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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.

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