Frictionless Investments for Sophisticated Investors

Yesterday I asked a Silicon Valley angel investor what he thought of BitBox*.

According to AngelList, you are an investor in BitBox. is what I said.

Oh, he said. I’m sorry, I don’t remember what BitBox does. I must have thought they had a good team. AngelList makes it way too easy to invest in companies.

Apparently AngelList is the new Tinder, where you can flip around and make noncommittal investments from the comfort of your toilet seat.

AngelList’s frictionless investment experience reminds me of Robinhood, whose founders have been criticized for making trading *too* frictionless. After all, active trading generally leads to underperformance. But Robinhood’s founder says, Young people can afford to lose a few hundred dollars, that’s the equivalent of “Oh crap, I dropped my iPhone in the toilet.”

Robinhood’s progressive premise: If you are rich enough to afford an iPhone (and their app is iPhone-only), you can afford to lose all your money in the stock market.


It’s the same rationale behind the SEC’s requirements for accredited investors: You must be rich enough to be able to lose a small fortune before you can be an angel investor.

If trading stocks on Robinhood is the equivalent of dropping your phone in the toilet, then I guess writing off an angel investment is the equivalent of, Oh crap, I dropped my Tesla Model S in the toilet.


The proud new owner of this vehicle is an accredited investor
The owner of this vehicle is an accredited investor

*Company names have been changed.

Robinhood (part 2): Democratizing Access to the Financial Markets


I love that Robinhood allows me to flip stocks on the toilet.

I used to do all my trading through Interactive Brokers, but its secure login system required that I be tethered to a desktop.

With Robinhood, I place orders with a thumb swipe. With a sufficiently volatile stock, I can make or lose a few pennies every time I visit the bathroom, which is about 76 times a day because I have issues.

So cool.


I used to think that maybe the financial markets shouldn’t be quite so democratized, maybe stock-picking should be reserved for sophisticated investors. Who am I kidding? Individual stock traders suck no matter what brokerage they use.

Retail investors are uninformed traders who underperform the market. Wall Street calls them wealthy hobbyists. Not me, of course, but the other retail investors.

Brokerages love wealthy hobbyists. Whether it’s E-trade or Scottrade or your beloved Robinhood, they sell orders placed by people like you to wholesalers. Wholesalers try to fill your orders internally because they know it’s generally a good idea to bet against dumb people.

Robinhood’s real goal isn’t to spread financial literacy or democratize market access. The goal is to democratize the illusion of access.

Just like Uber lets anyone feel baller by hailing a black car, Robinhood lets anyone feel like Jordan Belfort flipping stock orders.

We don’t care about the creation of wealth so much as we care about the feeling of wealth.

If you want to know what democratized access to the financial markets really feels like, open a client account at Goldman Sachs. The minimum deposit is $50 million. Want your wealth managed by a hedge fund like Bridgewater Associates? Minimum buy-in of $100 million.

With that kind of money you could buy your own Robinhood.

See Also:
1. Robinhood (part 1): Feeling Like a Rock Star is not a Trading Strategy
2. We Are All Useless Morons that Suck –Dragonfly Capital
3. How Your Order Gets Filled –bloomberg

Robinhood (part 1): Feeling Like a Rock Star is not a Trading Strategy


Software was eating the world, and a revolutionary stock brokerage wanted to provide services for younger, tech-savvy clientele. The target investor class was different from their parents. They would rather look at a screen than Talk to Chuck, and they didn’t trust existing financial institutions.

In a world that was accustomed to $20 trading commissions, this fantastic new company was offering trades for free. It was 1999, and the founders of Robinhood were still in diapers when Freetrade introduced zero-commission trading to a new generation of investors.

Screen Shot 2014-12-15 at 12.32.27 AM

Freetrade couldn’t have come at a better time. A dotcom bubble was brewing, and people were quitting their jobs to daytrade tech stocks.

The web brought streaming quotes to the browser, and discount brokers enabled real-time reactions. Back when a trade cost as much as the new Backstreet Boys CD, retail investors weighed their options carefully before placing an order. But when trades became free, people flipped stocks with abandon.

Freetrade shut down in 2005 due to an unsustainable business model.

A decade later, free trades are back, and this time it’s mobile-first.

Robinhood has a mission to democratize access to the financial markets. The app feels like a toy. Companies are distilled into a minimal set of “Stats”, so we can balance our portfolios much like we draft our fantasy football lineups.


I suppose I could pull up my Bloomberg terminal if I wanted to do some research before making an investment decision, but I feel like that’s not in the spirit of this app. Howard Lindzon, founder of Stocktwits and one of Robinhood’s early investors, says that placing orders with a flick of a thumb makes him feel like a rock star.

I think it’s great that Robinhood is encouraging millenials to take an interest in their financial future. But maybe the financial markets shouldn’t be quite so democratized. Maybe if Scottrade’s $7 commission is enough to impact your return, you shouldn’t be buying stocks. Maybe if you’re not willing to expend more than three taps per trade, someone else should be responsible for your portfolio.

Complain all you want about how Charles Schwab is swindling commissions from your account — trading fees force you to exercise a little more patience and selectivity when making investment decisions. You might not feel like a rock star, but how often do you think Warren Buffett needs to feel like a rock star?

After Freetrade went out of business in 2005, a startup called Zecco Trading launched another zero-commission brokerage. 16 months later, Zecco stopped offering free trades and got acquired.

Screen Shot 2014-12-15 at 2.17.53 AM