For years I have been pointing out that on-line trading platforms are all about the providers making profits off of the gambling impulses of their users. The business model is about capitalizing on addictive behavior and profiting as users bet their brains out, especially on margin.
For the investment banks that have underwriting and proprietary trading desks, their discount brokerage arms are just another captive distribution channel for product as well as “dumb money” on whom they can front-run, gouge spreads, re-hypothecate and trim other hidden timing profits. As discounters competed for fresh blood over the past 15 years, transaction rates dropped from dollars to pennies, and finally a focus on who was giving away the most trades “for free”. The marketing around “valuable research and tools for pennies a trade” was always a deft maneuver to distract their victims customers from the true nature of the business. This morning new start-up Robinhood’s Co-Founders Vladimir Tenev and Baiju Bhatt let the cat out of the bag when discussing the future of trading stocks for free. They admit the truth about on-line trading: the business is a loan shark model, enticing people to place their bets “for free” on margin. The model is a no-brainer business for them because as everyone should know by now: the house always wins. Here is a direct video link.
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