Can Access to Financial Markets Be Democratized?

Robinhood Financial and their quest to democratize access to financial markets ran into another speed bump this week, with Robinhood agreeing to pay a $1.25M fine to FINRA as a result of failing to insure the order flow they sold to third parties for execution without considering such factors as “price improvement” and best execution. We had previously noted in Sagacious that the “free” securities trades offered by Robinhood were somewhat of a misnomer given their practice of selling that order flow to other securities firms for execution, and it appears as if the policies and procedures in place to ensure best execution were inadequate. Without inside knowledge of the company’s operations, it would be interesting to know if the arduous growing pains for Robinhood (e.g., order flow policies, flaws in their leverage calculations, botched rollout of checking account) result from a lack of domain expertise or an aggressive growth trajectory that is pushing the envelope on product launches without adequate review and oversight. While it is yet to be seen on whether Robinhood will be able to realize their vision of democratizing access to financial markets for investors regardless of their wealth, there is no doubt they have been a major catalyst involved in disruption of access to financial markets for individual investors. The recent moves by Charles Schwab and TD Ameritrade to reduce trading commissions to $0 on equity trades is likely in partial response to low-cost brokerage firms like Robinhood and Interactive Brokers; however, it is still up for debate whether this is an area of investment management that needs to be disrupted. For example, does “free” equity trading promote optimal investor behaviour, or is disruption in the financial advice industry something that would be more material for investors over the long term?