Instant-ly a VIP
Many of you have probably read the article by my colleague, Alex Warfel, on Robinhood’s “Instant” service (which if you haven’t you’re waayy behind the ball) and are probably convinced that it’s the devil and it will get you into all sorts of trouble.
Well, he’s right: Robinhood Instant, if not used wisely, can lead you to being put on FINRA’s naughty list–but that’s not to say that you should avoid the service altogether. Having Robinhood Instant is like knowing the owner of the hip, new nightclub in town: sure you can wait in line, but why should you if you can walk right in?
To summarize, Robinhood Instant is a “limited margin” account with a lot of ‘hand-holding,’ due in part to the vision of the developers: a trading platform for all people. From my experience (and that of many others), it achieves just that. Robinhood’s user experience is second-to-none when it comes to simplicity among brokerage apps, which are largely in the stone-age (here’s looking at you, Merril). From the ease of the registration process, to fingerprint scanner integration for log-in, to the simple (but often limiting) holdings-breakdown, Robinhood’s primary goal is to make your trading experience as straightforward and painless as possible (Note: the painless trading experience implies the actual buying and selling of securities, not removing the pain of taking a 30% loss to your portfolio). Realizing this makes it obvious why Robinhood offers their Instant service and why they’ve structured it in this way. For example, the way that margin accounts work at most brokerages is that they make you play by strict rules, as written by industry regulators. This means holding you to Regulation T’s initial margin requirement of 50% and at least the margin maintenance requirement of 25% on long holdings (often more, so there is a cushion before a Fed Call). That is because these accounts are for people who are knowingly margining securities (leveraging or short selling) in order to maximize return (as well as risk), which is entirely different from the way that Robinhood approaches margin.
With Instant, Robinhood is selling you freedom. It’s the freedom to pivot your money as quickly as you want to–without having to ‘know a guy.’ Robinhood, in regular folklore tradition, states the benefit of Instant as being able to jump back into the market without waiting for the trade to settle after three days (called T+3, where T is trade date and 3 is the number of business days the trade settles in afterwards), in fact, they don’t mention the word “margin” until a third of the way down the FAQ page. Sure, they only offer this service because they know that impatient people will love the fact that they can play with someone else’s money until theirs comes back from a sale, or that they’ll get extra ‘kickbacks’ due to the likely increase of trading frequency on the platform, but what really counts is that they are offering a service that is few and far between in the industry. Sure, you can walk into your financial advisor’s office and ask to be moved into a margin account, but you’ll end up signing a dozen sheets of paper and have to remember all of the fun regulation involved–just because you wanted to be able to buy another security with the money from this morning’s sale. Like those annuity commercials have burned into your head “it’s my money and I need it now,” it just sounds fair, right? When you sell something at a flea market, you don’t have to wait three days for the buyer to actually hand you the money, so why should you have to wait for money from a sale of securities? (If you’re interested in how it all works, see this SEC page about settlement).
Furthermore, with Robinhood Instant, you are never allowed to borrow more money than you already have ‘on the way’ to your account, so you’re not in a situation of long-term leverage. That means you don’t have to worry about your broker turning into a loan shark if you make a bad call (on that note, look out for my next article, where I explore Will Smith’s killer iRobots crossed with the dozens of ‘robo-advisors’ that you probably thought were your best friends, too).
As Uncle Ben said, “with great power comes great responsibility.” In the context of Robinhood Instant, the power to use partial margin gives you the opportunity to (hopefully) maximize return by being able to capitalize on other investments instantly (pun intended). That being said, don’t turn into the person who is jumping in an out of a single stock each day, because you’ll surely: 1) lose your money, and 2) be pegged as a pattern day trader, so there’s not much you can do to fix your losses. For me, Robinhood Instant allows me to trade with a reasonable degree of flexibility, without keeping a lot of cash in the account. I’m no ultra-aggressive maniac that wants to trade with as much margin as I can get my hands on (mostly because I would lose it all), I just enjoy the convenience of being able to use my money immediately after a deposit or a trade–is that so horrible? That being said, once the move to T+2 is finally made, and then to T+1 (see this report by the DTCC for more information), Robinhood may find that people aren’t using the Instant service quite as much as they once did.
So where do you fall in the argument? Do you want the convenience of instant cash availability, or do you prefer to stay away and not risk feeling the SEC’s wrath?