I started paying commissions before there was an app for any of this. My first trades cost $20 a pop. Later, $7. Before that, my dad’s generation paid $300 per trade to a full-service broker, until Charles Schwab and E*Trade brought the cost down for normal people, what the industry calls retail investors. Nobody day-traded then. You saved up, thought for weeks, and pulled the trigger a couple of times a year. A wrong guess had a price, in fees and in your own attention.
So when Robinhood made trading free, that was genuinely good, and I’ll say so. The zero-commission model it pushed did more than win customers. It dragged the whole industry down with it. The same race is why you can buy and sell stocks for free at Fidelity, Charles Schwab, and ETrade today, and it’s part of the pressure that folded TD Ameritrade into Schwab and ETrade into Morgan Stanley. My old $20 clicks turned into $0. That’s real progress, and it started with a rival I never use.
The problem is the business model underneath the free trades. If you don’t pay for a product, you are the product. Robinhood’s customers aren’t really the people who download the app. The people who pay Robinhood are the market makers.
What a market maker is
When you place an order on any trading app, someone has to actually execute it. For most retail brokers, your buy order doesn’t shop itself around to the exchange that offers the best price. It goes to a market maker instead.
A market maker is a firm that stands ready at all times to buy and sell a particular stock. It earns its keep on the spread, the small gap between the price it pays when it buys and the price it charges when it sells. That gap is tiny per share, pennies at most, but it adds up across millions of orders.
Market makers don’t do this out of charity. They buy order flow because retail orders are profitable to fill. And the broker that sends them the flow? It gets paid for sending it. That fee is called payment for order flow, and for Robinhood it has been the main source of revenue. The shares you buy aren’t the product. You are.
None of this is illegal. It’s the standard architecture of free trading, and the big established brokers use the same rail. The difference shows up in what the app is built to encourage, because an app that makes money on orders wants more orders.
The GameStop freeze
Here’s where I got off the ride. January 2021. GameStop, a struggling video game retailer, became the symbol for small investors squeezing the funds that had shorted it. The stock rose 135% in a day. Retail traders on Robinhood were at the center of it.
The next morning, Robinhood and other platforms restricted trading, letting users close positions but not open new ones. Holders who had just watched GameStop double could buy no more; they could only sell or sit. Robinhood said the move was about risk and capital requirements. Whatever the technical cause, it starved the squeeze the retail crowd had just built, right at the moment the crowd was winning.
I know brokers do impose restrictions in wild markets, and this wasn’t only Robinhood. But a platform built to look like an arcade, where the game stopped favoring the players exactly when it mattered, showed its whole arrangement at once. The app that called itself a democratizer of finance cut off the traders. The market makers it routes orders to, the ones on the other side of every trade, kept their side of the market running.
The casino is in the design
The trading halt was one event. The design is constant.
Confetti when you make your first trade. A streak you have to feed by opening the app daily, or you lose it. A free share of stock for signing up. Fractional shares so you can own a sliver of a meme stock for two bucks. I’ve never had the app myself, so I’ll hold this at arm’s length, but the pattern is public and it’s the pattern. Nothing in that kit nudges you toward patient, boring, buy-and-hold investing. It’s all built to get you to open the app, check your position, and trade again. Activity is the feature, because activity is where the revenue is.
Investing should be boring
And boring is what works. A study by Brad Barber and Terrance Odean looked at 66,465 real brokerage accounts over six years. The households that traded most earned an annual return of 11.4%. The market, over the same period, returned 17.9%. The more people traded, the worse they did, and the gap was almost exactly the cost of trading.
You’ve probably heard the legend that the best investors are dead ones, or that Fidelity once found its best accounts belonged to people who forgot they owned them. That specific study never checks out, and I won’t repeat it as fact. The lesson survives anyway, because it’s the same lesson as the real research: the account you leave alone does fine, and the account you keep touching does worse.
That’s the whole case against Robinhood for me. The trading is real and the broker is registered, but the app and the business model point in exactly the wrong direction. An interface engineered for engagement and a revenue model that pays on activity will reliably produce more trading. More trading, on the evidence, produces less money.
What I use instead
Fidelity, Charles Schwab, and E*Trade. They’re dull. Their apps don’t rain confetti, and nothing nags you to open them. That dullness is the feature.
The actual plan is boring on purpose. Automate a monthly purchase of a total-market index fund in a retirement account. Buy it, buy it again next month, and don’t open the app. Rebalance once a year at most. The trades that matter are the automatic ones, and they don’t need an interface at all.
Robinhood got a lot right, and it deserves credit for the fee revolution it started. But a brokerage that sells your order flow and dresses trading up as a game is a casino wearing a broker costume. Casinos are fine to visit when you know what they are. I prefer to keep my investing where nothing sparkles.
