Robinhood Broker intriguing entrant into the discount broker space

Do you like the idea of paying $0.00 in total trading commissions ?  No minimum initial funding amount to open the brokerage account ? How about saving a few hundred to a few thousands of dollars per year ? (depending on how many total trades you make per year ).

In case you have not heard or read about them yet, is a new entrant into the discount broker space (read: ultra discount broker space) currently in pre launch phase.  Their mobile trading app is currently only available to a select few early beta testers who were lucky enough to sign up early to their waiting list.  You can get on the waiting list yourself quite easily just by submitting your email to them and then wait patiently for a personalized invite.  There are already close to 400,000 total potential accounts, but it would be false to assume that all of them will turn into live accounts.  Still, this is a significant number consider that discount broker Tradeking/Zecco have about 500,000 total accounts.

So what is all the excitement about and why should anyone bother to be interested in yet another discount broker ?

Well for starters they are not just discount, but ultra ultra discount, as in ZERO commissions on NASDAQ and NYSE stocks.  There is still limited information available since they are still so early in the beta, but it appears the zero commissions will be valid for trades either on their mobile app or website.  My understanding is that the zero commission rate is for market orders only.  This is a bit of a concern because it might lead to less than ideal execution prices.  But that partly depends on what the liquidity of the individual stock is.

I am personally looking forward to trying their brokerage app out to see what kind of executions I get on Nasdaq and NYSE stocks and if they are comparable to what I have received from Fidelity and E*trade.

robinhood venture backingIf the execution prices are reasonable, then I think Robinhood could be onto something very big, especially if they are able to achieve scale in terms of total account user base.  There are also plans to offer API access for possible integration of zero commission trading with other current social trading websites (for example  Robinhood is also backed by reputable venture funds.  Instead of being a mixed finance and technology operation, it appears to be mostly a tech company approach to this space focused on operational efficiency and an extreme cost control type operation. I would love to see them succeed in this space.

What kind of savings are we talking about ?

A round trip trade is defined as a buy and sale of the same security. And let us assume of an average cost of 8 dollars per trade.

Lets say you make:

10 round trip trades a month = 120 round trip trades per year = $1920 savings per year.

20 round trip trades a month = 240 round trip trades per year = $3840 savings per year.

Those are very significant savings and frankly I do not care if you have a 500 dollar account or a 100,000 dollar account, who does not want to save that kind of money per year ?

But again, it will be important to investigate the quality of execution prices.  However, keep in mind that the quality of execution prices is not the only factor that makes for successful trading.  A clear and sound trading plan and goal combined with a winning strategy is what makes for long term success.

The key selling point and leverage of the robinhood platform is the fact that one can literally open a new broker account at robinhood with as little as 10 dollars and then start to trade that 10 dollars profitably over time !  This fact is quite astonishing to me, and I look forward to testing it out. It potentially removes all barriers to entry in the trading business.  Why?  Because previously in order to start trading an account successfully over time, it is an essential requirement that one start trading with at least 1000 dollars, preferably more.  A round trip commission of 20 dollars is 2% of a thousand dollars and 4 percent of 500 dollars and 20% of 100 dollars.

Clearly, anyone interested in trading with less than 1000 or 500 dollars to start is at a key disadvantage right from the start.

Zero commissions changes that, and theoretically allows a person to start trading with only 10 dollars while at the same time still allowing them to practice sound money management and cut losses without the ‘penalty’ of the commission adding to the loss.

Lets say for example you decide you want to start trading with only 10 dollars and aim to make 10% per trade trading small cap stocks.  Then also assume you decide that you want to pyramid all of your profits into the next trade.

If we also assume that you do not suffer any losing trades using this method, how long would it take to reach $100,000 ?  The answer is 97 total trades.

That feat is impossible to accomplish with any other broker.

The assumption that you would never suffer any losing trade is of course unrealistic.  However assuming you have a proper trading system in place and you already know that you are a proven profitable trader, then the task of trading $10 dollars into $100,000 is just as feasible as trading $10,000 into $1,000,000.  The only difference is the starting capital amount.

Look at the following trade process assuming no losing trades and 10% compound growth per trade.


Column D is the cumulative growth of capital.  Column E is the gain per trade.

You can see from the progression that it takes a total of 97 compound trades to reach over $100,000 with only $10 starting capital.

Can this hypothetical trade process really be achieved ?

It could, but clearly there will be losses along the way that need to be carefully controlled.

Instead of 97 trades, it might take 200 or 250 total trades to achieve the $100,000 threshold.  But the main point is that it is still possible from such a small starting capital amount assuming you are using a zero commission broker.

I look forward to testing this out in the future and documenting the progress here at BestOnlineTrades.

As I already mentioned, having a zero commission broker and no minimum equity starting point is only 1/10th the battle.

The real key is winning the war of being consistently profitable as much as possible over time and making sure that losses are taken very quickly when necessary.

Posted in Online Trading

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