders maximize after-tax profits by timing when they sell winners and losers, or by selling one lot of shares instead of another.

•Determine Net Gains And Losses. Figuring the tax on a sale begins with subtracting the asset’s purchase price (plus adjustments in some cases) from the sale price and recording a capital gain or loss. At tax time, the investor adds up gains and losses for the year and then nets them using a tax-law formula based on how long the asset was held before sale.

Example: Say that a trader bought shares in XYZ Co. at $5 each in June and then sold one share for $10 in August and another in September for $4. She records a $5 gain and a $1 loss, for a net taxable capital gain of $4.

If the trader’s capital gains on sales exceed her losses on sales for the year, she owes income tax on the net gains. If the losses exceed the gains, there is no tax, and up to $3,000 of losses can be deducted against ordinary income like wages. If the trader has losses beyond that, they “carry forward” to offset future taxable gains until they are used up.

•Check Your Tax Rate. It may be higher than you think. Day traders usually aren’t eligible for lower rates that apply to long-term capital gains, because they are for investments held longer than a year.

Instead, frequent traders’ net profits typically are short-term capital gains taxed at the higher rates used for ordinary income like wages—a fact many traders overlook. If an investor’s tax rate on a net long-term gain would be 15%, then the rate on a similar short-term gain will likely be 22% or higher, depending on income.

•Specify Lots To Lower Taxes. Trading platforms, including Robinhood, usually allow investors to choose which shares they are selling if they have lots bought at different times. Doing this can lower taxes.

Say that a trader bought some shares of XYZ Co. at $5 and others at $7 and then sells a few shares for $9. Selling $7 shares will yield a taxable gain of $2 each, while selling $5 shares will yield a $4 taxable gain—a big difference. If the investor doesn’t specify which lot, the default is typically first-in-first-out, or FIFO, which often raises the tax bill.

•Beware Of Wash Sales. Most trades in taxable accounts are subject to the “wash-sale” rules. A wash sale occurs when an investor buys a security within 30 days of selling at a loss, either before or after it. In that case, the investor can’t immediately use the loss.

•Don’t Forget Other Taxes. There is a 3.8% surtax on net investment income above certain thresholds: $250,000 for married joint filers and $200,000 for singles. If a married couple has $150,000 of employment income and $110,000 of net taxable gains, then the 3.8% surtax would apply to $10,000.

Also be aware of state taxes. California has a top income-tax rate of 13.3% and no reduced rate for capital gains.

•Be Careful About Claiming Trader Tax Status. A coveted tax break allows some day traders to claim their trading is a bona fide business and deduct expenses—such as for specialized terminals, a home office or tax prep—on Schedule C. If these traders also make a timely election under code section 475(f), they reap other valuable benefits.

Darren Neuschwander, a CPA with Green, Neuschwander & Manning, a firm that specializes in claims for trader status, says he has had a surge of inquiries about it this year.

The requirements for this break haven’t been clarified by the IRS, but they are stiff. Among other things, traders often need to trade for at least four hours a day, for an average of four days a week, and make at least 720 trades a year, says Mr. Neuschwander.

Be ready for an IRS challenge, advises Robert Willens, an independent tax analyst. “The IRS jealously guards entry into this rarefied category, and the courts have often ruled against taxpayers,” he says.

•Do Year-End Planning. Investors can’t use losses on 2021 sales to reduce 2020 taxable gains. Mr. Willens advises traders with net losses near year-end to sell winners, if possible, to use the losses.

The wash-sale rules don’t apply to taxable gains, he notes. So it is OK to sell a winner, book a gain, offset it with a loss, and rebuy shares right away.

•Expect Tax Paperwork. Next spring, traders with taxable accounts will receive a Form 1099-B listing their trades. This document can be voluminous and—especially with options trades—raise a tax-prep bill of $300 to $400 by several hundred dollars, says Dan Herron, a CPA in San Luis Obispo, Calif. who has active traders among his clients.

Trading firms often offer electronic forms for direct import into tax-prep software. Sometimes the import works well and other times it doesn’t, says Mr. Herron. His rule of thumb: “The more complex the trading is, the more vague the reporting is—and the higher the tax-prep bill.”

Updated: 10-10-2020

Robinhood Traders, Including Bitcoin Holders, Left In The Lurch Following Theft: Report

A handful of Robinhood users who said their accounts had been liquidated by thieves recounted less-than-helpful responses by the personal investing fintech in a Friday report by Bloomberg News.

* Five customers interviewed by Bloomberg claimed Robinhood acted slowly and responded inadequately to heists against their trading accounts, in part because Robinhood has no emergency support line.

* One user, Bill Hurley, a Connecticut metal worker who told Bloomberg he lost $5,000 in stock and bitcoin in a theft, said it took Robinhood two weeks to respond to his requests for assistance.

* Hurley told Bloomberg he had reached out to Robinhood while the thieves were still transferring his funds to a Revolut account. But he said he heard nothing back until Thursday.

* Bitcoin held on Robinhood cannot be transferred off the platform due to regulatory restrictions. It can, however, be cashed out.

* Robinhood told Bloomberg the thieves targeted individuals’ email accounts and did not gain access from an internal security breach.

* “We’re actively working with those impacted to secure their accounts,” the fintech told Bloomberg. Robinhood did not immediately respond to multiple CoinDesk requests for comment.

Updated: 10-12-2020

How Investors Are Trading November’s Election

Traders are buying shares of green-energy companies and gauging the impact of possible corporate-tax increases as they prepare for a potential Biden win.

With market volatility rising ahead of November’s U.S. presidential and Congressional elections, investors are parsing what polls and policy proposals mean for everything from energy stocks to shares of private-prison operators.

This anxiety is already showing up in the moves of assets that investors use to protect portfolios and wager on volatility like futures contracts tied to the Cboe Volatility Index, a gauge of expected stock swings. It is also driving moves in sectors that investors believe would benefit from control of the White House and Congress by one party or the other.

Wall Street typically uses these sectors or other assets that would be impacted by different policies to build broad election baskets associated with each political party. Analysts then gauge the performance of those baskets over time to create probability forecasts of who they expect to win in November.

Dan Clifton , head of policy research at Strategas Research Partners, said the firm’s baskets for each party signal a roughly 60% chance of Democratic nominee Joe Biden winning and a 40% chance for President Trump . Those forecasts are similar to the Strategas projections from 2016.

Those were better chances than some forecasters gave Mr. Trump, but Wall Street often struggles to predict both political outcomes and their impact on asset prices.

Stock futures tumbled on election night in 2016 with investors concerned Mr. Trump’s victory would hurt corporate earnings because of his unpredictable policies and advocacy for barriers to trade. Stocks quickly overcame those worries as traders cheered the prospect of tax cuts.

Other longer-term Trump trades, however, like bets on infrastructure spending and higher bond yields, have reversed in the past few years.

Below, we take a deeper look at what these baskets are suggesting about November’s outcomes:

Energy

Components of the Democratic bucket include companies tied to renewable energy such as Sunrun Inc., NextEra Energy Inc. and Tesla Inc. Mr. Biden has introduced a $2 trillion plan to fight climate change that includes energy-infrastructure investments and supporting the transition to electric vehicles.

The iShares Global Clean Energy ETF has advanced about 80% this year, extending its gains after recent polls showed Mr. Biden’s lead increasing.

The former vice president has also proposed banning oil-and-gas production on federal lands and waters, making energy producers such as EOG Resources Inc. common components of Republican baskets. These stocks have lagged behind the broader market recently with the coronavirus hurting oil and gas prices and investors expecting Democrats to gain control in Washington.

“Energy really is the sector where we would most likely see the market’s expectations about the election priced in,” said Kristina Hooper , chief global market strategist at Invesco. “It is such a clear-cut difference between the two candidates’ policies.”

Tax Policy

Many investors also are weighing possible increases to corporate taxes. Mr. Biden has proposed increasing the corporate tax rate to 28% from 21% and raising taxes on U.S. companies’ foreign income, partially reversing the 2017 Tax Cuts and Jobs Act.

Goldman Sachs Group analysts estimate that Mr. Biden’s tax policies could slice 9% off S&P 500 profits, though greater fiscal spending and the removal of tariffs could offset much of that decline. The bank’s basket of stocks that benefited most from tax cuts has recently trailed stocks that didn’t gain as much from the bill.

Still, some investors expect low interest rates and recovering economic growth to support stocks regardless of any policy shifts.

“There’s a danger in overreacting to these baskets and missing out on the bigger picture,” said Andrew Slimmon , senior portfolio manager at Morgan Stanley Investment Management.

Private Prisons and Student-Loan Servicers

Another area of the market reflecting expectations for Democratic policies: private-prison operators. Shares of companies including Geo Group Inc. and CoreCivic Inc. surged in 2016 after Mr. Trump was elected given his hard-line stance on illegal immigration and deportation, but have slid 30% or more this year with Mr. Biden pledging to end the federal government’s use of private prisons.

Additionally, declining shares of student-loan-servicing companies such as Navient Corp. and SLM Corp. signal projections for a Democratic victory because they could be subject to more stringent regulations. Mr. Biden also wants to cancel a substantial portion of Americans’ $1.5 trillion in federal student debt.

Private-prison operators and student-loan companies normally don’t receive much attention from investors, but they are sensitive to policy changes, traders say.

“Those are going to be the stocks that send the signal of what’s going to happen in this presidential election,” Mr. Clifton of Strategas said.

Murky Areas: Trade, Infrastructure and Health Care

Investors are more divided on how to interpret possible shifts in policies impacting trade, infrastructure spending and health care.

Some investors are hoping more clarity on trade policy with China would boost shares of companies such as semiconductor makers Intel Corp. and Micron Technology Inc. that are reliant on smooth trade flows. The Trump administration’s trade feud with China sparked swings in stocks for much of 2018 and 2019 before the countries reached a phase-one trade deal. Mr. Biden has indicated that he, too, would challenge Beijing in several areas but would try to work with U.S. allies on trade issues.

Both Democrats and Republicans have advocated in recent months for increased infrastructure spending to repair the nation’s highways and bridges, but legislation still hasn’t been passed.

Shares of construction-materials companies such as Vulcan Materials Co. and Granite Construction Inc. had rallied in 2016 after Mr. Trump was elected amid hopes for an infrastructure bill but have fallen since then.

Some analysts expect a bill to pass if Mr. Biden wins and Democrats gain control of Congress, giving some stocks tied to infrastructure a boost recently.

Investors also are monitoring movement in health-care stocks, though their prospects remain unclear because policy changes there also could face hurdles in Congress. Mr. Biden has said he wants to expand on the Affordable Care Act by adding a public option like Medicare.

Health-care stocks had rallied early in the year because many viewed that plan as less disruptive to the industry than the single-payer program favored by Vermont Sen. Bernie Sanders and Massachusetts Sen. Elizabeth Warren . Still, many are unsure how Mr. Biden’s proposals would affect those companies’ profits.

“There’s a lot of uncertainty because of the lack of definition around policies,” Invesco’s Ms. Hooper said.

Updated: 10-15-2020

What Are Fractional Shares? A Guide To The Cheapest Way To Buy Stock

What You Need To Know

There’s a new way of buying stock that makes the share price almost irrelevant.

Brokerages like Charles Schwab Corp. and Robinhood have started to offer something known as fractional shares, which let people invest as little as $1 or 1 cent in a company.

The subtly radical product turns the concept of owning stock on its head. Instead of buying a fixed slice of a company at a certain price, you’re investing a specific amount of money, and in return getting a piece of the company. You get all the same benefits, proportionally, if the stock rises — and risk losing just as much if it falls.

Can’t afford to buy a single share of Amazon, which was trading at about $3,125 on Oct. 2? Why not buy $100 worth of the company instead? A 5% rise in the share price to $3,281 would make your stake worth $105. Or you can acquire a tiny bit of Google parent Alphabet Inc., rather than having to spend about $1,450 for a share.

Why It Matters

The barrier for entry to invest in high-flying stocks has now been lowered, just as more people buy and sell in the market on their own.

The flipside is that now more people can lose money in the market. And investors may soon learn that being out of the market for even just a few days can mean missing out on much of a year’s gains. Critics say that fractional shares encourage inexperienced investors to take risks they don’t fully understand. Of course, if all you put in is $5, you don’t have a lot to lose, and probably not a lot to gain, either.

Why Hasn’t This Been Available Until Now?

Fractional shares have been offered in the past, including by at least one company during the late 1990s dot-com boom. But until now, higher trading fees meant it usually didn’t make sense to buy shares in small dollar amounts. In the late 90s, some of the lowest commissions were still as high as $8 a trade. Now, you can trade for free.

Most of the largest U.S. brokerages began offering fractional shares for the first time in 2020, after smaller firms including Social Finance Inc. and Stash Investments LLC launched similar products over the last two years.

Though buying fractional shares on purpose is a relatively new concept, many people have probably owned them without knowing it. When dividends are reinvested, or when shares are divided up or combined — through stock splits, reverse splits or merger deals — sometimes investors are left with fractions of shares.

How It Works

Behind the scenes, a brokerage like Fidelity holds full shares, allocating portions to their customers and holding any remaining portion of the share in its inventory.

They pass on the dividends proportionally. Trades can typically be executed immediately, in part because the brokerages are mostly offering some of the most widely traded stocks. Some brokerages also pass on the equivalent percentage of stockholder voting rights.

At Charles Schwab, a customer on average invests just under $400 at a time and buys seven fractional shares in a single trade, and about 110,000 accounts have bought such shares since the program began on June 2. The number of such accounts at Fidelity Investments had more than tripled as of the end of July from 102,000 four months earlier.

Some brokerages only offer fractional shares in a limited number of companies. Schwab offers fractional shares in companies represented in the S&P 500 — not Tesla, then — while SoFi gives access to only a few dozen companies. Meanwhile, Fidelity, Robinhood and Stash have thousands of companies and ETFs available.

The Fine Print

One downside: You might not be able to simply transfer your fractional shares between brokerages. For example, if you use Robinhood and want to switch to another platform, you have to sell your fractional shares and move the cash. Of course, you can then buy fractional shares again with the new brokerage, but you might have to pay capital gains taxes on the shares you just sold.

If you’ve held the stock for less than a year, you pay the short-term capital gains rate. For many people, that’s going to be a lot higher than the long-term capital gains rate, which is 0%, 15% or 20% depending on your filing status and your income.

Updated: 10-15-2020

Digital Thieves Are Hacking Brokerage Accounts: Is Your Money Safe?

Some Robinhood customers say their money was looted, suggesting online stock trading may be less secure than investors hoped.

It feels as easy as it does safe. With a few swipes of the thumb, investors anywhere can trade stocks straight from their mobile phones, identifying themselves with the unique biometric data stored in their fingerprints or faces.

But an expanding pool of consumer complaints suggests that online trading, which has soared in popularity during the Covid-19 pandemic, may be less secure than investors would hope. Bloomberg News reported last week on the experience of some users on Robinhood Markets Inc.’s brokerage app who say their money was stolen.

Robinhood says the issue didn’t stem from a breach of its systems. Yet the lack of an emergency phone number left customers feeling stranded with little avenue for help as their funds vanished, they said.

Cybersecurity experts say the boom in online stock trading has created a parallel opportunity for hackers. And even the most diligent traders can fall prey to the increasingly sophisticated tactics of today’s digital thieves.

“Cyber hacking has now become the biggest threat to investors’ financial well-being,” said Andrew Stoltmann, a Chicago-based lawyer and former president of the Public Investors Advocate Bar Association. “Unfortunately, brokerage firms haven’t invested the money needed in order to keep cyber hacking of brokerage accounts from happening.”

What Are The New Tricks?

Messages from alleged Nigerian princes writing about unmissable investment opportunities have been replaced by more believable “phishing” emails, said Jonathan Care, a research director who specializes in cybersecurity and fraud at Gartner.

Such missives might use personal information gathered from publicly visible social-media accounts. They may use the logos of financial institutions to look official to even the most discerning eye. The result? Unwitting investors may be baited into forking over their log-in information.

Other tactics take place in the background and make legitimate-seeming web activity risky. Some hackers set up WiFi networks in public places with monikers that sound credible — such as the name of a nearby business — which can in fact be used to take control of a system.

Malicious software installed on some machines can detect when users log into financial accounts and even make additional transactions they did not intend to authorize, Care said.

What Can You Do?

“Any of us could have our brokerage account hacked if we do not take precautions to protect ourselves,” said Mark McCreary, chair of the privacy and data-security practice group at Fox Rothschild, a law firm based in Philadelphia.

Digital traders should change their passwords frequently, experts say, and avoid unfamiliar WiFi networks. They should be sure to have two-factor authentication enabled, which requires a secondary code to sign in.

But more than anything else, even savvy users could benefit from simply paying more attention to the flurry of emails, texts and other messages that flood their devices.

“Frankly, none of us are completely immune to an effective phishing email, simply because we may be distracted,” McCreary wrote in an email.

Can You Get Your Money Back?

McCreary recommends that investors who think their accounts are compromised immediately notify their brokers, who may be able to track down where funds were wired and reverse the transfer.

“The bottom line is that unlike a credit card with federal law protections, and unlike a bank account where lack of authorization will restore funds (e.g., a forged check), a brokerage account has no such legal protections,” McCreary said.

The Securities Investor Protection Corp., which functions for brokerage accounts in a way similar to the FDIC for U.S. bank accounts, does not cover situations in which money and securities are stolen due to a hack.

There is no magic bullet for international investors seeking compensation, either. However, those in Europe may have an additional avenue to pursue in the General Data Protection Regulation, said Simon Shooter, a partner at law firm Bird & Bird in London who heads its cybersecurity group.

GDPR is a stringent regime governing how companies gather and use citizens’ information, giving consumers more control of their data. Investors may have a right to some compensation if a hacked firm failed to comply with GDPR requirements when it comes to the security and safety of data, said Shooter.

While regulators may not be able to get you your money back, brokerage firms have a strong incentive to compensate consumers for losses.

“With most of these firms, the judgments are really reputational,” said Adam Fee, a former federal prosecutor in the Southern District of New York who is now a partner at Milbank, a law firm. “When something bad happens, they are asking, ‘Do we want a bunch of articles about how people are out money because we messed up and didn’t react?’”

With that in mind, Fee said investors shouldn’t “sit on their rights.” They should make themselves aware of what they may be entitled to in their investor agreements.

After alerting their brokers, investors may also find it helpful to file a complaint with law enforcement. The most direct way to do that in the U.S. is with the FBI’s Internet Crime Complaint Center. Don’t expect agents to show up at your door, however. Fee said this step simply helps formalize the complaint.

What Do The Brokerages Say?

A common industry practice is to promise to cover 100% of losses as a result of unauthorized activity in a brokerage account. The sticking point, of course, is whether the company will rule the breach was indeed unauthorized or lay the blame on you.

“If we determine through our investigation that the customer has sustained losses because of unauthorized activity, we will compensate the customer fully for those losses,” said Dan Mahoney, a spokesman for Robinhood. He also said the company works to “resolve any issues as quickly as possible.”

The company is hiring a Fraud Investigations Team Lead in Denver, according to its website.

Charles Schwab Corp. says on its website that it will cover all losses stemming from unauthorized activity in one of its brokerage accounts. Schwab says it employs more than 2,500 people in its service team and call centers alone, and over 1,300 others in client-facing roles at its branches.

Interactive Brokers has been hiring more client services staff, faced with big increases in client accounts and trading activity. It has live, chat and email support with centers around the world, and its phone service runs Sunday through Friday. Another tool called IBot uses artificial intelligence to answer some customer questions.

Updated: 10-18-2020

Individual-Investing Boom Fuels Trading In Low-Price Stocks

Zero-commission apps and online brokerages have driven a boost in volume for sub-$5 stocks.

On one Thursday in August, more than 10% of all U.S. stock-market trading volume was in shares of Gevo Inc., a little-known renewable-fuels company.

The stock popped to $1.82 from 55 cents that day after the company announced a big contract, triggering a surge in volume. Much of it was at off-exchange venues where retail brokerages route orders—a sign that hordes of individual investors were trading the stock, according to Rosenblatt Securities.

“It surprised the heck out of us,” said Gevo Chief Executive Patrick Gruber.

Trading in speculative stocks with low share prices has surged this year, fueled by a huge influx of individuals using zero-commission investing apps and online brokerages. During several months this spring and summer, more than 25% of the shares traded in the U.S. stock market were in companies with a share price below $5, according to data from the New York Stock Exchange.

From 2012 to 2019, that percentage mostly hovered between 10% and 15%, the NYSE data show. In September it fell to 17.1%, still high by historical standards.

Companies often try to avoid having a share price below $5 because of a perception that such stocks are risky “penny stocks”—even though, legally speaking, that term applies only to stocks that aren’t listed on exchanges. Asset managers, like mutual funds, often shy away from sub-$5 stocks.

That is why individuals play an outsize role in low-price stocks. Individual investors fueled unusual rallies this year in stocks like Eastman Kodak Co. and bankrupt car-rental company Hertz Global Holdings Inc.

To be sure, some of the activity in sub-$5 stocks was caused by the coronavirus-driven selloff in February and March. That temporarily sent some big stocks like Ford Motor Co. and Sirius XM Holdings Inc. below the $5 mark.

But many of the most actively traded stocks this year have been small companies—like Gevo, which has a market value of less than $150 million—that get intense attention on Twitter accounts and Reddit forums devoted to penny stocks.

Gevo was heavily cited in tweets on Aug. 20 after it announced an agreement with the U.S. arm of commodity-trading giant Trafigura Group Pte. Ltd. and its shares skyrocketed. The stock has since given up some gains. It closed Friday at $1.22.

Individual trading activity began to soar in late 2019, after the brokerage industry shifted to free stock trades, and it accelerated this year after the coronavirus forced millions of Americans to stay home with little to do.

Retail activity has accounted for almost 20% of trading volume this year, nearly double the level from 2010, according to Bloomberg Intelligence. JMP Securities estimates some 10 million new online-brokerage accounts have been created in 2020, about half at Robinhood Markets Inc., whose app is popular with younger investors.

Zero-commission trading has fueled a boom in low-price stocks because it attracts less-affluent investors into the market, said Anthony Denier, CEO of Webull Financial LLC, which offers a trading app with about 750,000 active daily users.

“If you have a $500 account, you can’t buy one of those highflying S&P 500 names. But you can get into, and speculate in, some of these cheaper names,” Mr. Denier said.

Webull says about 56% of the U.S. stock trades it has handled this year have been in stocks priced at $5 or lower.

Most brokerages won’t say how many of their investors hold low-price stocks. But data from Atom Finance, a financial-technology firm that supplies consumers with investment research, suggests such stocks are especially popular at Robinhood.

In August, 57% of Robinhood accounts held stocks priced below $5, compared with 14% at Charles Schwab Corp. and 16% at Fidelity Investments, Atom Finance estimates. Atom gathers such data by connecting to the brokerage accounts of its more than 100,000 customers.

A person close to Robinhood said Atom’s estimate was skewed because Robinhood gives users free shares of stock when they refer new customers to the company. Not including such promotional giveaways, about 30% of Robinhood accounts hold sub-$5 stocks, the person said.

Robinhood says trading of sub-$5 stocks on its app has declined in recent months as it has rolled out fractional trading, which lets investors own slices of stocks that may cost hundreds or thousands of dollars for one share.

Matthew Bradley opened a Robinhood account in May and has become an avid trader of cheap stocks. A 37-year-old father of two who lives in Lancaster, Ohio, and works in information technology, he often rises at 5 a.m., makes coffee and hunts online for trade ideas.

“It’s a great feeling to find something obscure and make gains on it,” he said. Last week, a friend mentioned one such stock: Pioneer Power Solutions Inc., a small New Jersey-based maker of electrical equipment. Mr. Bradley bought it at $4.80 a share and sold the next day for $6.51, making a small profit.

He wasn’t alone. Daily trading volume in Pioneer was nearly 294 million shares on Oct. 6, the day he made his purchase, according to Rosenblatt Securities. That made it the most actively traded stock in the entire U.S. market, representing 2.8% of total volume.

Pioneer shares more than quadrupled to $6.89 during the three days ended Oct. 7. They have since lost more than half their value, closing at $3.09 on Friday. There was no clear driver for last week’s rally, but there was a storm of social-media attention. An analysis by Meltwater, a global media-intelligence firm, shows that hundreds of tweets mentioned Pioneer’s ticker, PPSI, on the morning of Oct. 6.

Pioneer didn’t respond to requests to comment.

Updated: 9-2-2020

Robinhood Faces SEC Probe For Not Disclosing Deals With High-Speed Traders

Company could have to pay a fine exceeding $10 million if it agrees to settle.

Robinhood Markets Inc. faces a civil fraud investigation over its early failure to fully disclose its practice of selling clients’ orders to high-speed trading firms, people familiar with the matter said.

The investigation is at an advanced stage and the company could have to pay a fine exceeding $10 million if it agrees to settle the Securities and Exchange Commission probe, one of the people said. A deal, however, is unlikely to be announced this month, the people said, and the two sides haven’t formally negotiated a proposed fine, the person said.

A Robinhood spokeswoman declined to comment on the investigation or any talks with regulators, but said: “We strive to maintain constructive relationships with our regulators and to cooperate fully with them.”

An SEC spokeswoman declined to comment.

The probe is the latest headache for the upstart brokerage firm that was founded in 2013 and has developed a hugely popular app that allows individuals to trade stocks, options and cryptocurrencies without paying any commissions.

While Robinhood has seen phenomenal growth this year, the Menlo Park, Calif.-based firm has faced setbacks such as outages that prevented customers from trading, the cancellation of its plans to expand to the U.K. and fallout from the suicide of a 20-year-old Robinhood customer who thought he had lost money from a sophisticated options trade.

Companies that settle SEC investigations often pay fines without admitting or denying misconduct. Any settlement may not accuse Robinhood of intentionally violating the most serious antifraud laws, and instead allege the company should have known its statements were false or misleading, one of the people said.

The investigation, run out of the SEC’s San Francisco office, examined Robinhood’s failure to fully disclose on its website—until 2018—that it took payments from high-speed trading firms for sending them customers’ orders to buy or sell stocks or options, the people said.

The practice, known as payment for order flow, is a common—if controversial—way for retail brokerages to execute client trades. Critics say payment for order flow creates a conflict of interest for the broker that sells the orders.

The practice has raised suspicions that it could lead to sophisticated traders exploiting mom-and-pop investors, although brokers and traders say such concerns are baseless.

Until October 2018, Robinhood had a page on its website titled “How We Make Money” that listed only two revenue sources: fees for its margin-trading service and interest collected on customer deposits. It didn’t mention payment for order flow, even though the payments to high-speed traders were detailed in regulatory disclosures available elsewhere on the website.

The SEC enforces laws that require brokerage firms, public companies and other Wall Street players disclose all material facts that an investor would want to know to make a trading decision.

Payment for order flow is legal. It often results in slightly better prices for individual investors, the SEC wrote in a report about algorithmic trading issued last month.

The SEC’s report said high-speed trading firms pay for access to the orders because they “generally have more information and processing power than retail traders and brokers” and value the opportunity to trade with less informed traders.

Payment for order flow represented a significant portion of Robinhood’s revenue at the time. The privately owned startup earned under half of its revenue in 2017 from such payments, and roughly half in 2018, a person familiar with the matter said.

During the second week of October 2018, Robinhood updated its webpage to disclose that it “receives rebates from executing brokers.” Also that month, Vladimir Tenev, Robinhood’s co-founder and co-chief executive, published a blog post about the firm’s payments from high-speed traders.

“The revenue we receive from these rebates helps us cover the costs of operating our business and allows us to offer commission-free trading,” he wrote.

Robinhood collects payments from trading firms such as Citadel Securities and Virtu Financial Inc. for executing its customers’ orders. In 2019, the company paid $1.25 million to settle regulatory claims tied to that same practice.

The Financial Industry Regulatory Authority, a supervisor of brokerage firms that reports to the SEC, said Robinhood didn’t take sufficient steps from October 2016 to November 2017 to ensure it was getting the best prices for customer orders.

Robinhood said this year it has amassed more than 13 million customer accounts, and it was valued at $11.2 billion in a recent funding round.

Its trading app has boomed in popularity during the coronavirus pandemic, as more individual investors gamble with stocks and options. Its popularity has put its approach to attracting customers in the spotlight, with some critics saying Robinhood makes it too easy for novice traders to make risky bets.

Brokers and electronic-trading firms say small investors benefit from payment for order flow by getting better prices on their trades than they would get on public stock exchanges like the New York Stock Exchange or the Nasdaq Stock Market.

Although the investor might be able to buy a share for just a fraction of a cent less than on an exchange, those better prices add up to billions of dollars of savings for the entire population of small investors, analysts say.

Still, the controversial nature of payment for order flow makes it an awkward topic for Robinhood, which has described itself as a democratizing force in finance that is seeking to upend traditional ways of doing business on Wall Street.

This year, new disclosure reports mandated by the SEC have shed more light on Robinhood’s revenues from electronic trading firms. Robinhood made $271 million in such revenues during the first half of this year, the reports show.

Robinhood’s co-founders, Baiju Bhatt and Mr. Tenev, both have roots in the high-speed trading world. Before founding Robinhood, they ran Chronos Research, a startup that made software for ultrafast trading firms.

Its products included Zardoz, a trading platform named after a 1974 science-fiction movie starring Sean Connery, and a data tool called Brutalis, which the company touted as “brutally fast” on an archived version of its website.

Updated: 11-13-2020

Herding By ‘Naive’ Robinhood Traders May Be Good Signal To Short

From buying the dip to surfing the tech surge with options, an investor following the Robinhood crowd this year would have a lot to feel good about.

Provided they didn’t follow too long, that is.

Users of the millennial-friendly app — the first to offer commission-free trading — are more likely to chase popular stocks with extreme performance. The result is herding that ultimately becomes a drag on those companies’ returns, according to the latest academic research into retail investing.

When Robinhood users pile into a stock in large numbers, the average excess return on the day surges to 14%. But this is followed by a reversal of nearly 5% over the subsequent month, a new paper found.

The thinking is that in seeking to make investing easier, the platform’s slimmed-down interface could be resulting in concentrated trading in the most “attention grabbing” shares. That increases the chance of herding which can lead to big market reversals.

“Robinhood users are more subject to attention biases,” wrote authors including behavioral finance pioneer Terrance Odean. “The combination of naïve investors and the simplification of information is associated with herding episodes.”

Robinhood was at the center of Wall Street drama this year as the young fintech firm stirred up an investing frenzy amplified by Covid-19 restrictions and stimulus cash.

As retail volumes spiked, even professionals started tracking the activity of Robinhood’s 13 million users in a hunt for fresh trading signals. To do that they relied on data from Robintrack, a website that provided updates on retail stock demand, on which the academics also based their calculations.

One idea from the academic world: A strategy of selling a security after a herding event and buying it five days later delivers a 3.5% return and nearly double that for more extreme scenarios.

In fact, the researchers say there’s good reason to think hedge funds are doing some version of this, since they observed a spike in short interest among shares bought heavily by Robinhood traders.

It’s familiar territory for two of the paper’s co-authors. Odean at the University of California, Berkeley, and Brad M. Barber at the University of California, Davis have previously documented a tendency for individual investors to buy stock darlings.

In the case of Robinhood, they argue it’s even more extreme, since many users are first-time investors on a platform that offers frictionless trading and only limited information. For instance, users buy equities on the app’s “Top Mover” list more aggressively than other individual investors, meaning they’re more likely to trade extreme losers as well as winners.

“How information is displayed can both help and hurt investors,” wrote the team, which also included Xing Huang at Washington University in St. Louis and Chris Schwarz at the University of California, Irvine. “The simplified user interface influences investors decision.”

Updated: 11-18-2020

Stock Fund With 61% Return This Year Likes China, EV Stocks

A high-performing Matthews Asia fund manager says China is in a “sweet spot” for investors, thanks to rising individual wealth in the nation.

In some cities in China, residents have seen their incomes rise above $10,000 per capita, a global milestone for middle-class status, said San Francisco-based Michael Oh, manager for the Matthews Asia Innovators Fund. His fund has returned 61% this year and beat 90% of its peers.

“China has one of the the biggest consumer markets in the world,” Oh said. The increasing wealth of individuals will boost demand, which is why “innovative companies in China seem to me the most attractive right now,” he said. Strong human resources and capital markets in the country are also factors supporting the sector.

Favoring Chinese internet services and software firms, his fund allocated 65% of its assets to stocks in China and Hong Kong as of the end September, with stocks including Alibaba Group Holding, Tencent Holdings and video streaming service provider Bilibili Inc. among its top holdings.

Oh has also added Chinese electronic vehicle shares in recent months as the mainland government pledged to achieve carbon neutrality by 2026. Their relatively small size versus market leader Tesla Inc. indicates ample room to for them to grow in coming years.

Shares of Nio Inc., Workhorse Group Inc., Lordstown Motors Corp. and Electrameccanica Vehicles Corp. jumped sharply earlier this week following Tesla’s S&P entry. Their gains added to their rallies in recent months fueled by China’s renewed focus on building its battery-powered automobile industry.

Meanwhile, Oh said he has trimmed his holdings of high-end liquor stocks because of their high valuations.

Updated: 11-20-2020

Gen Z Trading Prodigy Wins Over Wall Street Backers For Startup

Yoyo Chang turned a hunch born in an English high school cafeteria into a payments app supported by serious, well-heeled investors.

When Yoyo Chang first told his parents that he wanted to start his own technology venture, they were alarmed: This was not part of the plan.

Paul and Pauline Chang had emigrated to the U.K. from Taiwan in 2003 so their son could learn English and eventually pursue an international business career, preferably at a global investment bank. Sure enough, Chang excelled in school. He also fell in love with the stock market at the age of 13, raking in £250,000 ($326,650) in trading profits for his family by the time he went to college in 2018.

But then Chang’s life took a turn. Rather than focus on his studies and save his money, he wanted to plow it into a startup. His idea was an app that would enable stores to accept payments directly from customers’ mobile phones, slashing transaction fees and eliminating the need for card readers and other hardware.

Worried his only child was taking on too much, Paul researched the complexities of payments infrastructure and learned it was tightly regulated and dominated by the likes of Visa, Mastercard, and PayPal, not to mention banks. What made Chang, an 18-year-old freshman, believe he could jump into that world?

“I told my boy, ‘Don’t do it. It’s too difficult,’ ” Paul says with Pauline and his son at his side. “I told him to buy a house.”

“I didn’t listen!” interjects Chang, now 20, with a laugh. “I was naive.”

His mother shakes her head. “He still doesn’t listen,” she says.

Now Chang’s naivete is paying off. His venture, KodyPay, has morphed from a crazy idea he and some friends conceived in their high school cafeteria into a fledgling business. KodyPay raised $2.3 million from angel investors this summer. Chang made deals with a partner of International Business Machines Corp. and a subsidiary of Visa Inc. to build his technology.

And KodyPay was ready to go live in November in cafes and shops at the University of York, where Chang is a third-year business management student. With the novel coronavirus forcing thousands of students to attend classes online throughout northern England, the plan is to try to release the app in January.

At first glance, Chang’s tech adventure follows the familiar contours of the Silicon Valley creation myth. He does idolize Steve Jobs, Elon Musk, and Jack Ma and unabashedly dreams of creating a company that can change the world. Yet Chang’s journey deviates from the traditional narrative in myriad ways. For starters, he isn’t a solitary brainiac holed up in his dorm room or garage writing computer programs. Actually, he can’t read a line of code, let alone write one.

Nor is he the product of elite private schools or the hothouses of innovation that thrive in universities such as Stanford and Cambridge. Chang was educated in state schools in southern England and has become an unexpected star at the University of York, an institution known more for its acclaimed scientific and humanities research programs than for its incubation of tech startups.

What’s more, his venture shows how the drive for innovation has truly expanded beyond the confines of Silicon Valley and gone global. “There’s a lot of hidden talent out there,” says Kiran Trehan, the pro-vice-chancellor for partnerships and engagement at the university.

Chang’s knack for strategic thinking and marshaling allies to his side is well suited to the next chapter in financial modernization. The fintech revolution of the last decade is largely done: Online banking and payment apps have been commoditized, and cloud computing has made starting a venture relatively affordable.

The game now is all about forming creative business models, marketing, and partnerships, says Brad van Leeuwen, a digital payments entrepreneur and co-founder of Cledara Ltd., a cloud software company in London. In payments, a $2 trillion global industry in annual revenue, the prize is titanic.

“The biggest challenge in the payments space isn’t the technology, it’s building a critical mass of customers,” Van Leeuwen says. “And the barriers to entry are no longer insurmountable—a 20-year-old can do it.”

A gregarious sort who talks at warp speed, Chang has attracted a squad of influential mentors to his cause. In June, Hank Uberoi, a onetime senior executive in charge of technology at Goldman Sachs Group Inc., became KodyPay’s chairman. As the former chief operating officer of Ken Griffin’s hedge fund Citadel as well, Uberoi moves in finance’s rarefied circles. He’s connecting Chang to his network of ex-Goldman partners, old Citadel colleagues, entrepreneurs, and angel investors.

The young man talks to Uberoi several times a day as he negotiates with potential partners and prepares to release the app. Although Uberoi knows his protege may ultimately fail in his quest, he’s happy to hop aboard for the ride.

“I’ve seen enough early-stage companies to know it takes 10 miracles to succeed,” says Uberoi. “But when I first met Yoyo, I knew within the first 10 minutes I was going to invest with him. It was his energy level, his enthusiasm, his grasp of detail that impressed me. And the reality is that often experience is a hindrance rather than an advantage—you’re constrained by what you think is not possible. Yoyo doesn’t feel constrained.”

What he does feel is pressure. Between assembling a board of directors, negotiating deals, raising working capital, and managing the rollout of the app, Chang’s days are a blur of tasks and meetings. When he wakes up, he says, the first thing he thinks about is all the business problems he must solve that day.

Then he’s got his schoolwork, too. His university advisers fear their pupil will become so overwhelmed he’ll drop out. As for a social life, Chang has no time to do what guys his age typically spend their time doing—hanging out with his friends on Discord or WhatsApp, playing sports, or even dating.

“I haven’t seen my friends in months,” Chang says. “Whenever they do want to meet, I just feel so guilty because I have so much stuff to do, and a lot of people are depending on me. I really didn’t know what I was getting into—I just went for it. But looking back, I think doing KodyPay is one of the better decisions I’ve made in my lifetime. I have to have that kind of mindset. I can’t not do it.”

On a radiant autumn morning, Chang is taking a break from his labors, strolling with his parents on the Long Walk leading to Windsor Castle, one of Queen Elizabeth II’s residences. Normally this tree-lined avenue would be filled with tourists. Today the Chang family and a few others have it to themselves.

The first thing you notice about Chang is his laugh—an air burst of cheer that’s inevitably followed by a tumble of words. He carries himself with the confidence of a young man who knows older people find him charming. There’s a cheekiness, a bit of the born salesman in him, but he does the work, too. When he talks about his venture, you can sense the steeliness behind the pitch.

A polite, good-natured couple, Paul and Pauline seem to be both excited and wary about their son’s ambition. There’s little doubt they primed him for a life of overachievement.

They started him on tennis lessons when he was 5 years old, then came piano, and though they spoke traditional Mandarin at home, they sent him to Taipei for a school year when he was 8 to make sure he could properly read and write the language as well.

Paul runs his own business exporting household goods to Taiwan, and Pauline is an operations manager at Aten U.K. Ltd., a Taiwanese information technology manufacturer with offices in nearby Slough.

When Chang was 13, his mother started bringing him to work after school. The teenager did clerical jobs and data entry and answered the phones.“I did it for three years,” Chang deadpans. “They paid me in food.”

Pauline smiles. “I showed him how the company worked,” she says. “My boss said, ‘When Yoyo finishes school, maybe he can join the company.’ ”

Chang hoots with laughter at the thought. “I might want to become a shareholder,” he allows.

He attended Windsor Boys’ School, which caters to academically gifted students, and was drawn to mathematics. For extra credit, he joined a couple of other pupils and took a crack at Goldbach’s conjecture, a centuries-old number theory problem that remains unsolved.

Impressed by the boy’s intensity, Mark Curtis, his math teacher and a onetime bond trader in the City of London, introduced him to the stock market so he could see math in action.Chang was delighted with the notion you could own shares in your favorite companies. He became the top stockpicker on his school’s investing team. It didn’t use actual cash, and before long he wanted to play the market for real, which took his mother aback.

“It was a school project, so we didn’t think much of it, but then he started asking for money from family members, so I got scared,” Pauline says. “I mean, how can I give my money to a teenager? We had some arguments at the time, but I trusted my son, and we did bring him here to have adventures. And I thought if he lost the money it would be a good lesson.”

At 16, Chang gathered £10,000 from his family and his own savings. After the newly elected Donald Trump vowed to spend $1 trillion on infrastructure projects, Chang bet that commodities and mining stocks would jump.

He plowed all of his cash into Glencore Plc, the Swiss natural resources giant, and was rewarded when its stock increased 13% in the first quarter of 2017. Having proved he knew what he was doing, he became the de facto chief investment officer for family members and friends. He wound up managing more than £150,000 on their behalf for the next couple of years.

Like any active shareholder, Chang wasn’t shy about quizzing the chief executive officers of his portfolio companies. He became a prolific chat correspondent with Tony Durrant, the head of Premier Oil Plc, a London-based exploration outfit that rallied from late 2016 through the third quarter of 2018. Similar to other market prodigies such as Ken Griffin, who traded convertible bonds when he was in college, Chang found financial freedom very early in life.

By the time he was preparing for his final exams in 2018, he’d built a six-digit nest egg and was considering a down payment on a house. Then one day he was rushing to get lunch in the school cafeteria when he got stuck in a long line at the cash register. Chang and his friends were frustrated they couldn’t just pay for their food using their phones.

Taking it a step further, they didn’t understand why they couldn’t send a payment from their phones to the merchant like a text. Why does anyone have to queue at all in the age of the smartphone? “A store shouldn’t have to buy any hardware at all to process payments,” says Chang.

It was an interesting notion, but Chang wasn’t exactly in the vanguard of the fintech revolution. For the better part of a decade, a raft of startups and financial stalwarts had rewired the way we pay for things, do our banking, and transfer money around the world. Apple Pay had elbowed its way into the exclusive payment relationship banks and credit card companies had long enjoyed with their customers.

With their own digital wallets, newcomers such as Venmo and Revolut were winning over millennials and Generation Z. Payment processing startups such as Amsterdam-based Adyen NV and Stockholm-based IZettle AB were well on their way to making inroads in the point-of-sale market in retail.

By the time Chang arrived on this crowded scene, it looked like the transformation of finance had already taken place.

“It was a school project, so we didn’t think much of it, but then he started asking for money from family members, so I got scared”

Chang wasn’t going to let the revolution carry on without him. He had his own angle as the world went increasingly cashless. When a consumer goes into a shop and buys, say, a pair of jeans, she can use a contactless debit card or a phone app or a watch and tap a terminal at checkout to pay for the item.

The terminal sends the transaction data on a journey through the multilayered payments system, and eventually it reaches her bank, which automatically approves and debits her account accordingly. Chang wanted to eliminate the terminal.

In the summer of 2018 he set up KodyPay, the name inspired by the dog of a girl Chang had a crush on. Chang invested £120,000 in establishing the business and beginning the process of building a prototype.

In his model, the payment would beam straight from a shopper’s phone to the store’s phone, tablet, or laptop and then eventually on to her bank for settlement. That meant the customer would no longer have to wait for a cashier to complete the sale. On the way out, she’d show a security clerk her phone to verify payment and be on her way.

As for the cost to the store, if it’s part of a chain of 20 or more outlets, it typically pays a transaction fee of 2.25%, and the company still has to purchase all the hardware to handle payments. Chang contends that if you eliminate the manufacture, installation, and maintenance of the machines, you can reduce annual costs as much as 65%.

Turning that idea into an application was the trick. So Chang pitched KodyPay to his faculty adviser, Peter Ball, and other university officials. The student broke down KodyPay’s proposition into simple economic terms for Jon Greenwood, the school’s director of commercial services. York had recently invested £350,000 in new tills and payment terminals in its retail outlets and cafes across campus.

With the pandemic already sharply diminishing the use of cash, he was unhappy paying tens of thousands of pounds in processing charges every year as more of his students went cashless. “Yoyo rolled up and said we could do away with two-thirds of that cost,” Greenwood says. “That’s what got my attention.”

Greenwood gave KodyPay a spot in the university’s brand-new startup incubator program called Phase One. Chang also jacked into the school’s alumni network. Before long, he’d clicked with York grads John Holmes, the chairman of Hardman & Co., a U.K. investment research firm, and Chris Baker, a professional astronomical photographer and angel investor. Both men advised Chang on establishing a business and put him in touch with professional contacts.

Still, KodyPay wouldn’t amount to anything more than a PowerPoint deck unless Chang could build and commercialize the application. By the fall of 2019 he was still searching for a way to do that when he caught a break. Through Greenwood, he met Ron Argent.

During a 31-year career at IBM, Argent helped design, build, and sell information technology systems to global banks, government departments, and other major organizations. In 2015 he set up Cognition Foundry, a kind of digital lab that took equity stakes in startups in exchange for developing their technology.

It also acts as a talent spotter for its sponsor, IBM. In the fall of 2019, Argent met with Chang and a couple of colleagues in a cafe on the south bank of the Thames in London.

Listening to Chang, Argent saw straightaway that KodyPay wasn’t doing anything groundbreaking in terms of the technology itself. He’d already seen similar device-to-device payment systems at work in China.

What he did like was Chang’s plan to take terminals out of the equation. Argent could see the immediate financial benefits. “Yoyo was talking about a very scalable idea and one that fits in nicely with IBM’s initiatives in fintech,” he says.

“What really grabbed my attention was Yoyo himself. I talk to a lot of people with innovative ideas, but the idea isn’t enough—you need a special type of person to turn that idea into something real. I thought Yoyo had the potential, and we could help him.”

By the spring of 2020, Cognition Foundry agreed to build KodyPay’s platform in exchange for a 5% equity stake in the startup. Argent assembled a squad of six to eight software developers in Bulgaria to write the code. He also briefed members of IBM’s senior management team on the venture, as well as its worldwide sales unit.

In October, Tom Rosamilia, senior vice president of IBM Systems in North America, interviewed Chang as part of a virtual technology conference for several thousand customers.

Meanwhile, Chang formed a partnership with Cybersource, a company owned by Visa that produces payment processing and security software. In August he closed his first fundraising round with investments from a wealthy Taiwanese family, angel investors, and Uberoi, the former Goldman partner.

From 2012 to 2018, Uberoi was the chairman and CEO of Earthport Enterprises Ltd., a London-based company that executed cross-border payments for dozens of financial companies worldwide. He’s helping Chang navigate the convoluted digital payments system and negotiate with powerful players in the industry.

At the top of the list is Alipay, the Shanghai-based mobile payment platform owned by Jack Ma’s Ant Financial group. Alipay, now rolling out its services in Europe, caters to Chinese nationals abroad. As it happens, there are more than 2,200 Chinese students at the University of York.

Even as Chang and KodyPay made strides, his parents and teachers worried about his other project—finishing school. He has long flirted with the idea of quitting university to concentrate on his startup, and it hadn’t gone unnoticed that his heroes Steve Jobs and Mark Zuckerberg didn’t complete their degrees.

Peter Ball, a business professor and Chang’s faculty adviser, was one of the first champions of KodyPay at the school, and he’s used the beta version of the app to buy fudge and mince pies for a meeting. But he’s kept a close eye on his student.

“I do nag him, but I think you have to,” Ball says. “I get the feeling he works on his business during the weekdays, and he squeezes his studies in on the weekends and whenever he can. I have said to him a couple of times, ‘I want to see you really successful, and KodyPay would be wonderful, but we also have a duty to your degree, and it’s essential to complete your studies.’”

Chang, who’s earning the rough equivalent of an A- so far, says he’s committed to finishing school, and, oddly, the pandemic has made that easier because he doesn’t have to physically be on campus and can study and take his final exams online. His parents want him to go for a master’s degree in finance, and he likes the idea of pursuing that in the U.S. But these plans may be upended by his continuing education in KodyPay.

With the University of York set to demonstrate KodyPay’s capabilities once students return to campus en masse, Uberoi and Chang are now putting out feelers as they look toward raising capital in a Series A round.

It’s a big step, choosing investment partners at such a formative stage. Chang, with Uberoi’s help, will be courting venture capitalists right as his baby goes out into the world. He’ll be doing so just as the pandemic is undermining in-store shopping during a tough winter.

For all the hopes and dealmaking and sheer toil that have gone into KodyPay, the reality is it may turn out to be just another payments app in a sea of apps. The fintech scene is littered with once-promising failures—in 2019 the U.K. payments player Ipagoo went into administration, as did Loot, a digital banking play backed by NatWest Group.

Even Monzo Bank Ltd., the onetime darling of London’s fintech hub, is hurting. In July the digital bank reported a loss of £113 million in the fiscal year ended Feb. 29 and warned that the pandemic’s impact on revenue, among other challenges, was casting “significant doubt” on the company’s ability to continue as a going concern.

Even with a first-rate strategy and whiz-bang app, it can be hard to get consumers to change their spending behavior, says Van Leeuwen, the payments entrepreneur. “Before you get usage of your product, you have to build acceptance,” he says.

The future of finance will be written by very few authors. Chang is philosophical about the possibility that he won’t be one of them if his venture fizzles, as deflating as that might seem. After all, he’s only 20.

“I can afford to make mistakes,” he says. “In fact, they’re not mistakes when you’re this young, they’re learning experiences. So it doesn’t matter. I don’t have to worry about the future. I just have to worry about the journey.”

Updated: 11-24-2020

For Retail Stock Traders, This Is a Party They Can’t See Ending

Mom-and-pop stock traders, reaping the rewards of a faith that has proved prescient all year, are doubling down on a rally that has pushed valuations into uncharted land.

Their voracious appetite for equities, unchecked by the pandemic or presidential transition, has sent markets to records and is whipping up volume in the normally sleepy Thanksgiving week. More than 26 billion shares changed hands on American exchanges over the last two days, up 72% from the same stretch a year ago.

Demand is swamping brokerage websites, with both Vanguard and Merrill Lynch confirming their platforms experienced outages today.

Infrastructure is being strained as an ocean of money flows into American equities. As of last week, some $53 billion had been sent to U.S. exchange-traded funds in November, perfectly timed for the Dow Jones Industrial Average’s first foray above 30,000. Also ballooning are valuations.

Buying the S&P 500 right now entails paying about $2.69 for every dollar of annual revenue, on a per-share basis. That’s way above any price-to-sales ratio reached in the dot-com bubble.

“There’s nothing this year that’s told them this wasn’t the right thing to do. Every time there was a dip, retail would flow in, and they were rewarded,” said Jerry Braakman, chief investment officer of First American Trust, in Santa Ana, California, which manages around $2 billion. “People are path-dependent, and if it’s been working, why change?”

All the excitement has caught the attention of Ayden McCloskey, a 23-year-old from Minnesota.

“I’ve been trading more. A lot of my moves are vaccine-related,” said McCloskey, a construction worker and DoorDash delivery driver. “When the market opens, I have to be thinking, what are investors thinking right now? A lot of people were thinking lockdowns soon. But when the vaccine news came, it was a new catalyst to latch onto.”

One thing retail has been right about: there was a fortune to be made buying beaten-down shares. November’s returns include an 84% rise in Occidental Petroleum Corp., a 51% jump in Boeing Co., a 48% increase in Carnival Corp. and a 45% increase in SL Green Realty Corp. Since the March bottom, Gap Inc., Etsy Inc., Freeport-McMoRan Inc. and L Brands Inc. have quadrupled.

A basket of stocks favored by retail traders has soared 75% this year going by Goldman Sachs data. That’s bested the S&P 500 by more than 60 percentage points and is double the return on hedge-fund favorites.

“Their persistence this year around buying the dip has paid off, and in some ways they probably feel emboldened to take on even more leverage and risk,” said Sameer Samana, Wells Fargo Investment’s senior global market strategist.

“It’s mainly the vaccine news, coupled with still-constructive economic data and a Federal Reserve that is very vigilant, all of which feed into this sense that an investor can’t go wrong buying the dip.”

At E*Trade Financial, clients have been scooping up shares of travel companies over the past week, with the platform seeing net buying in stocks like Boeing and United Airlines Holdings Inc.

“While the travel industry has been pretty beaten up since Covid, there may be some relief in the near term and traders could be hunting for bargains given current valuations,” said Chris Larkin, managing director of trading and investing product at the brokerage.

There’s also been interest in vaccine-maker Pfizer Inc. as well as big-box retailers Walmart Inc. and Amazon.com Inc. ahead of Black Friday, he said, though clients have been offloading shares of big-tech pandemic plays like Apple Inc. and Netflix Inc.

While the rapidity of gains is sure to remind some of the dot-com days, a few big differences exist. Unlike in 1999 and early 2000, gains in the stock market are broadening today, with value and cyclical shares catching up with the tech megacaps that led earlier this year and in the bubble era.

Back then, the Fed was raising interest rates. Today, it has them pinned near zero with little prospect of that changing.

“Sentiment toward stocks is hardly restrained, but our measures suggest it is less frothy than at the early-September peaks in the Nasdaq and the Russell 1000 Growth Index,” wrote Leuthold Group’s Doug Ramsey in a note Tuesday. “That makes sense, because the most extreme signs of retail speculation had been concentrated in these ‘can’t miss’ market segments, which have suddenly become the laggards.”

Updated: 12-08-2020

Robinhood Is Losing Thousands of Traders To A China-Owned Rival

Webull offers free trades and has picked up users after outages at Robinhood this year.

Even in a year full of surprises on Wall Street, this one stands out: A Chinese-owned brokerage has quietly built one of the fastest-growing retail trading platforms in the U.S.

Webull, founded by Alibaba Group Holding Ltd. alum Wang Anquan, has increased its roster of brokerage clients by about tenfold this year, to more than 2 million, by offering free stock trades with a slick online interface.

While that’s still a fraction of the more than 13 million at Robinhood, the broker that popularized commission-free trading, Webull says it’s been peeling off users from its rival. The company has plans to pursue a big funding round from private U.S. investors and may expand into automated financial advice and money management with a so-called robo-adviser service.

Webull’s breakneck U.S. expansion is almost unheard of for a Chinese-owned financial company, particularly at a time when relations between the two countries have sunk to the lowest point in decades.

The superpower clash that began with trade has recently moved into the financial realm, with the outgoing Trump administration mulling restrictions on Chinese payment platforms and pushing for rules that threaten to kick Chinese companies off U.S. exchanges.

While Webull’s ownership has attracted some attention in online forums frequented by the growing hordes of American stock traders, the firm goes out of its way to emphasize its U.S. links. It stores user data locally, is subject to the same regulations as any other U.S. brokerage, and has an office right next to a Trump building on 40 Wall Street.

It also voluntarily sought a review of its ownership by the Committee on Foreign Investment in the U.S. (Cfius), a panel that has blocked U.S. expansion plans by some Chinese-owned companies on national security grounds, says Anthony Denier, an American who is Webull’s chief executive officer.

Cfius gathered information from Webull but decided in December that it wouldn’t conduct a review, Denier says. The Department of the Treasury, whose secretary chairs Cfius, says it doesn’t comment on cases before the committee, including whether a company has filed for review.

Wang, who left Alibaba to help run the finance unit at Chinese tech giant Xiaomi Corp. before striking out on his own, founded Webull’s parent company in 2016, just as Donald Trump’s presidency was ushering in a new era of U.S.-China tensions. In an interview, Wang says he always set out to build a global firm, concluding that to do so he would first need to succeed in the U.S.

Armed with early backing from Xiaomi founder Lei Jun, Wang opened the U.S. brokerage and hired Denier to run it as CEO in 2017, with the two mapping out their initial strategy on napkins at a Mexican restaurant in New York. Denier, a Credit Suisse Group AG and ING Groep NV alum who has spent more than two decades on Wall Street, says Webull has intentionally kept a low profile. “We’re in a really competitive space,” Denier says. “Sometimes it’s better to not wake up the giants.”

For now, Webull’s users seem to care less about the firm’s China ties than the merits of its trading platform. Webull’s mobile app could be described as somewhere between Robinhood’s uncluttered, novice-friendly brokerage app and the more advanced data and analytics offered by the likes of Interactive Brokers Group Inc.

Robinhood’s interface has been criticized for making trading seem like a game, instead of encouraging long-term investments, though it says only a small percentage of its users are heavy traders.

Webull has a more professional look, with a desktop tool that emphasizes its layers of information on everything from analysts’ ratings to short-interest data and technical indicators. But it’s open to the same criticism that it’s drawing everyday retail investors into chasing stock moves and trading all day long. Denier says Webull has tried to avoid this, and that the “vision that we’ve had from the beginning [is] let’s not oversimplify and ‘gamify’ this.” Robinhood declined to comment.

Shayla North, a 30-year-old pharmaceutical product release specialist in Dallas who started posting YouTube videos about her stock trades during the pandemic, first heard about Webull from other YouTubers. She has since switched from Robinhood.

“It’s more geared for a semi-seasoned stock trader,” North says. One of her favorite features of the app allows users to simulate trading strategies before putting real money to work. She also likes its stock charts.

Webull’s growth has been fueled in large part by word of mouth and promotions from online influencers, Denier says. Like Robinhood, it also offers small monetary incentives—including free shares—to lure new users. The typical Webull client is in their late 20s or early 30s and has about $3,200 in their account.

The firm sees 850 transfers from other U.S. brokerage accounts every day, on average, roughly half of which Denier estimates are coming from Robinhood. “It starts out where they kind of have both accounts. They might even execute on Robinhood and do research on Webull, but eventually we tend to win them over,” Denier says.

Some traders made the switch after platform outages at Robinhood this year prompted them to search for alternatives. Robinhood had problems on its platform again on Dec. 7, as did Interactive Brokers. “Retail users focus more on whether their brokers’ trading systems and data are reliable and user-friendly,” says May Zhao, the deputy head of research at Zhongtai Financial International Ltd., a Hong Kong-based brokerage. “Political tension is a secondary concern.”

Webull also has a live customer service hotline during trading hours, something Robinhood lacks. Robinhood came under fire this year when some users’ accounts were broken into by hackers and frantic customers had no one to call for assistance.

The company has said that it works with customers in a timely manner to ensure their accounts are running smoothly and that if they lost money as a result of fraudulent activity, Robinhood will return the lost funds.

It also encourages users to add a layer of security to their accounts with two-factor authentication. Robinhood co-founder Vlad Tenev told Bloomberg earlier this year that email has proven “the best way to provide our service at scale and to answer people’s questions.”

Not every potential user is won over by Webull. Negative reviews in Apple Inc.’s app store often complain about a complicated interface; others say Webull’s customer service isn’t good enough. The app’s overall rating in the Apple store is 4.7 out of 5, compared with 4.8 for Robinhood.

It’s also easy to overstate Webull’s competitive threat. The firm may be growing fast, but it’s still a relatively small player in the discount brokerage industry. “It’s really difficult in a crowded market,” says Timothy Welsh, president of Nexus Strategy LLC, a consulting firm specializing in wealth management. “Scale is critical.”

That fact isn’t lost on Webull. Denier says, without providing names, that the firm is poised to raise more than $100 million in a financing round that will “bring in very big, well-known U.S. investors” and give it “unicorn status.” (A unicorn is generally defined as a private company with a valuation of $1 billion or more.) He says one of those U.S. investors will get a board seat.

Wang, Webull’s founder, has a stake of about 35% in the U.S. brokerage unit’s parent company, according to Chinese corporate registration records. Funds affiliated with Xiaomi own at least 14%, while a unit of Chinese wealth manager Noah Holdings Ltd. owns about 9%. Other investors include Chinese private equity funds.

Like other no-fee brokerages including Robinhood, Webull makes money by selling customer orders to sophisticated trading firms known as market makers, which can make money on the tiny “spread” between the price an investor is willing to pay for a stock and the price at which someone will sell it. The practice is legal, and brokers are required to seek the most advantageous trades for their customers.

The firm expanded into cryptocurrency and options trading this year and plans to offer fractional share trading “very soon,” says Denier, who declined to disclose details of the firm’s financial performance. A robo-adviser platform may come online in mid-2021.

While it’s unclear exactly how a Joe Biden presidency will affect the U.S. government’s scrutiny of Chinese financial firms, few expect tensions between the countries to ease anytime soon. But Denier says the most pressing concern for Webull is managing the operational challenges that come with its rapid expansion. “In any business that’s scaling extremely fast,” he says, “it’s going to be a lot of growing pains.” —Sophie Alexander, Annie Massa, and Evelyn Yu

Updated: 12-16-2020

Crypto-friendly Trading App Robinhood Faces Lawsuit From Securities Regulators

Massachusetts plans to sue Robinhood for alleged violation of state laws and regulations not related to crypto.

Massachusetts securities regulators are reportedly preparing to file a complaint against a major cryptocurrency-friendly trading platform, Robinhood.

According to a Wednesday report by the Wall Street Journal, Massachusetts regulators alleged that Robinhood’s marketing illegally targeted inexperienced investors.

According to a final draft of a 20-page administrative complaint reviewed by the WSJ, the enforcement arm of the Massachusetts Securities Division said that Robinhood exposed Massachusetts investors to “unnecessary trading risks” by “falling far short of the fiduciary standard.” The authorities expect to file the complaint on Wednesday, the report notes.

According to the WSJ, the complaint came from the office of William Galvin, the secretary of the Commonwealth of Massachusetts. Galvin reportedly said that his office filed the complaint to protect young Massachusetts investors. Robinhood’s trading platform is “presented as some sort of game that you might be able to win,” he said. Robinhood reportedly had nearly 500,000 customers in Massachusetts as of early December, with accounts totaling over $1.6 billion.

A Spokesperson At Robinhood Told Cointelegraph That The Firm Has Not Seen The Complaint:

“Robinhood has opened up financial markets for a new generation of people who were previously excluded. We are committed to operating with integrity, transparency, and in compliance with all applicable laws and regulations. We have not seen the complaint, but we have and will continue to work closely and cooperatively with all of our regulators.”

As of publication, the courts had not registered receipt of the complaint.

Robinhood has experienced a troubled 2020. In June, Forbes broke a tragic story of the death of 20-year-old Alex Kearns, who committed suicide after seeing a $730,000 negative balance on his Robinhood app. Robinhood founders subsequently released a statement pledging to tighten eligibility criteria, educational resources and upgrades to its user interface for customers trading.

The platform has also suffered some technical issues this year. As Cointelegraph reported, Robinhood faced multiple outages in March, resulting in downtime for several services and large losses by traders. A group of affected users subsequently filed a class-action lawsuit against Robinhood, accusing the platform of leaving its users unable to execute trades or change limit orders.

Updated: 12-17-2020

Trading App Robinhood Settles SEC Charges For $65 Million

The SEC says the trading app misled users by claiming to be commission-free while charging extra on execution prices that it got back from the market makers.

Robinhood has staved off a suit from the Securities and Exchange Commission by agreeing to pay $65 million.

The trading app, which takes its name from the English folk hero who stole from the rich to give to the poor, made its name by making investing simpler for newcomers. Per a Thursday announcement from the SEC, Robinhood deceived its users as to where its money was actually coming from between 2015 and 2018, citing:

“Material misrepresentations and omissions by Robinhood relating to its revenue sources, specifically its receipt of payments from certain principal trading firms, also known as electronic market makers, for routing Robinhood customer orders to them, and relating to certain statements about the execution quality Robinhood achieved for its customers’ orders.”

The SEC’s underlying Exchange Act does not prohibit broker-dealers like Robinhood from getting paid for directing orders through those principal trading firms, but it does require that those broker-dealers work to get their customers the best deal.

Indeed, the SEC said that Robinhood concealed the worse deal that customers were getting. The firm’s initial pitch as a commission-free platform allowed the firm to hide similar costs in the form of higher execution prices on user orders:

“One of Robinhood’s primary selling points was that it did not charge its customers trading commissions. In reality, however, ‘commission free’ trading at Robinhood came with a catch: Robinhood’s customers received inferior execution prices compared to what they would have received from Robinhood’s competitors.”

In its early years, Robinhood’s overwhelming dependence on order flow payments — which the SEC alleged was up to 80% of the firm’s 2015 revenue — seems to have led the firm to overlook this duty to customers.

Fortunately for Robinhood, 2020 has been extremely lucrative for such fintech platforms. With more people stuck at home and the stock market soaring above other means of making money, retail trading on consumer-friendly apps has picked up. The firm just saw a $660 million funding round in September.

At the same time, today’s settlement does not appear to be the end of Robinhood’s legal troubles. Just yesterday, reports emerged that Massachusetts securities regulators were looking to file a case against Robinhood for subjecting inexperienced investors to “unnecessary trading risks.”

Updated: 12-17-2020

Robinhood Is Not Gamifying Markets. It’s Democratizing Them.

Despite the complaints by Massachusetts, the online brokerage firm has led a massively beneficial revolution in retail trading services.

Securities regulators in Massachusetts have decided to attack the popular online brokerage Robinhood Financial LLC, the latest in a long pattern of regulators harassing hugely beneficial innovations. Who can forget the early 1980s, when inflation was running at double-digit rates and banks were prohibited from paying interest on checking deposits, but the Securities & Exchange Commission was fighting money market funds?

Robinhood led a movement to virtually eliminate commissions for retail traders, cut racial investing disparities in half and dramatically increase stock ownership among investors under the age of 40 and over 65. Its user-friendly interface and simple, clear, entertaining educational material set a standard that established brokers scrambled to meet.

Two Massachusetts complaints are legitimate but routine. Robinhood had service outages and approved inappropriate accounts for options trading, but all brokerages have these types of issues. And as a fast-growing firm with innovative technology and inexperienced customers, Robinhood has more than most. But these are issues for the SEC, not for state regulators filing cookie-cutter complaints, and suitable for negotiated fines and fixes, not bombshell press releases.

At the other extreme are entirely baffling complaints such as, “Robinhood’s stated mission is to ‘democratize finance for all.’” When did democracy become illegal in Massachusetts? Or, “Robinhood advertisements use young actors and illustrate Robinhood’s attempt to lure young, inexperienced investors into using its platform to make investments.” And then there’s this: “Robinhood provides lists to encourage customers to purchase securities without any consideration of suitability.”

What is the justification for the word “lure”? Yes, Robinhood uses young actors more than most traditional brokers, but also more women and minorities (Did Massachusetts ever object to the E*Trade baby?). The firm’s business model is to find and educate people overlooked or ignored by traditional brokers.

All brokers provide lists of stocks and recommendations, and the same lists to all customers. Who would want their broker to redact certain companies from stock lists because it thinks you’re inexperienced? Granted, there is a small point here.

Although most of Robinhood’s lists are standards such as the most active stocks, biggest gainers and losers, lowest and highest price-to-earnings growth, or highest dividend rates, the firm used to also list the most popular stocks on its platform before discontinuing the practice.

Such a list has dubious investment value and could encourage customers to stampede into the same stocks. But overall, Robinhood’s lists are better than most, with no technical analysis mystic nonsense and no branded proprietary lists.

Two final charges merit thought. The first is that “Robinhood uses gamification strategies in order to lure customers into consistent participation and long-term engagement with its trading platform.” Older readers may remember that early on-line brokers like TD Ameritrade and E*Trade were accused of offering “Nintendo trading” for having user-friendly interfaces.

Although “gamification” is used throughout the Massachusetts complaint and press release, the only example is confetti raining down on the app when a Robinhood user completes trades. I agree that’s not appropriate, but it hardly supports a general charge of gamification. And again, why the use of the word “lure”? Every company uses strategies to attract and retain customers.

Second, the complaint provides 25 examples of Robinhood customers trading from 15 to 92 times per day, but no other information or context is provided. Someone investing $500 per month in S&P 500 Index stocks could easily execute 25 trades per day on the Robinhood app without drawing concern given there are no commissions, one has the ability to buy fractional shares and that the firm’s minimum trade size of $1.

Looked at another way, someone day trading $1 could be gaining valuable investment experience without risking significant cash.

Of course, it’s possible that some inexperienced investors were engaging in risky, high-turnover strategies for significant amounts of money. But that’s why we have rules to identify day traders and impose high capital requirements and other restrictions on them. Plus, day traders are found at all brokerage firms.

Robinhood’s price cutting, user friendliness, high-quality and entertaining educational materials, and appeal to non-traditional investors touched off a massively beneficial revolution in retail trading services. Any scrutiny of its business practices should be careful to curb excesses without impairing the benefits offered to investors, especially young, old, female, minority and others underserved by traditional firms.

* The SEC didn’t throw in the towel until the early 1980s, by which time inflation had been tamed and interest-bearing bank checking accounts were available. Other prominent examples were harassment of 401(k) plans after the ERISA legislation made defined-benefit retirement plans so safe companies stopped offering them, and the roadblocks placed in the way of early efforts to offer index mutual funds.

* Of course, Robinhood is not the sole cause of these improvements. Many other companies contributed, and no doubt the logic of innovation would have forced them eventually if Robinhood had not been founded. But the Massachusetts complaint essentially threatens any company trying to lower prices or bring in new investors.

‘Flash Boys’ Led Robinhood Founders To Hide How Firm Made Money

Robinhood Markets became ubiquitous through a popular app that prompted millions of investors to start trading stocks. But unknown until now is that the brokerage feared author Michael Lewis’s seminal take down of high-speed traders might derail the business before it even got off the ground.

The revelation is buried in a Thursday Securities and Exchange Commission enforcement action that accused Robinhood of hiding for years how it made the bulk of its revenue: selling client orders to Wall Street securities firms. The company decided to obscure that fact after “Flash Boys,” Lewis’s 2014 book, portrayed it as questionable conduct that can hurt mom-and-pop investors.

The SEC, which fined Robinhood $65 million, doesn’t mention Lewis or “Flash Boys” by name. But the regulator does detail how a “best-selling author” labeled various aspects of lightning-fast trading as “controversial.” The book, along with widespread criticism of electronic markets, prompted Robinhood to remove references to selling client orders from a section of its website that explained how the firm made money, the SEC said.

“The settlement relates to historical practices that do not reflect Robinhood today,” Dan Gallagher, the firm’s chief legal officer, said in a statement. “We recognize the responsibility that comes with having helped millions of investors make their first investments, and we’re committed to continuing to evolve Robinhood as we grow to meet our customers’ needs.”

At issue is a practice known in the industry as payment for order flow that is employed by almost all retail brokerages. Critics argue that it’s riddled with conflicts that enable high-speed traders and other firms to profit by taking advantage of small-time investors. But defenders say it improves prices for customers on the vast majority of trades.

Indeed, Robinhood’s immense popularity stems in large part from the fact that it offers clients free trades, a strategy that competitors have copied.

Following Lewis’s book, Robinhood added a new section to its website in December 2014 that said its revenue from payment for order flow was “negligible” and that it would inform customers if that changed. It turned out that in 2015 through mid-2016, the practice accounted for 80% of the company’s revenue, according to the regulator. The firm settled the SEC case without admitting or denying wrongdoing.

In October 2018, Robinhood started prominently disclosing that almost half its revenue came from payment for order flow.

Updated: 12-22-2020

Robinhood User Says $300,000 Restored From Hack, Then Taken Back

Gangti Zhu, a Maryland retiree, says he put almost his entire life savings into a Robinhood Markets account this year, only to lose about $300,000 in a hack.

He describes the same painstaking experience that other users have encountered: a panicked search for a phone number, a slew of emails after finding there’s no emergency line and then relief when the money was finally returned to his account.

The key difference, he says, is that Robinhood then took the funds back.

“Our team concluded its investigation and determined that your account was not compromised and that no unauthorized activity took place in your account,” read the Dec. 4 email from a customer support representative named Greg P., seen by Bloomberg. “As a result of our findings, we removed the corrections made by Robinhood.”

“I was traumatized,” said Zhu, 63. “I was left in the dark, hopeless, anxious and had no idea what had happened to my account and what to do next.”

His case is an extreme example of a hacking allegation at Robinhood, the trading app that exploded in popularity this year as Americans stuck at home from the Covid-19 pandemic looked to profit from a gyrating stock market.

At a time when regulators are circling and the company is preparing for an initial public offering, the brokerage also is facing mounting customer-service complaints and claims of compromised accounts that can be thorny to resolve.

An internal investigation this year found that hackers hit about 2,000 accounts, Bloomberg reported in October, while advertisements on the dark web suggested thousands more could be at risk. More recently, Robinhood found “fewer than 40” instances of accounts being compromised by malware on user devices, according to a statement to Bloomberg for this story.

Malware can allow hackers to take over their account and make it appear that it was from a trusted device, making it more difficult to track fraud. Robinhood has taken steps with affected customers to help them fix the problem, along with offering a “goodwill credit,” David Favreau, the company’s head of fraud operations, said in the statement.

Zhu’s case is an instance where a claim, once addressed, has been reversed with little explanation. He had poured more than half a million dollars into his account — a much larger amount than the typical Robinhood user — and says hackers drained out the roughly $300,000 through options trades, which can be more difficult to identify as fraudulent than a simple removal of funds. He’s filed complaints with the SEC and the Financial Industry Regulatory Authority.

Robinhood, which has more than 13 million users, has promised to fully compensate customers if it determines they lost money because of unauthorized activity. The company said it has referred Zhu’s case to law enforcement.

“We are constantly monitoring for new threats and when we find fraud, we take steps to shut it down and remediate customers as appropriate,” Favreau said.

No Phones

For users who have seen money vanish from their accounts, resolving claims can be an arduous process. The Menlo Park, California-based company has no support line for users to call for help, leaving customers to rely on emailed responses that can take weeks, Bloomberg has previously reported.

Desperate users have turned regulators into their customer-service agents. This year through mid-October, there were 1,338 complaints filed to the Securities and Exchange Commission by Robinhood users with claims of hacking, data breaches, theft of funds, identity theft and fraud tied to their accounts, according to data from a Freedom of Information Act request.

Robinhood agreed last week to pay $65 million in fines to settle SEC allegations that it failed to properly inform clients it sold their stock orders to high-frequency traders and other firms.

“It appears that Robinhood is falling far short of what customers have a reasonable right to expect,” said Barbara Roper, director of investor protection at Consumer Federation of America, an association of consumer-interest groups. “At the very least, I’d expect the company to offer a live chat option that would enable customers to get some assurance that their concerns had been heard and were being addressed.”

Robinhood has relied in part on external staffing firms to fill roles like customer support. But this year, as millions of new and often inexperienced customers have flocked to the app, the company has hired hundreds of support staff to fill offices across the country, often poaching them from bigger and more established rivals.

“We’re working on customer support across the board,” Vlad Tenev, Robinhood’s co-founder, said in a CNBC interview in October. “We’ve made huge investments and are continuing to make huge investments.

Reversed Decision

While many complaints are ultimately resolved, Zhu isn’t alone in having trouble finding recourse.

Joshua Kim, 32, signed up for Robinhood in October, planning on investing his money to save up for a cruise for him and his wife after the pandemic ends. He’d only been using it for about a month before the account was compromised, which he suspects was the result of his email being hacked.

The hacker sold his shares in Tesla Inc. and Amazon.com Inc., among others, and set up the cash management tool to transfer money from the Citibank account he had linked to Robinhood, according to Kim. Then, they used that to withdraw funds in Poland and Kansas City, Missouri. This all happened over the course of two days even though he asked that his account be locked on the first day, he said.

Customer service told Kim they’d investigate the incident, he said. After a few days, he got a similar email to Zhu’s, saying no fraud was detected and the money he’d lost — about $2,800 — wouldn’t be returned.

Kim followed up on the email, asking for more information about the investigation. The response he got frustrated him even more.

“Due to regulatory concerns as well as the security and protection of any associated Robinhood accounts, we’re unable to share details about the outcome of the investigation,” according to the email, which Kim posted in a YouTube video explaining the situation and asking for help from anyone who watched.

“It’s not about money, it’s about justice,” he said in a phone interview.

After Bloomberg reached out to Robinhood Thursday for comment on this story, Kim was contacted by the company. He spoke with Robinhood representatives Friday morning and said “their attitude completely changed.” They apologized and told him they’d return all the funds that were lost, Kim said.

The company declined to comment on whether it reached out to the customer as a result of Bloomberg’s inquiries. A person familiar with the response said Robinhood had been investigating the issue prior to Bloomberg’s outreach.

‘Hack Emergency’

Zhu remains in limbo. He says Robinhood was immediately informed of his compromised account. His 29-year-old son, Simon, who had encouraged him to join Robinhood, also reached out, about an hour after Zhu was locked out.

“My Dad’s Account is hacked,” Simon wrote to Robinhood customer support. “His account keeps buying Fitbit options in large numbers. This is a fraud and a hack emergency. Please help immediately!!!”

For Zhu, the outcome is critical. The $300,000 is more than half of the retirement savings he has in his Robinhood account. Zhu said he’s keeping the account locked until the dispute is resolved. He has just $34.61 in his savings account.

“We are hopeless,” he said. “This is my last savings.”

Updated: 12-24-2020

Robinhood Financial Hit With Class-Action Suit For Selling Stock Orders

Robinhood Financial LLC was sued in a proposed class action for allegedly failing to inform clients it was selling their stock orders to trading firms and effectively charging back-door commission fees.

The complaint filed Wednesday in San Francisco federal court follows the company’s $65 million settlement last week with the U.S. Securities and Exchange Commission over similar allegations.

While Robinhood touted “commission free” trading on its platform, it didn’t disclose that it relied extensively on “payment for order flow,” collecting payment from market makers in exchange for executing trades, according to the suit.

“The principal trading firms/electronic market makers in turn passed these costs along to Robinhood’s clients on each trade through inferior execution quality — the price at which the requested market orders were executed,” according to the complaint.

As part of the accord with the SEC, Robinhood agreed to have an outside consultant monitor its compliance by ensuring it follows rules requiring firms to provide best execution for trades. Robinhood, which didn’t admit or deny the regulator’s claims, said at the time it is now fully transparent in its communications with customers about how it makes money.

Nora Chan, a Robinhood spokeswoman, declined to comment.

The case is Lemon v. Robinhood Financial LLC, 20-cv-09328, U.S. District Court, Northern District of California (San Francisco).

Updated: 1-1-2021

New Army of Individual Investors Flexes Its Muscle

More than 10 million new brokerage accounts were opened in 2020 as individuals piled in to bet on stocks.

The online brokerage industry might be hard pressed to outdo the record-breaking year it experienced in 2020, but for now, few are betting against it.

Individual investors opened more than 10 million new brokerage accounts in 2020, JMP Securities estimates, a record. Interest isn’t fading, either: App downloads for brokerage firms, while lower than earlier in the year, remain resilient, with the Robinhood Markets Inc. app expected to reach 500,000 downloads in December alone, data provided by the investment bank shows.

Website traffic for well-entrenched brokerages, including TD Ameritrade Holding Corp. and E*Trade Financial Corp., continues to increase as well.

“You have this incredibly engaged customer,” said Devin Ryan, senior research analyst at JMP Securities. “It appears that the end-customer is actually logging into their account more than they were at the beginning of the pandemic.”

2020 will be known as the year that individual investors dove into financial markets and doubled down, even in the midst of a global pandemic, strapping in for a roller-coaster ride that sent stocks plummeting—and then skyrocketing—in record time.

Driving the interest was a combination of factors that started with an industrywide shift to commission-free trading in 2019 but swelled as market volatility grew. As the coronavirus rolled across the U.S., millions of new investors found themselves stuck at home, some with extra time on their hands to learn about the markets. Others, unable to bet on sports or visit casinos, found the stock market’s outsize swings presented the perfect outlet to make bets.

In some cases, those wagers became a part of investing sensations, owing to the countless online forums where traders gathered to swap ideas. Similar to the online chat rooms that surrounded the late-1990s dot-com bubble, social-media sites such as Facebook, TikTok and the messaging platform Discord became hubs to talk up trades, sometimes helping send shares of companies on a wild ride.

Some investors, including prominent figures such as Dave Portnoy, used the spaces to tout gains and lament losses. Mr. Portnoy, founder of the popular digital media company Barstool Sports Inc., began streaming trades to his followers, who now approach 2 million, on Twitter.

“Stocks only go up,” Mr. Portnoy would proclaim, reiterating the phrase that had become popular on internet messaging forums.

For a while, as stocks zoomed higher, the mantra seemed to hold up. Three months after markets bottomed in March, shares of companies from Moderna Inc. to Tesla Inc. to Peloton Interactive Inc. had all jumped 130% or more. Individual investors piled into those stocks while snatching up shares of smaller companies, too.

Perhaps most notoriously, they sent shares of companies including Hertz Global Holdings Inc. and Chesapeake Energy Corp. soaring, despite the financial crises the companies faced. The companies, both of which filed for bankruptcy protection, were ultimately delisted from the New York Stock Exchange.

On peak trading days in 2020, individual traders are estimated to have accounted for nearly 25% of U.S. trading activity, Citadel Securities estimates. Overall, their share of total trading volume doubled to an average of 20% from 10% in 2019, Citadel said.

Analysts say individual traders likely make their biggest impact in driving share prices of smaller or less-popular companies, though they remain robust buyers of the same mega-cap technology companies and other stocks that institutional investors own.

Webull Financial LLC said Tesla and Apple Inc. were the most popular stocks on its trading platform in 2020. TD Ameritrade pointed to Amazon.com Inc. AMZN -0.88% and Paypal Holdings Inc. as among the most heavily purchased companies during November.

Retail platforms—Robinhood, in particular—have become the subject of increasing scrutiny. In December, Massachusetts regulators filed a complaint against the company, saying it failed to protect users’ assets and encouraged inexperienced customers to make risky trades.

Robinhood, which disputes the allegations, says it has added safeguards for options trading, which is generally considered to be a more complicated—and at times riskier—strategy. It also maintains that only 13% of users who traded in any given month in 2020 made an options bet.

“We see evidence that many of our customers are classic ‘buy and hold’ investors,” said Vlad Tenev, Robinhood’s CEO.

Robinhood in May said that the number of users of its platform had reached more than 13 million. Analysts believe that number is now higher. The app popularized free trading, thanks, in part, to its mobile-first, easy-to-use platform and the promise of free stocks when signing up or referring friends to join.

Despite the attention on the riskier trades that investors executed, studies have found individual investors performed well in 2020. A June note from Goldman Sachs Group Inc. analysts found that a basket of the stocks most popular among individual investors had outperformed hedge-fund and mutual-fund favorites—as well as the broader market—since the March lows, due to individual traders’ quicker embrace of value stocks.

Other analyses from researchers similarly found that individual investors didn’t significantly panic when markets tumbled this year, which rewarded them when markets began rising.

Although a debate about the risks and rewards that online brokerages enable is likely to continue, few analysts or financial advisers argue that enticing people to begin investing earlier is a bad thing. Studies have repeatedly shown that investing early can lead to bigger gains later in life.

The recent introduction by online brokerages of tools such as fractional investing—or the ability to buy just a portion of a share—has made trading big-name companies more accessible, too.

Analysts are expecting that many of the features that attracted individual investors to trading in 2020 will continue, even though many predict 2021 won’t bring the same levels of volatility.

This year “created a new generation of investors that are seeking more,” Mr. Ryan of JMP Securities said. “They want tools, they want education, they want to do more.”

Mr. Ryan noted that significant growth opportunities for brokerages are possible, especially if they continue to expand their product offerings. The ability to capture investors’ wallets while they are young, and then work to become the main financial relationship in their lives via trading, banking, wealth management and other services offers some firms significant potential, he said.

“If you think about the customer today, I think there’s a lot of attention on their small accounts,” he said. “But these are small accounts today that in 20 years could be very large accounts.”

Updated: 1-10-2021

Robinhood Weighs Selling Its Shares To Clients In IPO

Robinhood Markets, the trading platform popular with novice investors, is considering selling some of its shares directly to its own users when it goes public this year, according to people familiar with the matter.

The Menlo Park, California-based company has weighed allocating a significant minority of the shares it will list to clients, said one of the people, who asked to not be identified because the details aren’t public. No final decision has been made on how much stock it might sell to its own customers, or if it will proceed with the plan, the people said.

The move would be striking, because retail investors usually don’t get to buy into new listings at the offering price. Instead, they typically have to invest on the first day of trading in a rush that can drive up the stock price. Unprecedented demand for new technology listings sent DoorDash Inc. and Airbnb Inc. soaring when they debuted last month, raising questions about whether the market has become overheated.

Allocating a big chunk of shares to its own users could mitigate the size of a big first-day trading rally in Robinhood’s shares.

A representative for Robinhood declined to comment.

Robinhood is aiming to go public as soon as this quarter, Bloomberg News reported in November, after trading volumes on its platform surged during the coronavirus pandemic. The company, which was valued at $11.7 billion in a September funding round, has more than 13 million accounts on its platform, which offers equities and options trading.

Its rapid growth has come with controversy, including a hacking spree that compromised almost 2,000 accounts and flood of complaints to U.S. protection agencies depicting inexperienced investors losing money.

Updated: 1-25-2021

Thanks, Robinhood, but These Traders Now Want Professional Help

The age of coronavirus lockdowns helped fuel a blistering rise in retail trading, and many rookies even beat the market. But day traders also found that the year’s market gyrations required constant attention and that their amateur trading tools were limited.

So many do-it-yourself investors have decided that they need professional help.

Jeremy Johnson, a 31-year-old ad tech sales manager in Atlanta, started out trading popular stocks on Robinhood and making deposits to his Roth individual retirement account. But after investing more than $15,000 a year on average by himself, Johnson in November decided that it was time to turn to a financial adviser.

“You can save your money all you want,” he said, “but if it’s not doing anything, what does it look like long term?”

The pandemic-fueled surge in the ranks of day traders could have been seen as a death knell for the financial planning and advice industry. But the field continues to grow, since even day traders and people who prefer set-and-forget index fund investments have come to realize that there’s a lot more components involved in building wealth.

Johnson’s new adviser, chosen based on a friend’s recommendation, helped package his life insurance with a mix of whole- and term-based features, bolstered his savings habits and altered his retirement investments to improve their tax structure.

According to a Cerulli Associates research study from October, 40% of U.S. investors surveyed said they need more advice. Those who said they were willing to pay a financial professional rose to 56%, up 5 percentage points from 2019. And 82% of those who are paying for financial advice said that it’s worth the price.

In fact, stock investors who have a financial adviser were more than twice as likely to say that they are very confident that they have the best investment strategy compared with those going at it alone, according to a survey by Franklin Templeton and Gallup.

After stocks plunged in March over Covid-19 fears, Los Angeles wealth management firm Aspiriant LLC saw greater demand for its services. And another set of new clients arrived later in the year as a wave of initial public offerings hit the market, according to Sandi Bragar, the company’s managing director for planning strategy and research. All told, she said by phone, the firm’s client list grew 32% in 2020.

When Tia Ware, a 30-year-old pharmacist in Virginia, first considered hiring a financial adviser five years ago, she was taken aback by the $1,200 yearly fee.

“At first I was like ‘hell no,’” Ware said in a FaceTime interview. “But now, yes, when I see my accounts. If I didn’t have a financial adviser, I’d only have shoes and bags to show for it.”

In the early years, Ware just saw her adviser once or twice a year. But last year after the pandemic hit, she realized how imperative it was to engage more often.

Eddie Welch, whose Montgomery, Alabama-based advisory firm was bought by Captrust Financial Advisors last year, said that any time there’s been financial upheaval, people “have been more warm and receptive to paying for and receiving advice.”

Robinhood’s Impact

Welch, now a principal at Captrust, said that while apps like Robinhood make it easy to trade stocks, “it’s a little more difficult to get into the market with a plan. And in most cases I think that’s what people seek from us.”

The growth of retail trading on free apps prompted major brokerage firms to also offer no-fee trades, with the hopes of convincing some of those customers to pay for advice. Many firms also added robo advisers — software programs that use algorithms to mimic flesh-and-blood financial advisers.

Charles Schwab Corp., which in October 2019 became the first of the majors to offer zero trading commissions, added 142,000 new accounts that month. This created “more of a pipeline for paid financial advice,” according to Morningstar analyst Michael Wong, who said that many of these clients would likely gravitate toward Schwab’s robo advice.

In fact, Schwab’s digital advisory assets grew 18% year over year to $57.9 billion in 2020. This was part of the explosion in robo advisers, with users increasing to 71 million from 46 million in 2019, according to data compiled by LearnBonds.com.

But most traders still want a personal touch. An Investopedia survey of young adults with household incomes of $50,000 or more found that 56% trusted a human financial adviser more than an automated one.

Phyllis Klein, who leads Captrust’s education and advice programs, said clients’ desire for insights was growing sharply as the coronavirus pandemic wreaked havoc on society. “We’ve had almost 12,000 webinar attendees and that is threefold of what it was the prior year,” she said.

“I can’t emphasize how much people need help,” Klein said, “and how much they just want to talk to somebody.”

Why Are Markets Going Crazy? Smartphones, One Study Suggests

Low interest rates? Bored traders stuck at home? A new study has come up with an alternative explanation for the surge in speculative activity.

Smartphones.

A study circulated by the National Bureau of Economic Research found the use of smartphones increases the purchase of riskier and lottery-type assets, and chasing past returns.

The researchers looked at two large German retail banks that introduced trading applications for mobile devices between 2010 and 2017. For over 15,000 clients, they observed not just the transactions but the specific platform used for each trade.

The researchers were able to look at the same investor during the same month. Smartphones increase the probability of buying so-called lottery stocks by 67%. The use of the devices increases the probability of buying assets in the top 10% of past performance by 12 percentage points.

Worryingly, once they start using smartphones, they also increase their risk chasing on non-smartphone platforms.

Another finding is that the risky behavior continues up to 10 quarters after the initial use of the smartphone app. What is also startling is that the researchers weren’t looking at particularly young and inexperienced traders — these German investors were, on average, 45 years old with nine years of experience investing.

But one interesting finding is that nudges — the prominent feature of stocks that have experienced big moves — do not seem to drive activity. Results were strong across all asset classes and not just for those that are featured in the smartphone app.

The working paper was written by Ankit Kalda and Alessandro Previtero at Indiana University, Benjamin Loos at the TUM School of Management in Munich, and Andreas Hackethal at Goethe University Frankfurt.

Futures on the technology-heavy Nasdaq-100 NQ00, 0.60% pointed to further gains on Wall Street COMP, 0.64% on Monday, after a rally in Asian tech stocks in Hong Kong HSI, +2.41% overnight. GameStop GME, 20.50%, a videogames retailer that saw sales drop 3% in the holiday period, rallied over 40% in premarket trade.

Updated: 1-26-2021

Robinhood Traders Face The Taxman After Falling In Love With Stocks

What should you know if you made money on your investments last year?

Almost everyone who makes money must get acquainted with the taxman.

That’s the reality dawning on U.S. investors who began buying and selling stocks on apps such as Robinhood last year, when they were cut off from other pastimes during pandemic lockdowns. At least 8 million people opened new brokerage accounts in the first nine months of 2020 — many of them young traders who were dipping their toes into the investing pool for the first time.

Now that these investors realize they could be on the hook for taxes, they aren’t outraged (as George Harrison of the Beatles was when he wrote “Taxman”) as much as confused about the rules.

Chase Alford recently received a notification from Robinhood alerting him that it’s almost tax season. The 19-year-old investor, who ended 2020 with less than $5,000 in net gains, is unsure whether he has to pay up.

“I read up on it and everything that I saw didn’t lead me to believe that I had to pay, however I was at the grocery store or something so I didn’t dive into it as much as I needed to,” said Alford, who got into trading in March when he was stuck at home in Fulshear, Texas.

So what should you know if you made money on your investments last year?

The U.S. tax code penalizes speculative trading by taxing short-term gains at a higher rate than long-term gains. The dividing line is one year: To get the lower, long-term capital gains rate, investors must hold onto a stock for a year and a day.

Married couples who earn up to $80,000 pay nothing on long-term capital gains and qualified dividends. Most other middle-class income groups pay 15%, and the top rate for high earners is 23.8%. Short-term gains, meanwhile, are taxed like ordinary income, at a top rate of 37%.

Those who made big short-term gains in the market last year may owe a hefty check to the Internal Revenue Service and, depending on where they live, to their state tax collection agency.

When Americans get paid at work, taxes are usually withheld from their paychecks. Brokerages rarely do the same for gains on stocks and other investments. That can create a headache when taxes are due in April, especially if investors haven’t put enough money aside.

“The biggest misconception most investors have is that they won’t be taxed as long as they don’t withdraw the money,” said Ryan Marshall, a financial planner and partner at ELA Financial Group in Wyckoff, New Jersey. That’s true for individual retirement accounts, or 401(k)-style plans. But any other investment income — from selling stocks and bonds, from dividends, and gains created by mutual funds — is taxable.

The boom in brokerage sign-ups last year means individual investors — known as retail traders — now account for a fifth of stock volume in the U.S., according to data from Bloomberg Intelligence. It wasn’t just a U.S. phenomenon.

Trading accounts across the globe tripled from 2019, according to a survey by BrokerChooser. In Japan, online firm Rakuten Securities saw a 25% jump in accounts in nine months, while small investors make up almost two-thirds of trading in South Korea. About one in three people in Saudi Arabia has a brokerage account.

Rise of Retail Investing

Shares traded at top U.S. retail brokers as a share of total volume.

Newbie investors are turning to search engines, tax websites, online communities, family members or CPA professionals for help as the start of the U.S. filing season approaches — on Feb. 12, two weeks later than usual.

“That’s a whole other process that I need to learn,” said Mac Coughlin, referring to his potential tax obligations. “Quite honestly I have no idea about any of it,” the 20-year-old business major at Fordham University said. “I took a small loss over the whole course of the year so in terms of filing and tax returns I do not really understand the process.”

For investors with negative returns in 2020 like Coughlin, trading losses can be turned into larger refunds from the IRS. For other investors, however, filing season may be costly. And traders with gains who ignore their tax obligations could wind up with even larger bills down the road.

Matthew Savello, a certified public accountant, spends his days answering questions about filing taxes in about 15 investing and stock groups on Discord, a popular chat service for young investors. He works full time at an accounting firm but has now also launched his own advisory, Prestige Tax & Accounting LLC.

“Now that it’s actually coming time to file, people are starting to scramble a little bit,” said Savello, 27. “One of the key things is you have to budget it. Probably most of the people I talked with actually have losses, there’s not many who can actually pull this off successfully. And for the ones who do, budgeting has become quite an issue.”

Robinhood — the company that’s become synonymous with the retail investing phenomenon over the past year — says it recommends that its customers speak with a tax professional for specific questions about tax documents, including how to file. It’s reaching out to users to update them on the information they can expect to receive from the company in preparation of tax season, including an overview of key dates and tax forms, according to a spokesperson.

Filing as an investor can mean collecting a lot more paperwork. There’s the 1099-B form from brokers, the 1099-INT reporting interest income, and the 1099-DIV for dividends. Some firms consolidate all activity on one form. It might take until mid-February for your 1099-B to arrive, and other specialized forms, like the K-1s generated by partnership investments, take even longer.

Those who trade cryptocurrencies or who jumped from platform to platform in 2020 might need to do extra work to compile all the taxable transactions they need to report.

The IRS gets a copy of every 1099. If you don’t report every cent of income, the agency will notice and send a letter demanding money. In many cases, the IRS’s computer could end up charging much more than you actually owe — for example, by taxing the entire proceeds of a sale, rather than just your gain.

“It’s to your benefit to pay it off as quickly as you can,” said Jordan Kendall, a partner at Marcum LLP. Ignoring your filing obligation altogether could be even more of a hassle.

“Many taxpayers don’t realize that if you’re delinquent in tax filings and you owe the government money, they could withhold your passport and stop you from traveling internationally,” he said. “They could make your life difficult.”

If you enter the right forms, tax software can generally figure out how much you owe. But if you’re trading without knowing the tax rules, you can end up with a much bigger tax bill than expected.

2020’s Trading Surge

Total shares executed by largest U.S. online retail brokers.

In addition to lowering taxes by holding onto investments for more than a year, savvy investors can avoid them entirely by generating losses. By selling stocks that have dropped in value, they can offset any gains in their portfolio. It’s something amateur investors are often reluctant to do.

“Selling at a loss, particularly, is the hardest move for new investors to make,” said Linda P. Erickson, a financial planner at Erickson Advisors in North Carolina. “They seem to always want to wait until it ‘comes back.’”

Losses can not only erase taxes on gains, they can also offset up $3,000 per year in ordinary income. Losses can also be carried over to future years. However, there’s a catch to this strategy, often called “tax-loss harvesting”: If you sell a stock at a loss, and then buy the stock again within 30 days, you can’t claim the loss on your taxes.

The so-called “wash-sale rule,” designed to prevent taxpayers from gaming the system, could pose a problem for novices who spent 2020 trading in and out of the same few stocks. Their investments may have lost value, but they won’t be able to claim a loss on their 1040 form.

For many, the extra tax costs of trading might just mean a smaller refund. Those who made substantial money in 2020, however, may find themselves with unexpectedly large tax bills. The good news is that the IRS allows people to pay taxes by installment with only a little bit of extra paperwork. The bad news is that penalties and interest can apply.

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