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In May last year, Robinhood said it had more than 13 million account holders. This number has probably increased significantly in recent months.
Tiffany Hagler-Geard / Bloomberg
The Super Bowl ad aired by Robinhood this weekend doesn’t talk much about stocks, and maybe it’s for the better.
An increase in stock transactions by retail investors has put the investment application in the spotlight and is likely to remain there for a few months. In the coming weeks, the company’s CEO, Vlad Tenev, is due to testify before Congress, and then – perhaps immediately after the second quarter – Robinhood is expected to go public. The initial public offering process will likely highlight Robinhood’s huge rise, but also the significant risks it faces in trying to overturn decades of Wall Street rules.
Robinhood, founded in 2013, has grown from a tough start-up to a central role in brokerage wars and is now an important part of the US financial system’s healthcare facility. Its core innovation – commission-free trading – has realigned the industry and helped attract millions of new Americans to equity investments.
The Robinhood platform became the central battleground where retailers took to Wall Street during the GameStop frenzy (ticker: GME) late last month. But the company faltered at a key moment, banning the purchase
GameStop,
AMC Entertainment
(AMC) and a few other stocks as well as retail investors rushed in.
Other brokers also imposed restrictions, but most continued to allow shares to be traded. Robinhood said it was suddenly forced to place more capital – up to 10 times normal levels – with the clearing house as collateral and could not allow the high trading volume on its platform to continue. Finally, the company eased those restrictions and lifted them completely on Friday. But not before GameStop lost 85% of its value, a move that some investors blamed on Robinhood restrictions.
Robinhood declined to comment or make Tenev available to discuss the IPO, its financial statistics or the company’s criticisms. In the blog posts, the company dispelled rumors about anything bad about trading limits, showing that the volume was “larger than the norm.”
Robinhood did not release recent figures on the size of its customer base, but in May last year, the company said it had more than 13 million account holders. Now, it’s probably somewhere north of 15 million. Data from web analytics company SimilarWeb shows that the Robinhood app has been downloaded more than a million times in just two days, at the height of the GameStop frenzy, many times more than competitors. Reduces the gap with the industry leader
Charles Schwab
(SCHW), which had about 30 million active accounts at the end of the fourth quarter.
However, mathematics is not in favor of Robinhood. While Robinhood is the growing leader, its clients have tended to have much smaller balances than those of rival brokers, with some estimating that its average account size is below $ 5,000. Customers of larger competitors tend to have over $ 100,000.
Robinhood does not release revenue or profit figures, but securities deposits provide some clues. The company depends heavily on what is known as order flow payment, which means that Robinhood receives some of the money market makers receive from the spread between supply and demand prices for the assets it markets. trades them. In 2020, Robinhood earned $ 687 million in payment for the flow of orders on stock and option transactions. (It also makes money from cryptocurrency trading, although its records do not disclose these numbers.) CFRA analyst Pauline Bell estimates that about 80 percent of Robinhood’s revenue comes from paying for order flow, which would mean the company had close $ 1 billion in revenue in 2020. Analysts say they suspect the company is not profitable.
Robinhood’s last traditional fundraising round valued the company at $ 11.7 billion. Analysts believe the company could go much higher than the $ 13 billion
Morgan Stanley
(MS) paid for the purchase of E * Trade last year.
To make this assessment, Robinhood will likely need to convince investors that its revenue stream is safe and consistent. However, the payment for the order flow was examined. In December, Robinhood was forced by the Securities and Exchange Commission to pay $ 65 million to settle claims it misled customers about how it was making money, even though it was not getting the best execution for them. The company did not admit guilt. He said he changed practices. Other brokers also earn money by paying for the order flow – with the exception of Fidelity – but it is generally a much lower percentage of their income.
ClearBridge Investments analyst Miguel del Gallego, who covers financial companies, believes that payment for the flow of orders could see regulatory changes, although he expects general practice to continue.
Option trading, which may involve much higher risks than traditional stock trading, is also likely to gain more control. Robinhood generated nearly two-thirds of its payment revenue for the order flow from options in the fourth quarter, which means it could face an oversized risk from any regulatory changes.
Robinhood’s business model has often raised questions about its alignment with customers. “It can be argued that its real customers are these high-frequency traders who actually take this information and trade against what are called uninformed investors,” Gallego said.
The company is now facing an adverse reaction on social networks. Some retailers have amassed the company with the Wall Street villains they despise. In a Reddit interview, billionaire Mark Cuban wrote that Robinhood “disappointed you greatly” and suggested traders find a “broker with MILLIONS of dollars in assets on their balance sheet.”
A survey of about 10,000 investors on the social network StockTwits showed that 40% of them intended to change brokers – and most of those who intended to switch were Robinhood clients. Competitors do not lie down. Schwab is successful in attracting younger customers, with about half of its new customers under the age of 41. Most new customers sign up for trading tools that help them create self-directed accounts, the company says, from 20% in 2016 – a sign that Schwab attracts a recently encouraged generation of traders who are not content to “set and forget” it. with their accounts.
Robinhood faces another potential risk once it’s published: as one person wrote on Reddit last week: “I can’t wait to brief Robinhood on Robinhood.”
Write to Avi Salzman to [email protected]