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Last May, Robinhood said he had more than 13 million account holders. That number has probably grown significantly in recent months.
Tiffany Hagler-Geard / Bloomberg
The Super Bowl announcement that Robinhood will air this weekend doesn’t say much about stocks, and perhaps it is for the better.
An increase in stock trading by retail investors has put the investment app in the spotlight, and is likely to remain there for several months. In the coming weeks, the company’s CEO, Vlad Tenev, is expected to testify before Congress, and after that – perhaps as early as the second quarter – Robinhood should go public. The initial public offering process is likely to highlight Robinhood’s huge growth, but also the significant risks he faces in trying to overturn decades of Wall Street regulations.
Robinhood, founded in 2013, has gone from a courageous start-up to a central player in the brokerage war and is now an important part of the U.S. financial system. Its basic innovation – commission-free trading – has realigned the industry and helped attract millions of new Americans to invest in stocks.
Robinhood’s platform became the central battleground where retailers faced Wall Street during GameStop’s (ticker: GME) frenzy at the end of last month. But the company faltered at a key moment, prohibiting the purchase of
GameStop,
AMC Entertainment
(AMC), and several other stocks only when retail investors were entering.
Other brokers also imposed restrictions, but most continued to allow stock trading. Robinhood said he was suddenly forced to put more capital – up to 10 times normal levels – with his clearinghouse as a safeguard and could not allow the high volume of trading on his platform to continue. The company eventually eased those restrictions and lifted them entirely on Friday. But not before GameStop lost 85% of its value, a move that some investors attributed to Robinhood’s restrictions.
Robinhood declined to comment or make Tenev available to discuss the IPO, its financial statistics or criticism of the company. In blog posts, the company dispelled rumors of anything nefarious about trading limits, showing that the volume was “larger than normal”.
Robinhood did not release recent data on the size of its customer base, but last May, the company said it had more than 13 million account holders. Now, it probably has somewhere around 15 million. Data from web analytics firm SimilarWeb shows that Robinhood’s app has been downloaded more than a million times in just two days at the height of the GameStop frenzy, many times more than its competitors. It is closing the gap with the industry leader
Charles Schwab
(SCHW), which had around 30 million active accounts at the end of the fourth quarter.
Mathematics is not entirely in Robinhood’s favor. Although Robinhood is the growth leader, its clients tend to have much smaller balances than those of rival brokers, with some estimating that the average account size is below $ 5,000. The customers of some larger competitors tend to have more than $ 100,000.
Robinhood does not disclose revenue or profit numbers, but the securities records offer some hints. The company is heavily dependent on what is known as the order payment flow, which means that Robinhood gets a share of the money that market makers pocket with the spread between the purchase and sale prices of the assets they trade. In 2020, Robinhood made $ 687 million by paying the order flow in stock and option trades. (He also makes money from crypto negotiation, although his files do not disclose those figures.) CFRA analyst Pauline Bell estimates that about 80% of Robinhood’s revenue comes from paying the order flow, which would mean the company had about of $ 1 billion in revenue in 2020. Analysts say they suspect the company is unprofitable.
Robinhood’s last traditional round of private fundraising valued the company at $ 11.7 billion. Analysts think the company could go public for considerably more than the $ 13 billion it
Morgan Stanley
(MS) paid to buy E * Trade last year.
To achieve this assessment, Robinhood will likely have to convince investors that his revenue stream is safe and consistent. Payment for the order flow, however, is under review. In December, Robinhood was forced by the Securities and Exchange Commission to pay $ 65 million to settle claims that he cheated customers about how he made money, even though he was not getting the best execution for them. The company did not recognize the flaw. He said he changed the practices. Other brokers also earn money by paying for order flow – with the exception of Fidelity – but it is usually a much smaller percentage of their revenue
ClearBridge Investments analyst Miguel del Gallego, who covers finance companies, believes that payment for the order flow may undergo regulatory changes, although he expects general practice to continue.
Option trading, which can involve much greater risks than traditional stock trading, is also expected to receive more scrutiny. Robinhood obtained almost two-thirds of its payment flow revenue per order for options in the fourth quarter, which means that it could face enormous risks from any regulatory changes.
Robinhood’s business model often raises questions about its alignment with customers. “You could argue that your real end customers are these high-frequency traders who are actually taking this information and trading against what is known as uninformed investors,” said Gallego.
The company is now facing a negative reaction on social media. Some retailers mistook the company for the Wall Street bigwigs they despise. In an interview on Reddit, billionaire Mark Cuban wrote that Robinhood “let you down in style” and suggested that traders find a “brokerage with TRILLIONS OF DOLLARS in assets on their balance sheets”.
A survey of about 10,000 investors on the social network StockTwits showed that 40% of them were planning to change brokers – and the majority of those planning to change were Robinhood customers. Competitors are not lying. Schwab is succeeding in attracting younger customers, with about half of its new customers under the age of 41. Most new customers are signing up for trading tools that help them create self-directed accounts, says the company, at 20% in 2016 – a sign that Schwab is attracting a newly encouraged generation of traders who are not content with “Set and forget” with your accounts.
Robinhood faces another potential risk once it becomes public: as one person wrote on Reddit last week: “I can’t wait to buy Robinhood at Robinhood”.
Write to Avi Salzman at [email protected]