Free-Trading Commission Apps: Good or Bad (part 1/2)?

Context: Historically, access to the stock market for individuals has been challenging because of strong commissions and/or a rather complex and heavy admin onboarding process which means that it only makes sense for the ones who have a significant amount to invest.

Robinhood has set a new standard since 2013, allowing anyone to invest in either ETFs or stocks and with no minimum amount. I personally appreciate this positioning as they democratize the access to the stock market, they kill high fees practiced by banks or online platforms and finally make it a smooth onboarding process. However, this will to do good comes with a few perverse challenges for publicly traded companies, institutional investors and individual investors.

Exemple 1: Hertz filed for bankruptcy protection on the 22nd of May because it could not sustain its heavy debt pile (19bn$) as revenues did not come in during the Covid-19 period. As a reminder, when a company files for bankruptcy, debt holders will be paid first, before any shareholder. The price per share of Hertz fell to 0.56$ (May 26th) before bouncing back to 5.53$ (June 8th). How did this happen? Let’s take a look at Robintrack, which tracks the price per share of a company and the number of Robinhood users holding shares of this specific company.

• Historically, there were about 2K Robinhood users holding at least one Hertz share.
• On May 22nd the day of the filed bankruptcy protection they were 40K users
• On the 7th of June, they were 170K

Exemple 2: Whiting Petroleum also filed for bankruptcy on the 1st of April.

• Historically, they were about 2K Robinhood users holding at least one WLL share
• On the 1st of April, they were 12K users owning shares
• On the 12th of June, close to 60K users owned at least one share
• The share price peaked twice: from 0.34$ on the 1st of April to 1.68$ 20 days later. It then fell back to 0.75$ on May 28th before jumping to 3.48$ on the 8th of June.

Comment: These two examples demonstrate the challenges that bring these commissions-free trading apps (Robinhood, Freetrade etc):

• Will professional investors take into account the non-rational individual investors’ behavior to maximize their selling price?
• Will companies take advantage of the share price peak to sell shares and bring in some cash? (Hertz considered selling 250M unissued shares in the hope that retail investors would buy).
• Will it truly benefit the buyer (i.e individual investors)? This speculation phenomenon could actually make them poorer than richer.
• Are there any mental side effects for individual investors? This topic will be the second part of this article.

Key Takeaways: It will be interesting to closely monitor this event. Stock picking for individual investors is rather a lottery. If highly skilled professional public equity investors struggle to deliver an Alpha (i.e beat an index such as S&P 500), always ask yourself, why would you?

William