Robinhood: What Does The Future Hold?
Over the last month, Robinhood has been making a lot of headlines. The commission-free trading app, established in April 2013, has had a lot of recent ups and downs. The app is oriented towards the young and wide-eyed investor. In early 2015 it had an average user age of 26 years old, and 25% of the users were first-time investors (Timms). However, it seems like its users and the finance industry have matured in the last few years as it hits its half-decade anniversary. The users have learned to exploit the premium service of Robinhood Gold which has allowed some to gain seven-figure positions. Brokerage giants have converted to commission-free trading to keep up with the Silicon Valley start-up. This leads to a lot of speculation to see where the platform may go from here.
In early November, a bug in the app’s infrastructure permitted traders to trade with excess borrowed funds through the Gold service, which allows investors to trade on money borrowed from the company a.k.a. margin, for $5 a month. This is perfectly fine on its own, but opportunistic users would invest in call options with low strike prices and quickly make a profit off of these trades. The system would accidentally put the money into the user’s capital as buying power and the investor could double this as buying power using Robinhood Gold’s margin (Kochkodin). This “infinite money cheat code” was made viral by the r/WallStreetBets subreddit, as users were turning in ridiculous profits, one of which turned $4,000 into a $1 million position.
Another piece of bad news for Robinhood is that top brokerages such as Charles Schwab and TD Ameritrade have learned to keep up with their competition and gave in to commission free trading (Fitzgerald). Commission fees are ultimately for the profit of the brokerage, as it costs them pennies to make a trade. However, as recent as the 1970s, a single trade could cost hundreds of dollars. The SEC has attempted to restrict the high fees, with them decreasing to $70 in 1975 and even further to below $20 via online brokers in the 1990s. In the last 5 years, options have traded at anywhere from $5 to $8 before Robinhood went mainstream and people started to question why they were paying a fee to invest their own money in the first place (Divine).
However, all is not bad for the millennial-targeted, flawed trading system. As of December 4th, the app has surpassed the 10 millionth account milestone. Usage on the app that was founded by Baiju Bhatt and Vlad Tenev has been increasing exponentially (Fitzgerald). This is a very impressive improvement for the California-based company, yet they would be wise to remain humble when comparing their competition’s size with their own. Their main competitors Charles Schwab and TD Ameritrade serve about 24 million clients combined. It is important to note their combined quantity of accounts as Schwab announced in November that they are buying TD Ameritrade.
Another piece of good news for Robinhood is that they were valued at $7.6 billion after their last funding round. This is a large improvement from their March 2015 standing wherein they only raised $16 million in venture funding (Fitzgerald/Timms).
Since Robinhood’s competition has caught up to them, the next thought would be what direction will they move in to stay ahead? When the app was still in the early works, Bhatt and Tenev’s plan to profit off of the app was to create “revenue mainly through marginal lending and premium services” which has proven to be exploitative and inefficient. Most members don’t buy the Gold service and it has proven to be the kryptonite of the app as previously mentioned. With these options executed and not fully working in their favor, their next plan involves public listing. Robinhood hired former Amazon Vice President of Finance Jason Warnick as its first ever chief financial officer to support the possible IPO (Rooney). Warnick was at Amazon for almost twenty years and has accumulated the experience and reputation necessary to become a CFO. He is part of their long-term plan to go public in the next few years. With that being said, it should be interesting to see where Robinhood goes from here on out.
Works Cited
"Can Robinhood Use Millennials as a Springboard to Institutional Success?" Timms, Aaron: Institutional Investor Mar. 2015. Business Insights: Global. Web. 5 Dec. 2019. http://bi.gale.com.remote.baruch.cuny.edu/global/article/GALE%7CA422695654/79625840e90db3b46e4f0e6d7a4def22?u=cuny_baruch
Divine, John. “How Robinhood Changed an Industry.” U.S. News & World Report, U.S. News & World Report, 17 Oct. 2019, https://money.usnews.com/investing/investing-101/articles/how-robinhood-changed-an-industry.
Fitzgerald, Maggie. “Start-up Robinhood Tops 10 Million Accounts Even as Industry Follows in Free-Trading Footsteps.” CNBC, CNBC, 4 Dec. 2019, https://www.cnbc.com/2019/12/04/start-up-robinhood-tops-10-million-accounts-even-as-industry-follows-in-free-trading-footsteps.html.
Kochkodin, Brandon. Bloomberg.com, Bloomberg, 5 Nov. 2019, https://www.bloomberg.com/news/articles/2019-11-05/robinhood-has-a-glitch-that-gives-traders-infinite-leverage.
Rooney, Kate. “Robinhood Hires Amazon Veteran as CFO - a Key Step in Its Path to Eventual IPO.” CNBC, CNBC, 27 Nov. 2018, https://www.cnbc.com/2018/11/27/robinhood-hires-amazon-veteran-as-cfo-a-key-step-in-its-path-to-ipo.html.
