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Last May, Robinhood said it had more than 13 million account holders. The number has probably grown significantly over the past few months.
Tiffany Hagler-Geard / Bloomberg
The Super Bowl ad that Robinhood airs this weekend is not talking much about stocks, and maybe that’s for the best.
A boom in stock trading by retail investors has put the investment app in the spotlight and is likely to stay there for a few months. In the coming weeks, CEO Vlad Tenev will testify before Congress, and thereafter – perhaps as soon as the second term – Robinhood is expected to go public. The initial listing process is likely to highlight the enormous growth of Robinhood, but also the significant risks with which you are trying to overthrow decades of Wall Street norms.
Founded in 2013, Robinhood has risen from a luxury start to the central player in the brokerage wars, and is now an important part of the plumbing work of the US financial system. Its basic innovation – commission-free trading – has reshaped the industry and helped millions of new Americans invest in equities.
Robinhood’s platform has recently become the central battlefield where retailers have plagued Wall Street during the GameStop (ticker: GME) frenzy. But the company faltered at an important moment and the purchase of
GameStop,
AMC Entertainment
(AMC) and several other stocks just as retail investors stormed in.
Other brokers also imposed restrictions, but most still allowed stock trading. Robinhood said it was suddenly forced to put more capital – as much as ten times normal levels – with its clearing house as a guarantee, and could not continue the high trading volume on its platform. The firm eventually eased the restrictions and lifted them completely on Friday. But not before GameStop lost 85% of its value, a move that blames some investors for Robinhood’s limitations.
Robinhood declined to comment or make Tenev available to discuss the IPO, its financial statistics or the company’s criticisms. In blog posts, the company dispelled rumors of anything ominous about the trade restrictions, and it showed that the volume was ‘greater than the norm’.
Robinhood has not released recent figures on the size of its customer base, but last year the company said it has more than 13 million account holders. Now it probably has somewhere north of 15 million. Data from web analytics company SimilarWeb shows that the Robinhood app was downloaded more than a million times in just two days at the height of the GameStop frenzy, many times more than competitors. This narrows the gap with the industry leader
Charles Schwab
(SCHW), which had approximately 30 million active accounts at the end of the fourth quarter.
Mathematics, however, is not all in Robinhood’s favor. While Robinhood is the growing leader, its clients tend to have much smaller balances than those of competing brokers, and some believe its average account size is below $ 5,000. Customers of some larger competitors usually have more than $ 100,000.
Robinhood does not publish revenue or profit numbers, but bond submissions offer some tips. The company is heavily dependent on what is known as payment for order flow, which means that Robinhood gets a share of the money that marketers trade from the spread between the bid and ask prices on their assets. In 2020, Robinhood will earn $ 687 million from paying for order flows on stocks and options. (It also makes money trading cryptocurrencies, although the numbers do not disclose the numbers.) CFRA analyst Pauline Bell estimates that about 80% of Robinhood’s revenue comes from paying for order flows, which would mean that the company almost $ 1 billion in revenue in 2020. Analysts say they suspect the company is not profitable.
Robinhood’s last traditional round of private fundraising valued the company at $ 11.7 billion. Analysts believe the company could sell significantly more than the $ 13 billion
Morgan Stanley
(MS) paid last year to buy E * Trade.
To achieve the valuation, Robinhood will likely need to convince investors that its revenue stream is safe and consistent. However, the payment for order flow was scrutinized. In December, Robinhood was forced by the Securities and Exchange Commission to pay $ 65 million to settle claims that he had misled customers about how it was making money, even though it was not the best execution for them. The company did not admit error. It is said to have changed the practice. Other brokers also earn money for order flow payments – with the exception of Fidelity – but this is generally a much smaller percentage of their revenue.
Miguel del Gallego, analyst at ClearBridge Investments, which covers financial ventures, believes that paying for order flows could bring about regulatory changes, although he expects the general practice to continue.
Option trading, which can pose much greater risks than traditional stock trading, is also likely to be explored further. Robinhood made nearly two-thirds of its pay-for-order flow from options in the fourth quarter, meaning it could pose excessive risk due to any regulatory changes.
Robinhood’s business model has often raised questions about connecting with customers. “The argument can be made that the real end customers are these high frequency traders who take this information and trade against the uninformed investors,” Gallego said.
The company is now getting a setback on social media. Some retailers have shut down the company with the Wall Street bigwigs they despise. In an interview on Reddit, billionaire Mark Cuban wrote that Robinhood had “let you down” and suggested that traders should find a “broker with billions of dollars in assets on their balance sheet”.
A survey of 10,000 investors on the social network StockTwits showed that 40% of them were planning to change brokers – and most of those planning to switch were Robinhood customers. Participants do not lie. Schwab succeeds in attracting younger customers, with about half of its new customers under the age of 41. The majority of new customers sign up for trading tools that help them set up self-directed accounts, the firm says by 20% in 2016 – a sign that Schwab is attracting a new generation of traders who are not happy to set it up and do not forget ‘with their accounts.
Robinhood faces another potential risk once it becomes known: As one person wrote on Reddit last week: “I can not wait to fall short of Robinhood on Robinhood.”
Write to Avi Salzman by [email protected]