Philosophy

Please read the attached TWO articles about Robinhood. Also read the article in your textbook by Robert F. Frederick and W. Michael Hoffman called “The Individual Investor in Securities Markets: An Ethical Analysis.” It is in the chapter called “Money, How We Get it and Where It Goes.” You can also refer to the slides on Robinhood that are in Module 4 on Canvas. Then answer the questions at the end of this document.

Article 1

Robinhood and Young Traders in the Stock Market

Its users buy and sell the riskiest financial products and do so more frequently than customers at other retail brokerage firms, but their inexperience can sometimes lead to staggering losses.

Richard Dobatse, in San Diego with his family, signed up for Robinhood in 2017 and said he lost $860,000 in March.Credit...John Francis Peters for The New York Times

By  Nathaniel Popper

Richard Dobatse, a Navy medic in San Diego, dabbled infrequently in stock trading. But his behavior changed in 2017 when he signed up for Robinhood, a trading app that made buying and selling stocks simple and seemingly free.

Mr. Dobatse, now 32, said he had been charmed by Robinhood’s one-click trading, easy access to complex investment products, and features like falling confetti and emoji-filled phone notifications that made it feel like a game. After funding his account with $15,000 in credit card advances, he began spending more time on the app.

As he repeatedly lost money, Mr. Dobatse took out two $30,000 home equity loans so he could buy and sell more speculative stocks and options, hoping to pay off his debts. His account value shot above $1 million this year — but almost all of that recently disappeared. This week, his balance was $6,956.

“When he is doing his trading, he won’t want to eat,” said his wife, Tashika Dobatse, with whom he has three children. “He would have nightmares.”

Millions of young Americans have begun investing in recent years through Robinhood, which was  founded in 2013  with a sales pitch of no trading fees or account minimums. The ease of trading has turned it into a cultural phenomenon and a Silicon Valley darling, with the start-up climbing to an $8.3 billion valuation. It has been one of the tech industry’s biggest growth stories in the recent market turmoil.

But at least part of Robinhood’s success appears to have been built on a Silicon Valley playbook of behavioral nudges and push notifications, which has drawn inexperienced investors into the riskiest trading, according to an analysis of industry data and legal filings, as well as interviews with nine current and former Robinhood employees and more than a dozen customers. And the more that customers engaged in such behavior, the better it was for the company, the data shows.

More than at any other retail brokerage firm, Robinhood’s users trade the riskiest products and at the fastest pace, according to an analysis of new filings from nine brokerage firms by the research firm Alphacution for The New York Times.

In the first three months of 2020, Robinhood users traded nine times as many shares as E-Trade customers, and 40 times as many shares as Charles Schwab customers, per dollar in the average customer account in the most recent quarter. They also bought and sold 88 times as many risky options contracts as Schwab customers, relative to the average account size, according to the analysis.

The more often small investors trade stocks, the worse their returns are likely to be,  studies   have   shown . The returns are even worse when they get involved with options,  research   ha s  found .

This kind of trading, where a few minutes can mean the difference between winning and losing, was particularly hazardous on Robinhood because the firm has experienced an unusual number of technology issues, public records show. Some Robinhood employees, who declined to be identified for fear of retaliation, said the company failed to provide adequate guardrails and technology to support its customers.

Those dangers came into focus last month when Alex Kearns, 20, a college student in Nebraska,  killed himself  after he logged into the app and saw that his balance had dropped to negative $730,000. The figure was high partly because of some incomplete trades.

“There was no intention to be assigned this much and take this much risk,” Mr. Kearns wrote in his suicide note, which a family member  posted on Twitter .

Like Mr. Kearns, Robinhood’s average customer is young and lacks investing know-how. The average age is 31, the company said, and half of its customers had never invested before.

Some have visited Robinhood’s headquarters in Menlo Park, Calif., in recent years to confront the staff about their losses, said four employees who witnessed the incidents. This year, they said, the start-up installed bulletproof glass at the front entrance.

“They encourage people to go from training wheels to driving motorcycles,” Scott Smith, who tracks brokerage firms at the financial consulting firm Cerulli, said of Robinhood. “Over the long term, it’s like trying to beat the casino.”

At the core of Robinhood’s business is an incentive to encourage more trading. It does not charge fees for trading, but it is still paid more if its customers trade more.

That’s because it makes money through a complex practice known as “payment for order flow.” Each time a Robinhood customer trades, Wall Street firms actually buy or sell the shares and determine what price the customer gets. These firms pay Robinhood for the right to do this, because they then engage in a form of arbitrage by trying to buy or sell the stock for a profit over what they give the Robinhood customer.

This practice is not new, and retail brokers such as E-Trade and Schwab also do it. But Robinhood makes significantly more than they do for each stock share and options contract sent to the professional trading firms, the filings show.

For each share of stock traded, Robinhood made four to 15 times more than Schwab in the most recent quarter, according to the filings. In total, Robinhood got $18,955 from the trading firms for every dollar in the average customer account, while Schwab made $195, the Alphacution analysis shows. Industry experts said this was most likely because the trading firms believed they could score the easiest profits from Robinhood customers.

Vlad Tenev, a founder and co-chief executive of Robinhood, said in an interview that even with some of its customers losing money,  young Americans risked greater losses  by not investing in stocks at all. Not participating in the markets “ultimately contributed to the sort of the massive inequalities that we’re seeing in society,” he said.

Mr. Tenev said only 12 percent of the traders active on Robinhood each month used options, which allow people to bet on where the price of a specific stock will be on a specific day and multiply that by 100. He said the company had added educational content on how to invest safely.

He declined to comment on why Robinhood makes more than its competitors from the Wall Street firms. The company also declined to provide data on its customers’ performance.

Robinhood does not force people to trade, of course. But its success at getting them do so has been highlighted internally. In June, the actor Ashton Kutcher, who has invested in Robinhood, attended one of the company’s weekly staff meetings on Zoom and celebrated its success by comparing it to gambling websites, said three people who were on the call.

Mr. Kutcher said in a statement that his comment “was not intended to be a comparison of business models nor the experience Robinhood provides its customers” and that it referred “to the current growth metrics.” He added that he was “absolutely not insinuating that Robinhood was a gambling platform.”

Democratizing Finance

Robinhood’s co-founders and co-chief executives, Baiju Bhatt, left, and Vlad Tenev, created the company to make investing accessible to everyone

Robinhood was founded by Mr. Tenev and Baiju Bhatt, two children of immigrants who met at Stanford University in 2005. After teaming up on several ventures, including a high-speed trading firm, they were inspired by the  Occupy Wall Street movement  to create a company that would make finance more accessible, they said. They named the start-up Robinhood after  the English outlaw  who stole from the rich and gave to the poor.

Robinhood eliminated trading fees while most brokerage firms charged $10 or more for a trade. It also added features to make investing more like a game. New members were given a free share of stock, but only after they scratched off images that looked like a lottery ticket.

The app is simple to use. The home screen has a list of trendy stocks. If a customer touches one of them, a green button pops up with the word “trade,” skipping many of the steps that other firms require.

Robinhood initially offered only stock trading. Over time, it added options trading and margin loans, which make it possible to turbocharge investment gains — and to supersize losses.

The app advertises options with the tagline “quick, straightforward & free.” Customers who want to trade options answer just a few multiple-choice questions. Beginners are legally barred from trading options, but those who click that they have no investing experience are coached by the app on how to change the answer to “not much” experience. Then people can immediately begin trading.

Before Robinhood added options trading in 2017, Mr. Bhatt scoffed at the idea that the company was letting investors take uninformed risks.

“The best thing we can say to those people is ‘Just do it,’” he  told Business Insider  at the time.

In May, Robinhood said it had 13 million accounts, up from 10 million at the end of 2019. Schwab said it had 12.7 million brokerage accounts in its latest filings; E-Trade reported 5.5 million.

That growth has kept the money flowing in from venture capitalists. Sequoia Capital and New Enterprise Associates are among those that have poured $1.3 billion into Robinhood. In May, the company received a fresh  $280 million .

“Robinhood has made the financial markets accessible to the masses and, in turn, revolutionized the decades-old brokerage industry,” Andrew Reed, a partner at Sequoia,  said  after last month’s fund-raising.

Robinhood shows users that its options trading is free of commissions. 

Mr. Tenev  has said  Robinhood has invested in the best technology in the industry. But the risks of trading through the app have been compounded by its tech glitches.

In 2018, Robinhood released software that accidentally  reversed the direction  of options trades, giving customers the opposite outcome from what they expected. Last year, it mistakenly allowed people to borrow infinite money to multiply their bets, leading to some enormous gains and losses.

Robinhood’s website has also gone down more often than those of its rivals — 47 times since March for Robinhood and 10 times for Schwab — according to a Times analysis of data from Downdetector.com, which tracks website reliability. In March, the  site was down  for almost two days, just as  stock prices were gyrating  because of the coronavirus pandemic. Robinhood’s customers were unable to make trades to blunt the damage to their accounts.

Four Robinhood employees, who declined to be identified, said the outage was rooted in issues with the company’s phone app and servers. They said the start-up had underinvested in technology and moved too quickly rather than carefully.

Mr. Tenev said he could not talk about the outage beyond a company  blog post  that said it was “not acceptable.” Robinhood had recently made new technology investments, he said.

Plaintiffs who have sued over the outage said Robinhood had done little to respond to their losses. Unlike other brokers, the company has no phone number for customers to call.

Mr. Dobatse suffered his biggest losses in the March outage — $860,000, his records show. Robinhood did not respond to his emails, he said. A Robinhood spokesman said the company did respond.

Mr. Dobatse said he planned to take his case to financial regulators for arbitration.

“They make it so easy for people that don’t know anything about stocks,” he said. “Then you go there and you start to lose money.”

Article 2:

Robinhood Hits Campus to Recruit Customers

The company plans to hit up college coffee shops to spread the word about its services. When credit card companies did it a generation ago, Congress got involved.

By  Ron Lieber

Robinhood, the free stock-trading app with  21 million active users  and counting, is about to hit the road for a  college coffeehouse tour  to drum up new customers.

Now where have we heard this one before? Ah, yes, the credit card industry.

The campus antics that the card companies got up to two decades ago were so egregious that they helped lead to a  2009 federal law  that made it harder for anyone under 21 to get their products in the first place.

There are some important differences. Credit card issuers can put marks on your record that can keep you from qualifying for an apartment or other services years later. Robinhood is handing out a mere $15 to give each student a taste of investing.

But here’s what they have in common: Both products are habit-forming, and if you get in over your head, the ramifications can be costly.

So let us begin with a history lesson.

First-year college students are a highly desirable pool of prospective customers. They replenish themselves by the millions each year, and most start school with no strong affinity for any particular peddler. And they’re fish in a barrel for the right pitch: A generation ago, card issuers and their marketing firms started turning up on campus with offers of free food or college logo merch to people who completed an application.

“Truly, you had kids signing up for exactly the wrong reason,” said Odysseas Papadimitriou, a former Capital One employee who became intimately familiar with how to work with customers with little credit. “They had no clue how the products worked.”

MBNA, which Bank of America eventually acquired, took things a step further. It cut deals with the schools or their alumni chapters — worth up to seven figures a year — in return for names, addresses and phone numbers so the company could pitch students directly.

Enterprising student journalists and others raised alarm bells, noting that the schools were leading their lambs to the slaughter. Inevitably, politicians and consumer advocacy groups took notice.  U.S. PIRG , a consumer group that began on campuses, started showing up for a countercampaign. One of its visuals aped Visa’s logo: Feesa, with a tagline that read “Free gifts now. Huge fees later.”

Then, in 2009, Congress passed the federal credit card act. Among its  many provisions  was one that kept most people under 21 from getting a credit card without a co-signer.

Is Robinhood destined for a similar fate? It could happen, especially if the markets take a dive and large numbers of customers experience unexpected losses.

Like credit cards back in the day, Robinhood’s service is easy to get and easy to use. (Robinhood’s original gamelike interface was especially appealing to younger investors; students who pry themselves away from the screen long enough to attend class will no doubt be discussing its design prowess in business schools for decades to come.) And as with credit cards — another saturated industry where it’s expensive to swipe customers from competitors — much depends on finding inexperienced people who want to sample your offering.

This is not necessarily a bad thing. If you use credit responsibly early on — and plenty of people do — you start a permanent record that can lead to high credit scores. Similarly, stock market exposure is necessary for most people to retire comfortably, and the earlier you start investing prudently, the better off you are.

But an  avalanche of studies  over the decades has shown that individuals who trade too often end up with less money than if they had simply left their investments alone. We lock in losses because we’re fearful and grasp too much for winners because of  our greed .

Less trading poses a problem for Robinhood. Like some other brokerage firms, it makes money from something called  “payment for order flow.”  Third parties pay Robinhood for the privilege of executing its customers’ trades, since those parties can themselves make money through clever market maneuvers. You can’t make money from order flow without orders, though.

And there is already evidence that many younger Robinhood investors are getting burned, as my colleague Nathaniel Popper  reported  last year. Robinhood  settled a lawsuit  brought by the family of one college student who killed himself believing he had incurred over $700,000 of losses. The  frenzied trading in GameStop  drew in  yet more novices .

Caution flags and other guidance could help, and some of Robinhood’s  educational materials  are pretty good. They reiterate that necessary point that holding on to investments for a long time can earn you piles of compound interest.

Nevertheless, the company doesn’t offer individual retirement accounts, which can help turn small investments into big nest eggs. Roth I.R.A.s come with tax benefits that are of  particular use  to college-age, lower-income savers.

In July, Robinhood’s  chief executive, Vlad Tenev, said  it might add such offerings. A company representative had no additional information to add about any decision or timeline.

Still, there is reason to be skeptical of Robinhood. It  recently paid  about $70 million in restitution plus a fine — the biggest in the history of the  Financial Industry Regulatory Authority  — to settle charges of misleading millions of customers and letting others trade investments that were not appropriate for them. And late last year, it  paid $65 million  to settle Securities and Exchange Commission charges that it had misled users about its use of payment for order flow.

In both cases, the company neither admitted nor denied the charges and findings.

“Investing early is important to building wealth long term, but research shows that the vast majority of young adults have never invested in the stock market,” the company said in a statement. “We want to help educate and empower all investors, including college students, about investing.”

According to Robinhood’s own survey data, its customers are already more racially diverse than those of more established brokerage firms like Fidelity and Charles Schwab. Kudos for that.

But Robinhood has gotten a lot of mileage out of portraying itself as the champion of newer investors and its  boast  of “democratizing” finance. It has even panned critics who question whether it has the best interests of beginners at heart.

“It’s pretty elitist to suggest that participation in the markets by small investors is gambling, while participation by the wealthy is investing,” the company said in a statement when I raised this issue.

That’s pretty rich, given that no serious person is suggesting that people with low balances are all gamblers. Hopefully, the Robinhood employees and investors who cashed in on the company’s  $31 billion initial public stock offering  in July won’t turn out to be the elitist types.

Robinhood said its campus tour would be heading to community colleges and historically Black colleges and universities, although it did not name them. Perhaps the teenagers who do trade aggressively at those institutions will somehow achieve above-average results over the long haul.

No doubt some Robinhood investors have come out ahead so far. In a rising stock market, plenty of people do — which made this as good a time as any for Fidelity to  introduce a plan  of its own to get its adult customers to open accounts for their teenage children.

I was curious whether Robinhood’s coffee shop tour would include the same kinds of financial arrangements with schools as the credit card companies had made, paying for student data. A company statement said that it was not compensating schools for “this specific” partnership. The company declined my suggestion to make a pledge that it would not do so in future partnerships, either.

So let’s assume that these kinds of campus pitches aren’t going away, and that Robinhood remains a central player for a while.

If your future holds an experiment with any trading app, think about it as you might if you were or are a new driver.

Most people don’t learn to drive in a high-performance vehicle. In addition, they often take a weekslong course and learn to be defensive. “I learned to drive in a slow car,” said  Ed Mierzwinski , who helped lead the U.S. PIRG credit card countercampaign.

Beginners also usually learn lessons from mistakes. Smaller investment losses can be a very good thing, as I noted in  a column  last year.

Mr. Papadimitriou, who started the credit and personal finance website  WalletHub  after his Capital One stint, found himself $20,000 in the hole after losing big on complex bets on  Priceline’s stock  during a tech stock meltdown two decades ago. Today, he said, he is much more conservative.

If history is any guide, today’s gunslingers will shoot themselves in the foot, lick their wounds and creep back into the market via buying and holding a few basic index or exchange-traded funds.

Until then, however, there will be a fresh crop of teenagers each year, graduating from high schools that taught them little or nothing about personal finance — unleashed from any sort of parental monitoring. Robinhood would like to buy those students a latte.

QUESTIONS ABOUT THE ROBINHOOD CASE

1. Is it ethical in your view for Robinhood to be promoting easy access to stock trading for all individuals, even those with no experience in the stock or bond markets? Why or why not?

2. Is it ethical for Robinhood to allow inexperienced investors to trade in securities without professional guidance from an expert in investing? Why or why not?

3. Should Robinhood be held liable for foolish or risky trading that results in large losses of money by individual investors who use the app? Why or why not?

4. Is it more ethical for licensed stock and bond traders to be the only persons allowed to make trades on the securities markets for clients? Or should anyone with a smartphone be able to do it? Why?

5. Should individual investors in securities be asked to pass a test that measures their knowledge of the risks involved in investing, just as people must pass a driver’s license test? Why or why not?

6. Should people’s liberty to do whatever they want with their money be unrestricted? Or should people be protected from investing practices that might potentially harm them, just as they are protected from taking many drugs that might potentially harm them because they require a doctor’s prescription? Why or why not?

7. Based on the article about Robinhood promoting its app on college campuses, do you think it is an ethical business practice to do that? Why or why not?