Legendary investor and Berkshire Hathaway CEO Warren Buffett slammed stock-trading app Robinhood — saying it’s turning the market into a on line casino.
Robinhood has “become a very significant part of the casino aspect, the casino group, that has joined into the stock market in the last year or year and a half,” Buffett mentioned at Berkshire Hathaway’s annual assembly on Saturday.
He added that there’s “nothing illegal to it, there’s nothing immoral, but I don’t think you build a society around people doing it.”
Robinhood, which pioneered “free trading,” payments itself as a democratizer of the stock market. The app has made buying and selling extra accessible to youthful individuals and people with much less money available by eliminating fee charges.
Instead, the app relies on a practice called payment for order flow as its revenue engine. The observe, whereas widespread, has usually been criticized for its lack of transparency.
Market makers, akin to Citadel Securities, pay Robinhood and different on-line brokers for the proper to execute buyer trades. The dealer is then paid a small payment for the shares which can be routed, which might add as much as tens of millions when prospects commerce actively.
“American corporations have turned out to be a wonderful place for people to put their money and save but they also make terrific gambling chips,” Buffett mentioned Saturday.
“If you cater to those gambling chips when people have money in their pocket for the first time and you tell them they can make 30 or 40 or 50 trades a day and you’re not charging them any commission but you’re selling their order flow or whatever…I hope we don’t have more of it.”
Robinhood, which is eyeing an IPO later this 12 months, landed in regulators’ crosshairs earlier this 12 months when the app helped gasoline a GameStop stock frenzy that noticed the stock run up practically 400% at one level.
At a Congressional hearing in February, lawmakers pressed Robinhood CEO Vlad Tenev on the corporate’s relationship with market makers and its use of cost for order stream. A handful of lawmakers additionally alleged that Robinhood gamifies the stock market.
In a December lawsuit, Massachusetts Secretary of State Bill Galvin mentioned Robinhood used aggressive tactics to attract inexperienced investors. He accused the app of utilizing methods that handled buying and selling like a sport to lure younger, inexperienced prospects, together with having confetti rain down for each trade made on its app, a practice the app ditched in March.
Buffett’s long-time lieutenant Charlie Munger additionally took Robinhood to job.
“I think it’s just God awful that something like that brought investments from civilized men and decent citizens,” Munger mentioned. “It’s deeply wrong. We don’t want to make our money selling things that are bad for people.”
In a statement to CNBC, Robinhood defended its customers and mentioned it’s breaking down obstacles to buying and selling which have existed for generations.
“There is an old guard that doesn’t want average Americans to have a seat at the Wall Street table so they will resort to insults,” a Robinhood spokesperson informed CNBC.
“The future is diverse, more educated and propelled by engaging technologies that have the power to equalize. Adversaries of this future and of change are usually those who’ve enjoyed plentiful privileges in the past and who don’t want these privileges disrupted. Their criticisms are unfortunate but they prove why Robinhood’s mission is in fact critical.”
“The new generation of investors aren’t a ‘casino group.’ They are tearing down old barriers to investing and taking control of their financial futures. Robinhood is on the right side of history,” the spokesperson added.
A spokesperson additionally said to Axios that “if the last year has taught us anything, it is that people are tired of the Warren Buffetts and Charlie Mungers of the world acting like they are the only oracles of investing.”