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As the company’s founders have told the public over and over again for the last few years, the ultimate goal of Robinhood
HOOD,
has always been to “democratize finance.”
That lofty goal created a company that attracted more than 30 million users at its height, forced the brokerage industry to adapt to its zero-commission business model, and allowed it to go public at a $32 billion valuation.
By getting those untapped traders into ‘stonks,’ Robinhood might have actually democratized finance to some extent, but those traders kept educating themselves and that newly earned awareness may be killing Robinhood slowly.
When Vlad Tenev and Baiju Bhatt gave up their lucrative business providing financial firms with high frequency trading software in 2013, they built a platform that would attract millennials curious about playing the stock market and let them fool around with small sums until they gained the experience and confidence to make bigger moves.
It worked. The interface was fun, brokerage rates were low and the market went up and up and up turning a whole group of Regular Joes into Armchair Chads, sharing stock tips and investment theses, much to the condescending delight of Wall Street.
But between the beginning of 2016 and the end of 2019, things changed a lot for Robinhood and its users.
Users were offered higher tier memberships that gave them access to margin accounts and Robinhood’s curated data. They were granted access to options accounts and fractional shares, and they were trading Bitcoin
BTCUSD,
and Ethereum
ETHUSD,
in 6 U.S. states.
In short, the Armchair Chads were getting out of their armchairs and into a desk chair, adding a screen and going full “Beautiful Mind” on a stock market that had detached itself from financial fundamentals.
Meanwhile, Robinhood had become a juggernaut disruptor of tech-enabled hipster finance; a multi-billion dollar outsider force that looked impossible for institutional Wall Street to stop, forcing suits and fleece vests alike to look at Robinhood’s user growth and make the decision to evolve or die.
By the dawn of 2020, almost every major online brokerage had given up their sweet flow of trade execution fees in delayed acknowledgment of the app’s new and sudden domination.
And in case that seems hyperbolic, we’ll invite you to recall that in February 2020 Morgan Stanley
MS,
bought E*Trade for $13 billion, or $2,500 per customer.
Robinhood had The Street running scared.
And then, the rest of 2020 happened.
With billions of people finding themselves stuck at home with only overwhelming boredom, existential dread, and “Tiger King” to keep them company, tens of millions decided maybe it was time to play the incongruously surging stock market, and Robinhood’s interface of virtual confetti fun just made it all the more welcoming.
More than 9 million users joined up with Robinhood in 2020, according to the company’s data, an amount that was almost equal to its entire user growth up until that point.
When shares of bankrupt car rental operator Hertz suddenly surged in May 2020, a wider awareness of Robinhood’s increasing power began to percolate in people’s consciousness as it was clear that retail investors had jumped into Hertz stock taking big Wall Street short sellers like Carl Icahn by surprise…which was objectively kind of fun.
But with that kind of growth comes some pain.
Robinhood’s platform crashed twice in March 2020 as a tsunami of users attempted to buy into an unprecedented market bounce back from pandemic lows, regulators started to take an interest in how much the company was making from selling its order flow to high frequency traders, and a 20-year-old user in Illinois took his own life after misinterpreting a $730,000 loss on an unsettled options trade.
And all the while, retail traders were getting a clearer sense of the virtual world around them.
Then came 2021.
We’ve touched on it a bit before in this column, but there was a January short squeeze on GameStop
GME,
AMC Entertainment
AMC,
and other meme stocks, and it brought Robinhood’s influence to the forefront of the American consciousness.
Users had become sophisticated enough, using options and margin and all the other stuff Robinhood had given them, to launch a multi-pronged attack on institutional Wall Street, causing losses for hedge funds and plunging professional traders into panic.
And Reddit’s army of ‘Diamond-handed Apes’ could have gotten away with it too, they will still tell you, if it hadn’t been for Robinhood and its pesky margin requirements.
Because Robinhood halted trading on the volatile meme stocks, the squeeze ended with a whimper and Tenev ended up in front of Congress explaining why his company was caught unaware by not having enough cash on hand to handle the action. He also had to answer uncomfortable questions about how Robinhood makes half its revenue from selling trade order flow to market makers like Citadel Securities, a firm founded by Ken Griffin, who also founded Citadel LLC, a massive hedge fund that bailed out Melvin Capital, one of the short-sellers targeted by Robinhood’s own users.
That relationship has also caused a public discussion about best execution of Robinhood’s trades and led to retail investors reading up on market wonkery like settlement times on options contracts in addition to everything else they’ve learned.
And that’s where our story turns.
Retail investors, who had spent months and years using social media to sharpen each others’ acumen on how to trade options and crypto and identify heavily-shorted stocks, began to lose faith in the very app that got many of them involved in trading in the first place.
Users flowed out of Robinhood as quickly as they had entered, moving over to competitors like Schwab and Fidelity that had been so afraid of Robinhood just years before. The boring Boomer rules and structure of those firms were now exactly what serious Robinhood traders were looking for in the wake of January.
To do a quick perusal of finance Reddit in the spring was to come across copious examples of users sharing screenshots proving they had ditched Robinhood for a new brokerage. In recent weeks, that trend has intensified with users claiming to have moved their meme stock shares into direct listings so as to keep them off limits from short sellers looking to borrow.
That’s also led to what appears to be a percolating liquidity issue for certain meme names, but we’ll talk about that another day.
When Robinhood finally went public in July, the market got a glimpse inside its own disruptor, and what it saw was a big startup still hellbent on growth and subsisting almost entirely on crypto trading revenue and the suddenly toxic money spigot that is payment for order flow.
While Robinhood’s users still trade equities on the app, it has come to rely heavily on crypto revenue, with offerings having expanded well beyond Bitcoin and Ethereum and into 46 states.
In Tuesday’s second-quarter earnings release, Robinhood disclosed that the crypto business has been a little tough lately.
Crypto trading activity, earned Robinhood $233 million in revenue in the second quarter of 2021. It brought in $51 million for the latest quarter.
“Historically, our growth has come in waves,” Tenev mused on Tuesday’s earnings call, possibly ignoring a harder truth.
Crypto trading is now available almost everywhere and much less scary for investors afraid of their money just disappearing.
Coinbase
COIN,
alone now boasts 56 million users worldwide, major banks are letting customers deal with crypto, and even crypto ETFs are an actual thing now.
Robinhood users are openly clamoring for the platform to let them trade Shiba Inu, the latest and hottest fad in crypto that makes Dogecoin
DOGEUSD,
look like a municipal bond. Such a move might give Robinhood another chance to leverage the bleeding edge of financial hipness, and Tenev is waxing poetic about “crypto wallets” coming soon, but it’s not just crypto that Robinhood needs to worry about anymore.
The big narrative around meme stocks is that interest and volume is fading, which is sort of true, but that take fails to fully grasp the large group of die-hard retail investors who are not going to give up on their quest for a MoASS [Mother of All Short Squeezes] and will continue to create chaos in the market when it suits them using all of the tools that they’ve accumulated in the last 2 years, with options being by far the most popular.
To riff on the old axiom, “Teach a man to trade options on margin, and he’ll take his account to Fidelity.”
On Wednesday, Cboe Global Markets announced “Nanos by Cboe,” its own unsubtle bid to cut into Robinhood’s revenue stream.
According to a press release, Nanos will be “a first of its kind options contract designed to simplify options trading,” designed to “help make options trading accessible for the everyday retail trader.”
Tenev couldn’t have come up with a better idea himself.
And because the “everyday retail trader” is actually trading options contracts in 2021, that customer has a lot more questions to ask of the people who want their business. They know that zero-commission apps make them the product and they will keep shopping themselves until they get the right fit.
Robinhood has played a huge role in creating a new breed of educated investors, but its future now hinges on its appeal to retail investors who are no longer into confetti and free shares, but hungry for a more boring and safe way to continue their perma-campaign against hedge funds.
In response to its third quarter earnings, Robinhood stock fell more than 10% on Wednesday.
It seems likely that the stock will continue to struggle unless the company makes an announcement that turns heads, and that weakness will feed the overarching narrative that the retail investing boom is over and its hurting Robinhood’s bottom line.
But meme stocks aren’t dying, even if they are killing Robinhood.
