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Last May, Robinhood said it had more than 13 million account holders. That number has likely risen significantly in recent months.
Tiffany Hagler-Geard / Bloomberg
The Super Bowl ad that Robinhood airs this weekend doesn’t talk much about stocks, and maybe that’s for the better.
A surge in equity trading by private investors has put the investment app in the spotlight and is likely to stay there for several months. In the coming weeks, the company’s CEO, Vlad Tenev, will testify before Congress, and after that – perhaps as early as the second quarter – Robinhood is expected to be made public. The IPO process is likely to highlight Robinhood’s tremendous growth, but also the significant risks it faces as it tries to topple decades of Wall Street standards.
Founded in 2013, Robinhood has grown from a brave start-up to a pivotal player in the brokerage wars, and it is now an important part of the plumbing of the U.S. financial system. The basic innovation – commission-free trading – has aligned the industry and helped attract millions of new Americans to invest in stocks.
Robinhood’s platform became the central battleground where retailers conquered Wall Street during the GameStop (ticker: GME) frenzy late last month. But the company faltered at a key time and banned buying
GameStop,
AMC Entertainment
(AMC), and several other stocks, just as private investors are rushing.
Other brokers also imposed restrictions, but most continued to allow stock trading. Robinhood said it was suddenly forced to place more capital – up to 10 times normal levels – with its clearing house as security and it could not allow the large volume of trading to continue on its platform. The company eventually relaxed those restrictions and lifted them completely Friday. But not before GameStop lost 85% of its value, a move some investors blamed for Robinhood’s limitations.
Robinhood declined to comment or make Tenev available to discuss the company’s IPO, financial statistics, or criticisms. In blog posts, the company has dispelled rumors of something outrageous about its trading limits, stating that the volume was “magnitudes higher than the norm”.
Robinhood has not released recent figures 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 north of 15 million. Data from web analytics company SimilarWeb shows that Robinhood’s app was downloaded more than a million times in just two days at the height of the GameStop frenzy, many times more than its competitors. It narrows the gap with the market leader
Charles Schwab
(SCHW), which had approximately 30 million active accounts at the end of the fourth quarter.
The math isn’t all in Robinhood’s favor, though. While Robinhood is the growth leader, its clients tend to have much smaller balances than competing brokers, with some estimating that the average account size is less than $ 5,000. Customers of some of the bigger competitors usually have more than $ 100,000.
Robinhood does not disclose any income or earnings figures, but the securities deposits offer some hints. The company relies heavily on what is known as payment for order flow, meaning that Robinhood gets some of the money that market makers put up from the spread between the bid and ask prices on assets they trade. In 2020, Robinhood made $ 687 million in payment for stock order flow and options trading. (It also makes money from cryptocurrency trading, although the filings do not disclose those numbers.) CFRA analyst Pauline Bell estimates that about 80% of Robinhood’s revenue comes from payment for order flow, which would mean the company is close to $ 1 billion in sales 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 go public for significantly more than $ 13 billion
Morgan Stanley
(MS) Paid last year to buy E * Trade.
To achieve that valuation, Robinhood will likely need to convince investors that its income stream is safe and consistent. However, payment for the order flow has been scrutinized. In December, Robinhood was forced by the Securities and Exchange Commission to pay $ 65 million to settle claims that it misled customers about how it made money, even though it didn’t get the best execution for them. The company did not recognize a mistake. It has said it has changed practices. Other brokers also make money from order flow payment, with the exception of Fidelity, but this is generally a much smaller percentage of their earnings
ClearBridge Investments’ analyst Miguel del Gallego, who covers financial companies, thinks that the payment for the order flow will entail regulatory changes, although he expects general practice to continue.
Options trading, which carries much greater risks than traditional stock trading, is also likely to receive more attention. Robinhood generated nearly two-thirds of its income from options-based options in the fourth quarter, meaning it could face undue risk from regulatory changes.
Robinhood’s business model often raises questions about alignment with customers. “The argument can be made that the real end customers are these high-frequency traders who are actually using this information and trading against what are referred to as uninformed investors,” Gallego said.
The company is now facing a backlash on social media. Some retailers have lumped the company up with the Wall Street toppers they despise. In an interview on Reddit, billionaire Mark Cuban wrote that Robinhood “disappointed you in a big way” and suggested that traders find a “broker with TRILLIONS DOLLARS worth of assets on their balance sheets.”
A survey of some 10,000 investors on the social network StockTwits found that 40% of them planned to switch brokers – and most of those planning to switch were Robinhood clients. Competitors do not lie. Schwab is successful in attracting younger customers, with about half of its new customers under the age of 41. A majority of new clients are signing up for trading tools that help them create self-directed accounts, the company says, up 20%. in 2016 – a sign that Schwab is attracting a new encouraged generation of merchants who are not content to “fix and forget” with their accounts.
Robinhood faces another potential risk once it goes public: As one person wrote on Reddit last week, “I can’t wait to cut Robinhood on Robinhood short.”
Write to Avi Salzman at [email protected]