Free stock-trading smartphone apps like Robinhood, Firstrade and Stockpile are attracting a wave of new investors, and are helping to prop up U.S. stock markets despite the headwinds of the coronavirus.
Alongside such familiar software-based stocks as Amazon, Facebook and Google, their investments have boosted shares of some obscure and money-losing companies, trading records show.
"It's educational, it's affordable -- you can buy fractions of shares for just a few dollars -- and it's a good time," said Karen Hartley-Nagle, president of New Castle County Council in Delaware, who says she has recommended Robinhood and Stockpile to her four young-adult children as a way to learn about investments.
But investment professionals like Matt Topley, president of Lansing Street Investment Advisers in Ambler, Pa., warn that neophyte app investors are riding an artificial high. They're jumping into markets that are stimulated by record government spending on subsidized loans to businesses, extra unemployment checks, and Federal Reserve purchases of trillions of dollars in investor debt.
He compared the rush of new investors through free apps like Robinhood to the day traders who fed the dot.com boom of the late 1990s, before the market's 2001 collapse. "This will not last long," he predicted.
Of course, free trading apps are a threat to pros. Buying investments used to mean hiring advisers -- like Topley's local practice, or Wall Street giants such as Goldman Sachs, or big discounters like Vanguard Group. How can apps trade for free?
Robinhood says it gets paid by referring customers to a bank so they borrow to buy more. It also collects interest on clients' uninvested cash even at today's very low rates, and it sells their trade orders to big wholesale trading firms like Virtu Financial and Citadel Investments, which make money on the spread between what buyers and sellers pay.
During the coronavirus shutdowns, when "a vast preponderance of folks are working from home or are at home, there's more opportunity to trade during the day," and orders have "increased substantially," said Douglas Cifu, chief executive of Virtu, in an investor conference call after posting record sales and profits last month. "When you can do something for free, I guess people do it more often."
Robinhood, started by a pair of Stanford grads in 2013 and backed by more than $700 million from Silicon Valley venture capital giant New Enterprise Associates and other investors, has become a special focus of market watchers. It claims more than 13 million users, and its data are tracked and posted by another start-up, Robintrack, whose popular tracking page was founded by an undergraduate at Valparaiso University in Indiana in 2018.
In December, Robinhood agreed to pay $1.25 million to settle accusations by the Financial Industry Regulatory Authority that it had violated industry rules in 2016 and 2017 by failing to help customers trade stocks for better prices than offered by the trading firms paying Robinhood for business. The company denied wrongdoing but agreed to pay the fine to end the dispute.