Investor Paul Mampilly recently tweeted about the Robinhood app. Robinhood is a brokerage company that the millennial generation has adopted as the preferred way to trade securities because the company does not charge commissions. Traditional brokerage firms have been known to charge as much as $10.00 a trade. Many younger investors see the Robinhood app as revolutionary. Investors such as Paul Mampilly have been in the investing business for years and so they understand that a firm like Robinhood is making money somehow, even if they advertise free trading.
One of the ways a brokerage company can make money is by doing a method called internal crossing. This is where a broker will complete a stock trade between two of their own clients. This allows both the individuals to get a better trade for their stock orders. Also, the ability to complete two orders from clients at the same firm can help equities fall at a smoother pace when the market tanks. The broker Robinhood does not use this method to execute trades for their clients. They use a method called selling order flow. This method allows them to sell your information to trading firms and they profit from the information they sell. Robinhood will claim this is ethical because every firm supposedly does this. Brokerage firms report how much they earn for selling orders and Robinhood consistently makes more money than all the other brokerage firms.
Paul Mampilly and other experts are concerned that Robinhood may unload equity orders in an uncontrollable fashion during a declining equities market. Regular brokerage companies take necessary precautions to lessen the impact of stock orders in the event of sharp stock declines. Without the safeguard of crossing orders, Robinhood would be forced to unload numerous orders all at once when the other trading firms are unwilling to purchase the order flows. This could mean that companies like Robinhood could make a stock market crash more detrimental. It would also take longer for the stock market to bounce back due to all the added sell orders made. As revolutionary as free trades may sound, Paul Mampilly would probably advise millennials to take caution about just jumping into the Robinhood app.