The Robinhood app icon on an iPad. Credit: Flickr / Focal Foto
A study finds that Robinhood has higher transaction costs for trading options than other competitors, disproving the company’s claim of having low fees.
The study, released in early September, compares Robinhood to five other competitors including top investment firms Charles Schwab, Fidelity Investments, and Vanguard which executed orders at a lower price for investors than the other platforms. After 6,962 buy or sell transactions executed on 18 stocks and funds from March to June of this year, the three finance professors for the University of California Irvine and Washington University in St. Louis, MO concluded Robinhood had the highest transaction fees for customers.
The study disproved Robinhood’s strategy of being the cheapest trading platform for retail investors. Findings show that Robinhood is more costly for traders than other platforms in the study for roundtrip option transactions–buying and selling the same option. Its low fees are overshadowed by hefty execution costs that aren’t required to be reported to the public resulting in users losing money on hidden fees more than they would anywhere else.
The market didn’t seem to care about the unfavorable news. Despite a small dip in trading after reports surfaced during the last full week of September HOOD closed the week higher, up 5.24%, while the S&P 500 Index gained 0.34%. Hood is up 76.06% year-to-date, the S&P 500 is up 19.5% during the same period.
Options are high risk but can yield a high reward; they give investors the right to acquire stocks at a certain price for a set period of time–commonly referred to as an option contract.
Most brokers profit from options by collecting payment, often a portion of the investor’s purchase price, from the trading firm, or payment for order flow (PFOF). The study found a positive correlation between these payments and expensive hidden fees. The result is that less of the funds investors allocate towards acquiring options actually go towards their purchase request.
Wall Street remains bullish about Robinhood. Dan Dolev, a senior analyst at Mizuho Financial Group said they’re a leader in young generation trading. “They’re slowly getting more mainstream,” he said, adding that he believes investors should buy shares of the company.
Majority of analysts have a buy rating for Robinhood, according to Bloomberg, and have an average price target of $23.37.