A Timely Warning About Robin Hood Trading

Dec 29, 2020

Vijay Bhambwani, Editor, Fast Profits Daily

Today's video is an extension of my earlier video on Robin Hood trading.

In that video, I explained how platforms like Robin Hood were changing the world of trading.

In this video, I will dig into the recent investigation into Robin Hood and tell you why it could be just the tip of the iceberg.

I'll also tell you how to be aware of such scams happing in India.

As a trader, knowing what not to do is just as important as knowing what to do.

Hi, this is Vijay Bhambwani, and in this video, I will talk to you about things that you should not do. We have spoken enough about what to do in the market, but believe me, as a good friend, a Samaritan, a guide, call it whatever you want, the job of an adviser, friend, mentor, guide, whatever it is that you want to call me, is also to caution people about what not to do.

You see, making profits is important, but not losing money is also important, and there are times I have to walk a very thin dividing line, you could call it the Razor's Edge, recording videos that are exactly either very pleasant news or sometimes rub people the wrong way, either because they miss understand, or because the advice is going against their belief system.

That basically results in comments, which can be a little caustic but hey, keep them coming. Everything bouquets, brick backs, everything is acceptable. So the more you communicate with me the better it is. I could get a feedback from you about what is likely to go down well or otherwise.

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This is actually a follow up video about the three videos that I have recorded in the Fast Profits Daily. The one 29th of June 2020, about how not to get taken in by zero brokerage offers from brokers who are enticing you to open accounts with them.

Then on 9th of September 2020 about the perils of trading in the dabba market or the unofficial trading market, where no bills, no paperwork, or any kind of any kind of KYC or official give and take is done. Now this is an illegal parallel market.

The third video that I had made of which this is an extension, this video's an extension to, was on 12th of October 2020 about our Robin Hood trading was redefining the way trades are taking place in the market.

I had said that this was a brave new world and the sort of something that Old World traders like me don't really feel very comfortable about and guess what? The Securities and Exchange Commission, the SEC has initiated an in-depth inquiry on Robin Hood traders and fined it US$ 65 m in penalties.

Guess what? In spite of the 65 million penalty, Robin Hood promoters are still going to go laughing all the way to the bank and as per the principles of basic accounting and finance, every debit is matched by a credit, and vice versa.

So if Robin Hood promoters are grading all the way to the bank, there has to be some loser also, who's lost a proportionate, if not a disproportionate amount of money. No prizes for guessing. It's the clients, the subscribers of Robin Hood who lost money.

Is there a lesson in this for us in the Indian context? Or why even the Indian context? The global context? Yes, there is. I'm gonna explain this to you in this video because, frankly, I get extremely disappointed when I interact with traders or when people contact me on social media, which I love hearing from people, of course, provided you're open to the idea of modifying your trading system.

If you ask a question and get announced from somebody who is better knowledgeable and you're willing to modify your way of trading, that's proactive.

But if you're stubborn and if you would refuse to let go of your belief systems, believe me, you're wasting the time of the person you're a raising a query to, and unless you're willing to change, why even raise that query?

So unfortunately, when I ask people simple questions like, how do you select a counter to trade, do you know what percentage terms mobility or intraday range that this counter offers, have you tailor made a trading system based on this intraday tap of this particular stock commodity, currency or index, people draw a blank. They just don't know what to answer.

For example, when I ask people, do you know what your execution costs per crore of turnover is, I can bet a vast majority of people don't know what the exact answer is. At the same time, if these guys were to own a shop or a showroom or run a factory, they would calculate everything. The cost of raw material labour, electricity, tea, coffee expense etc and transport per unit of goods sold.

But when you are dealing and stocks, commodities, currencies or indices, derivatives, etc why do you not do this kind of a calculation?

At Equitymaster we actually compiled a list of things to do and not do, and how much brokerage you should pay max to be able to avail of super fine trading services were a lot of trades, frequent trades are likely to occur because it is important for you to keep your cost and execution costs like brokerage GST, exchange turnover, taxes, stamp duty and SEBI turnover tax will eat into your profits.

This Robin Hood scam has actually eaten US$ 34 m if not more. US$ 34 m is something that has been only found. The investigation is still underway and they could be a lot more disclosures coming in as time follows on the investigation. So I'm gonna tell you how the modus operandi was.

Robin Hood did not believe in charging brokerage or commissions to its clients. Now that itself should tell you, hey, this is too good to be true and anything that's too good to be true as per oldies like me, I'm, 55 years old, I have been trading in the market for 35 years now, I got a lot of grey hair to show for it. I am extremely circumspect and cautious is about tall claims especially, you know, the kind that you get in your SMSs saying 110% return per month, 100% trading accuracy with XYZ software. Only so much of fees per month.

These are all it all claims. Too good to be true. So Robin Hood was too good to be true. Also zero brokerage. So how they make money? They basically gave you a two way quote, a bid, and an offer. A buy rate, and a sell rate.

Remember what I said in the dabba trading video of 9th of September 2020. Your counterparty, the person you're buying and selling to you is the Dabba trader itself. So if you want to buy shares, there must be a seller. If you want to sell shares, there must be a buyer.

In the dabba market, since no transactions were going through the exchange, the dabba operator himself was buying and selling to you. Guess what? He knows how to win. Therefore, you will always lose.

Nor Robin Hood was basically making money by offering you a bid and offer spread. The difference between the buying and selling was its profit. But was it not executing these costs on the exchanges? Yes, they were. How did they go about it?

They were going through other brokers who were channelling or funnelling their orders into the exchange. Do other people also do it. Yes. E-Trade and Charles Schwab. The benchmarks in American Online trading and broking community, also channelise their orders through external brokers but Robin Hood actually went to the extent of 72-75% of the total trade book size going through outside brokers, and they shared 80% of the bid and offer difference with the broker.

What I mean is that Robin Hood's share in the bid and offer spread the difference between the buy and the cell rate, Robin Hood took away 80%. The industry norm for the want of a better word, the norm is that the broker through whom you of channelling your trade only gives you 20% kickback. Robin Hood received 80%.

Why? This is another question that comes to my mind. Why would a broker offer an 80% bid and offer spread, which is a profit to Robin Hood?

It was because Robin Hood allowed it to offer a very big difference between the bid on the offer.

Who loses? The investor and the trader loses because he gets such a wide difference between the buy and the cell that his profit is going to be very small, if at all, if at all.

Secondly, Robin Hood made money on the interest it earned by taking the deposits kept by their clients in loans. This interest was not shared with their clients. Wakey Wakey. There is no such thing as a free lunch in life.

Thirdly, Robin Hood enticed its investors, traders, clients subscribers, call it what you want, to upgrade to higher ended services which were paid for. So the fees earned in those services and extra bells and whistles that they were giving were supposed to be in the profit that Robin Hood would take away.

Included in the gold scheme, which is a paid scheme, were things like trading aftermarket hours that in self should raise a red flag for you. trading after market hours? Remember the 9th of September 2020 video on dabba trading? Got it?

Then they would also offer their clients shares on loan so that they could shot sell the shares, deliver them to the exchange, buy it back at lower prices and give it back to Robin Hood. What would Robin Hood earn? It would earn a rent or a free for loaning these shares. All these have come out in the Securities and Exchange Commission's inquiry into Robin Hood.

How you get impacted in the Indian context? Do you know that brokers pay something called an exchange transaction tax? If you take your brokerage contract note of the day, you will see that your beings six kinds of charges. First is brokerage. Second is GST on the brokerage. The third is STT or securities transaction tax or commodities transaction tax, depending on which exchange it is on. Then you pay exchange turnover charges. Then you pay stamp duty, which varies from state to state and then SEBI transaction charges.

Now this exchange turnover tax is not a fixed fee. It's a telescopic charge. So the higher is the turnover of a broker. The lower is a slab of the tax paid by the broker. Which is why brokers want more and more turnover generating clients. So that they pay a smaller percentage of the exchange turnover tax.

Now when a broker routes a transaction, a small broker who is unable to pass through the 100 crore turnover per day club and therefore knows that he will have to pay a higher turnover tax, when he roots his order through a broker who is 1,000 crore per day turnover guy, he has to pay a small exchange turnover fee but he can charge the routine exchange turnover fee to a client and pocket the difference.

Now, this is something why there is a brokerage rate war going on. The bigger brokers can actually offer you cut-throat discounts because they are saving money elsewhere. So if you are getting offers from smaller brokers who are telling you, we charge zero brokerage and no other charges etc, except for STT, stamp duty SEBI fees, exchange turnover, tax, etc, remember that things maybe a little different as compared to what you were being told they are.

It is only the vigilant trader who makes money in this market. The dies is actually tilted against you. No more than 8 to 12%, now the percentage varies on a day on day basis, no more than 8 to 12% of traders consistently make money. The remaining come there, make money on a fluke, lose money most of the time, and over a period of time, lose their capital and go away.

I can bet that this minority of 8-12% traders know their onions from their beet roots. They know how much they are paying. They know how much the brokerage is, the exchange turnover tax, the STT, the SEBI tax, the stamp duty, etc. They have a strict control over their costing, and therefore they are super sharp traders.

I want my viewers on the Fast Profits Daily video to be in this super sharp category, and I will keep bringing you videos that will help you become super sharp traders.

On this promise, I'll say goodbye to you in this video not before assuring you that more videos to come on this in the future.

If you're watching this video on YouTube, please click like on this video and subscribe to my YouTube channel if you haven't already done so and click on the bell icon so you receive alerts of new videos being put up in this YouTube channel.

In the comments section I'd love to hear from you about what you think of this video and what you want me to record in my next. Help me reach out to fellow like-minded traders and investors who believe in knowledge based investments and trading systems by referring this video to your family and friends.

Do take very good care of your health., your family, your trades, and investments. Have a very profitable day ahead. Vijay Bhambwani signing off for now. Thank you for watching.

Warm regards,

Vijay L Bhambwani
Vijay L Bhambwani
Editor, Fast Profits Daily
Equitymaster Agora Research Private Limited (Research Analyst)

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