TheChek News Flow

Robinhood app luring and robbing amateurs — like in the dot-com era

The 1990s were simpler times. The news was dominated by Bill Clinton’s various sexual escapades, but also a bubble in internet-related stocks that was partly fueled by the democratization of stock trading.

The latter inflated the stock market generally, and if you’re old enough to remember, pretty much crashed it. Newbie investors took the brunt of the crash, with some losing their lifesavings, well after professional traders had sold their positions.

Now history may be repeating itself in the form of Robinhood, a stock-trading app that has become something of a cultural phenomenon during the pandemic.

Robinhood now boasts 13 million users and growing — about 3 million of those joined since COVID-19 hit. Bars and gyms are closed, people are in lockdown, but Robinhood gives you a chance to make money — and a way to alleviate boredom.

It’s aided and abetted by the massive government economic-relief effort that appears to make trading a no-lose proposition, enticing retail investors to flip stocks just like they did two decades ago.

During the dot-com era, there was a famous commercial of an office clerk teaching a C-suite executive how to trade online. Meanwhile, Robinhood is so easy to use that even a Luddite like me can set up an account and start trading stocks, options or cryptocurrencies in a matter of minutes, as I did in preparation for this story.

Plus it’s free, or at least that’s the impression the company wants to give (there are no commissions, but I’ll explain how the company makes money later).

There’s a lot to like about Robinhood. It’s a clean, easy-to-use interface. You can even get a free stock for signing up. I received a free share of a company called Agenus, trading under the symbol of AGEN for $3.28, a company described in my Robinhood portfolio as a “clinical-stage immuno-oncology company.”

Of course, I found none of this on Robinhood’s website. Nowhere does it tell me that my free share of stock is described by Wall Street pros as a speculative “penny stock” because it trades ­below $5 a share.

And that gets to the problem with Robinhood — it’s built for the person who doesn’t know a lot about the markets and doesn’t ask a lot of questions.

It’s also built for people who think they can trade like the big guys, people like Steve Cohen, Dan Loeb, Ken Griffin. To arm you against the professional, Robinhood gives users access to research and reporting in its news feed, but again, when much of this type of news hits the tape, the pros have already traded on it.

That’s not insider information, but the way the Wall Street information mill works. The big guys who pay the biggest commissions get the best info, not some guy trading a few shares of AGEN.

Robinhood is now valued at around $8 billion given its recent success, meaning it’s heading for a big IPO payday itself. You might ask how it makes money without charging brokerage commissions, and the simple answer is that it sells its trading-order flow to third parties that match buyers and sellers, a practice known as payment for order flow.

Big brokers pay Robinhood for order flow because they can trade out of these orders at huge profits, and given all the action on Robinhood, brokerages are clamoring for this business. In other words, nothing comes for free, and Robinhood users are the product, just like they are on Facebook.

I’m not a Robinhood hater. Founders Baiju Bhatt and Vlad Tenev come from immigrant families and met at Stanford and created a great business designed to “bring in those who’ve been left out of the system by making investing more approachable,” a company spokesman tells me. Moreover investing is a worthwhile pursuit, and that’s why there are mutual funds and index funds for the masses.

But there is a learning curve to buying and selling individual stocks, which isn’t investing but the profession of trading. That’s how Steve Cohen makes $1 billion a year and can afford to buy the Mets.

Many eye ‘Tik’ing a chance

The Microsoft bid to buy controversial social-media app TikTok is far from over, but already the tech giant is receiving interest from outside investors to join its bidding group, sources tell me.

These potential co-investors include General Atlantic Partners and Sequoia Capital, both current investors in TikTok’s Beijing-based parent, ByteDance, sources with knowledge of the matter say. In addition, don’t be surprised if a big private-equity firm jumps into the group.

Keep in mind, a lot can happen between now and the time that Microsoft actually makes a bid. It is currently focused on TikTok’s US operations — around 100 million monthly users, mainly Gen-Zers and social-media influencers in this country who use the short-video app to post everything from dance videos to commentary to political satire. But TikTok’s audience is expected to expand; sports franchises are said to be interested in posting.

That said, a Microsoft bid is far from a done deal. The company has looked at whether buying just the US portion makes sense since TikTok has 800 million ­users globally. Moreover, it will have to convince President Trump that the app is secure from Chinese influence.

While all this plays out, TikTok’s future in the US is ticking away.

On Thursday night, the Trump administration issued executive orders banning U.S. companies from working with TikTok, the popular social-media site owned by China’s ByteDance, and WeChat, the hugely popular global service owned by China’s Tencent Holdings (ticker: 700.Hong Kong).

The TikTok news wasn’t a surprise. The administration had targeted TikTok for weeks, leading Microsoft (MSFT) to consider a purchase of TikTok’s U.S. operations. That deal could work out nicely for Microsoft (see page 9).

But the Tencent news stunned investors. Its stock, which is listed in Hong Kong, tumbled on Friday before closing down 5%. It’s still up 40% so far this year.

Tencent has been steadily building a global reach, and its WeChat app has 1.2 billion users across the world.

The app has expanded beyond voice messaging and texts with services that allows users to post photos and videos, along with a Facebook -like timeline. Users can also do everything from banking to booking train tickets, among other functions.

Although the vaguely worded U.S. order focuses on WeChat’s operations, it left questions about whether other parts of Tencent’s business could be next, a move that would upend global companies relying on WeChat to do business in China.

President Donald Trump considers TikTok and WeChat to be security risks. WeChat could be removed from Apple and Google’s app stores in 45 days, when the orders take effect. Tencent said that it is reviewing the order, and TikTok reiterated that it would work with U.S. officials to find a way forward.

Gavekal Research’s Dan Wang wrote in a research note on Friday that a narrow interpretation of the executive order would block access to TikTok and WeChat in the U.S., while a broader one could potentially prevent any U.S. firm from supplying technologies to Tencent or ByteDance.

The news rippled through the videogame industry, where Tencent is a dominant force. The company owns Riot Games, publisher of League of Legends, and holds a 40% stake in Epic Games, publisher of Fortnite.

Morgan Stanley China equity strategist Laura Wang points out that Tencent’s direct revenue exposure to the U.S. market is just 2%, and that most of it is tied to gaming, not WeChat.

Tencent also has stakes in companies like Activision Blizzard (ATVI), Ubisoft Entertainment (UBI.France), Snap (SNAP), Spotify Technology (SPOT), and Tesla (TSLA), among others.

It’s a sprawling business that tech investors can’t ignore. On Friday, Activision shares fell 5%, while the Nasdaq Composite snapped a seven-day winning streak.

Hookup between Simon Property Group, Amazon would show how retail and logistics are converging more rapidly

Simon Property Group Inc., the biggest mall owner in the U.S., has been in talks with Amazon.com Inc. to turn some of its anchor department-store spaces into Amazon fulfillment centers, according to people familiar with the matter.

For Amazon, more fulfillment centers near residential areas would speed up the crucial last mile of delivery. For Simon, turning over what was once prime mall space to fulfillment centers shows it would be willing to relinquish an essential way to bring in more mall traffic to secure a steady tenant.

Simon’s discussions with the online retailer have been under way for months and began before the coronavirus pandemic, these people said. The two companies have explored converting stores formerly occupied by J.C. Penney Co. Inc. and Sears Holdings Corp. into Amazon distribution centers; in some cases, Simon and Amazon explored buying out occupied space from the retailers, these people said.

The talks reflect the intersection of two trends that predate the pandemic but have been accelerated by it: the decline of malls and the boom in e-commerce.

It wasn’t clear how many stores are under consideration for Amazon, and it is possible that the two sides could fail to reach an agreement, people briefed on the matter said. Simon malls have 63 Penney and 11 Sears stores, according to its most recent public filing in May.

Simon, which is the largest U.S. mall landlord by number of malls, is also considering other options for its vacated big-box spaces, say people familiar with the matter.

A number of U.S. malls are already doing business with Amazon, such as renting parking lots to Amazon’s huge van fleets. But for Simon to lease a large, well-located indoor location would be the rare instance of a major mall operator offering prime retail space to Amazon.

“To replace department stores, mall owners considered schools, medical offices and senior living,” said Camille Renshaw, chief executive officer of B+E, a real-estate investment brokerage firm. “With the current pandemic, industrial is the only thing left now.”

A hookup between Simon and Amazon would show how retail and logistics—especially delivery for the critical last mile—are converging more rapidly.

Many retailers use their stores as mini-fulfillment centers to speed delivery of online purchases, particularly since the pandemic curtailed in-person shopping and curbside pickup became a new alternative. Amazon would likely use the department-store space for a smaller version of its huge distribution centers, relying on vans to navigate suburban streets, analysts said.

Simon Property said it has entered into logistics ventures with some retail tenants to help with their fulfillment needs. Mall owner Washington Prime Group also has a new venture that leases space to retailers such as Dick’s Sporting Goods for inventory clearance.

Malls’ strategic locations often make them attractive as distribution hubs. Many are near main highways and residences. Amazon has already acquired the sites of some failed malls and converted them to fulfillment centers. FedEx Corp. and DHL International GmbH have done the same.

Amazon has also been in talks with multiple mall landlords about putting its coming grocery-store chain in J.C. Penney locations, according to a person familiar with the matter, though it couldn’t be determined if that included Simon malls.

Simon’s negotiations with Amazon also illustrate how critical it is for large mall operators to fill big-box vacancies, and the sort of compromises they might be willing to make. Sears and J.C. Penney have filed for bankruptcy protection and each continues to close dozens of stores. Other department stores such as Lord & Taylor also filed for bankruptcy early this month, while Nordstrom Inc. closed 16 stores in recent months.

These big-box spaces are typically more than 100,000 square feet and often span more than one level. Smaller mall tenants have counted on traffic to department stores to spill over to neighboring retailers, and many have clauses that allow them to reduce rents or break their leases if the department store stays empty.

Having an Amazon fulfillment center could still trigger some of these co-tenancy clauses, but some landlords say even that scenario would be preferable to keeping that yawning space vacant.

Still, Simon’s other tenants might not celebrate a deal with Amazon. Many blame the giant online retailer for severely disrupting their business. Its presence as a new neighbor would likely do little to pacify them, especially if Amazon’s new distribution capabilities in well-located Simon malls helped make it even more competitive by helping speed up its delivery times.

Fulfillment centers wouldn’t draw much additional foot traffic to the mall, though some employees could eat and shop at the mall. That is why landlords have preferred to replace department stores with other retailers, gyms, theaters or entertainment operators. Yet many of these tenants are struggling to survive during the pandemic and aren’t in expansion mode.

Simon would likely rent the space at a considerable discount to what it could charge another retailer. Warehouse rents are typically less than $10 a square foot, while restaurant rents can be multiples of that. Depending on when the leases were signed and their locations, department-store rents can be as low as $4 a square foot or as high as $19 a square foot.

But Amazon’s growth and healthy balance sheet would make it a reliable tenant at a time when most retail business has been waylaid by the pandemic. Simon, which owns 204 properties in the U.S., has had to contend with a ramp up in retail tenant closures in recent years that has accelerated during Covid-19.

Simon and Brookfield Property Group are putting in a joint bid for J.C. Penney, which filed for bankruptcy in May. By taking over the department-store chain, it gives them control over the store space and certain rights such as making changes to the parking structure, exits and access to shared space and roads.

The Woeful Inadequacy of School-Reopening Plans

We wasted the summer, while President Trump sowed distrust and promoted heedlessness. What’s left now is to see what can be salvaged.

School isn’t due to start in New York City until after Labor Day, but in Georgia some districts began opening last week, even though the state is averaging upward of three thousand new cases of covid-19 a day—more than France, Germany, and the United Kingdom combined. Schools opened in Paulding County, outside Atlanta, despite there being an outbreak among members of a high-school football team. Students posted photographs of the first days of the term at the high school, showing teen-agers jammed in two-way corridor traffic, most of them without masks. Brian Otott, the county’s school superintendent, said that the crowding did not violate its “protocols” and that “wearing a mask is a personal choice and there is no practical way to enforce a mandate to wear them.” School administrators did, however, warn students that they would be disciplined if they kept posting “negative” images.

Otott’s statement exhibited defiance, denialism, and a peculiar sort of defeatism—all factors that have contributed to what it is now clear are woefully inadequate preparations to open schools nationwide. In May, as the number of new cases in much of the country was declining, it might have been possible to believe that, by the fall, it would be high time and easy, as President Trump tweeted, to “OPEN THE SCHOOLS!!!” Indeed, many people who care deeply about vulnerable populations in ways that he has never shown are desperate to open schools. Children can be less safe at home than they are at school; families can face a crisis if a parent or guardian (often a mother) has to stay with a child rather than go to work.

But as Lori Lightfoot, the mayor of Chicago, put it last week, when she announced that all school instruction in her city will be remote at least until November, we have now moved to “a very different place in the arc of the pandemic.” Los Angeles, San Diego, Miami-Dade, Philadelphia, and Houston made similar decisions. In some places, sufficient groundwork simply hasn’t been done. In New York City, which has more than a million students, the virus has ebbed, but Mayor Bill de Blasio has offered an inept plan that relies on staff and equipment that don’t exist and that the city has no plans to pay for, all to give children in-person instruction only one to three days a week. Michael Mulgrew, the head of the United Federation of Teachers, has said that the city’s safety standards are “not enough.”

It remains true, thankfully, that the number of children who die from covid-19 is very small, but they can become quite ill and have high viral loads. (A video of Trump claiming, last week, that children were “almost immune” was taken down by Facebook for violating its policy on dangerous covid-19 misinformation.) And children, particularly older ones, can spread the virus; in Israel, the reopening of middle schools and high schools with relaxed social distancing preceded outbreaks in the wider community. A study by the Centers for Disease Control of a summer camp in Georgia found at least two hundred and sixty confirmed cases among the some six hundred children and staff members; half the children aged six to ten tested positive, the highest rate of any age group present. Staff had been required to wear masks; campers were not.

The focus on teachers’ safety, and the stand taken by their unions, has provoked some anger—this is, after all, a country willing to mandate that a teacher endanger her life but not that a teen-ager wear a mask. The most thoughtless voices, exemplified by a Wall Street Journal editorial last week entitled “School-Opening Extortion,” dismiss teachers’ fears and accuse them of being little more than pandemic shakedown artists looking to “squeeze more money from taxpayers.” Others argue that teachers are “essential workers,” and need to take the risks that come with the job, just as health-care or transit or food-industry workers do. But essential workers have every right to insist that sensible measures be taken for their safety. Teachers, because their unions are organized and politically influential, can stand up for themselves in a way that immigrant meatpacking workers cannot; in a sense, that power confers an obligation to speak out and set standards for what any worker in this long pandemic deserves.

Where does all this leave children, parents, and employers? Some families are forming at-home “pod schools” with friends; others are turning to private schools. The public-policy challenge is what will happen to students whose families do not have such resources. California is exploring a kind of triage, in which some elementary schools open, and older students stay home; there are inventive proposals, such as holding classes outdoors, but that still requires space, staffing, and funding. As grim as it is to say, though, the most practical thing that districts can do may be to improve remote learning, which will be part of the equation in all scenarios.

This spring, “remote instruction” was often a euphemism for “no instruction.” For some children, it involved little more than intermittently watching a screen. Others didn’t even have a screen to watch; in Los Angeles alone, a quarter of a million households with school-age children lacked a computer with broadband. Even if a home has a digital device, it may be shared by more than one student and by parents working remotely. Attempts to insure that students have what they need to learn have been patchy; as with so many things related to the pandemic, the money isn’t there. Many school systems, including New York City’s, have had their budgets cut. Democrats in Congress have proposed more than four hundred billion dollars in aid to public schools as part of the second pandemic relief bill, while Republicans have sought only a fraction of that.

If there is to be any hope for in-person schooling not only in the fall but in the spring—when a safe vaccine, even if one exists, might not be fully available—a rapid change in course is necessary. This might include targeted lockdowns, or trading closed restaurants and shops for open schools. It certainly demands a greater financial, political, and community commitment. Several countries, such as Germany and South Korea, have done the work both to beat back the virus and to allow schools to reopen in a reasonably safe manner, with measures such as mandatory masks, small classes, broad testing, and strict distancing.

The United States accomplished neither; as a nation, we wasted the summer, while Trump sowed distrust and promoted heedlessness. What’s left now is to see what can be salvaged. We’re already late for school.

US health secretary’s Taiwan trip is sign of strategic shift

Visit highlights island’s growing importance in clash between Washington and Beijing

A trip by the US health secretary to a country that has successfully contained coronavirus would not normally be controversial — unless that country is Taiwan, which China claims as its territory.

Alex Azar, who landed in Taiwan on Sunday night, is the most senior US cabinet official to visit the island since Washington broke off diplomatic relations with Taipei in 1979.

The visit highlights the strengthening of ties between Taiwan and the US, its unofficial protector, as well as the new risks it creates for Taipei as it becomes a crucial battleground in the escalating clash between the world’s two biggest economies.

“We ought to push the envelope because the envelope was sealed by us, and we have opened it before,” said William Stanton, a former director of the American Institute in Taiwan, the US’s quasi-embassy in Taipei. “But there is the worry — and it is one Taiwan needs to consider as well — that the China threat is consistently there.”

Under commitments made to Beijing as part of its switch in diplomatic relations from Taiwan to the People’s Republic of China 41 years ago, Washington has long avoided any semblance of official ties in its dealings with Taipei. It has a set of internal rules stipulating that communication between government officials must go through AIT, that Taiwan’s government must only ever be referred to as “authorities” and that administration officials must not meet representatives of Taiwan in US government offices.

But as the political establishment — and public opinion — in the US has turned against China, pressure has built for better treatment of a fellow democracy.

Under Donald Trump, the US has deepened its engagement through a flurry of co-operation initiatives, ranging from cyber security to gender issues, more substantive military contacts and higher profile bilateral government exchanges.

Since late 2017 the US president has signed six laws aimed at supporting Taiwan, including streamlining arms sales, encouraging high-level visits, and helping Taiwan preserve its remaining diplomatic allies and gain greater participation in international organisations.

At the same time, adherence to Washington’s strict internal protocol guidelines has started to fray — an issue regarded as highly politically sensitive to the Chinese government, which abhors any sign that Taiwan might gain recognition.

Two weeks ago, for example, David Stilwell, assistant secretary of state, received Taiwan’s new envoy to the US at the state department, a departure from protocol as prescribed under the department’s internal rules.

Senior US officials including Mike Pompeo, secretary of state, and Matt Pottinger, deputy national security adviser, have also set a new tone. They have made high-profile statements in which they praised Taiwan, called it a force for good in the world, and referred to Tsai Ing-wen, the country’s top elected official, by her title of president. 

One recent pro-Taiwan law even called Taiwan a country.

However, despite elation in the Taiwanese government about what officials on both sides have called the best relations in decades, observers are wary.

“There are people in the administration who want to improve relations with Taiwan because they believe Taiwan is a strong advocate for American values and a good friend to the US,” said Shelley Rigger, a professor at Davidson College in North Carolina and a leading Taiwan expert.

But she added: “Others want to upgrade relations with Taiwan as a way of tweaking Beijing and showing that the US is not afraid to challenge Beijing.”

Analysts said the US had made many substantive changes but it had not taken Taiwan’s economic interests into account. The administration has failed to seriously consider a bilateral trade agreement which could help mitigate Taiwan’s exclusion from other regional trade deals due to Chinese pressure.

Washington’s efforts at cutting off Chinese technology group Huawei from key chip suppliers and disintegrating global supply chains has also squeezed Taiwan, home to TSMC, the world’s largest contract chipmaker.

Most important, observers are concerned that Mr Trump — who has described Taiwan as insignificant by comparing it to the tip of his pen — could use the country as a pawn in his fight against China.

Prof Rigger said the president’s erratic foreign policy record — including his abandonment of the Kurds in Syria and his flip-flopping in his dealings with North Korea — might suggest to Beijing that he could back down in the face of serious risk.

“If I were Beijing I would be asking myself: ‘If the US gives us a justification to attack Taiwan, what are the odds that he will change his pattern of cutting and running?’” she said. “Is Donald Trump really going to go to war with China three months before the election — over a pen nib?”

Proportion of trades made electronically continued to rise even as markets calmed

The coronavirus crisis has ushered in a “dramatic” shift in the world’s largest bond market away from traditional trading by phone towards electronic execution, according to a report produced by JPMorgan Chase.

The figures from the Wall Street bank, one of the biggest Treasury dealers, suggest that a gradual drift towards electronification of the market for US government bonds was accelerated by the impact of the pandemic as many of the bank’s clients — who found themselves suddenly working from home in a volatile market meltdown — preferred to transact based on prices quoted on a screen rather than picking up the phone to negotiate with a human trader.

Over the past two years, roughly 50 per cent of trading in the US Treasury market has been carried out electronically, according to the report by JPMorgan’s Treasury trading desk, seen by the Financial Times. That figure surged to 70 per cent in April and has continued to rise even as the most acute market stress eased, hitting 77 per cent in June. The data suggests that “the way these securities trade is starting to change dramatically”, the report said.

“A lot of people working remotely, both in terms of clients and trading floors, is definitely a factor in accelerating this trend,” said Thomas Pluta, co-head of North America rates at the bank. “Many clients now have a comfort level in trading these products electronically. You might see this trend reverse partly [as market participants return to the office] but I don’t think it will go back to where it was.”

The US Treasury market, the world’s most liquid bond market, has led the shift to electronic trading, but still lags behind other asset classes such as equities in the adoption of the technology. Typically, the most heavily traded “on-the-run” bonds are more likely to change hands electronically than more thinly traded “off-the-run” securities, which are older issues of the benchmark bonds and make up the majority of the market.

But starting in March, even off-the-run Treasuries — which saw the biggest price dislocations when liquidity cratered — have seen a “noteworthy” shift towards electronic execution of trades, according to the report. 

During March’s market turmoil, a desperate dash for cash led foreign central banks and companies to dump their Treasury holdings. Many fund managers were also forced to sell in order to meet redemptions from investors. Further exacerbating the situation was the unwind of a popular and highly leveraged trade involving Treasury securities and their corresponding futures contracts. 

Coupled with the fact that banks had limited capacity to absorb the deluge of selling hitting the market because of regulatory constraints, trading conditions quickly deteriorated. Volatility surged and traders complained brokers were at times not quoting prices. 

The sudden evaporation of liquidity in what is supposedly the safest corner of financial markets prompted a preference for so-called firm quotes — offers to buy bonds that are not subject to cancellation — from these sellers. JPMorgan said this may have contributed to the shift toward electronic trading. For trades of above $100m, investors continued to show a preference to trade by phone, the report added.

Despite the scale of the shift, Mr Pluta said he does not expect electronic trading to supplant human traders. Some automated systems are overseen by traders, who also work with the programmers who build trading algorithms.

“This is not the machines taking over,” said Mr Pluta. “It’s more that the role of the trader has changed. Voice traders are very much involved in the electronic trading.”