Robinhood

Company information

• Date founded: 2013
• Industry: Financial technology; financial services
• Corporate headquarters: Menlo Park, California
• Type: Public

Overview

Robinhood is a publicly traded financial technology (“fintech”) company founded in 2013 and headquartered in the Silicon Valley municipality of Menlo Park, California. It is the creator and distributor of a software application that allows users to trade securities including stocks, stock options, and exchange-traded funds (ETFs). Investors in most US jurisdictions can also use the Robinhood platform to invest in various cryptocurrencies. The company launched its initial public offering (IPO) of common stock in July 2021 and trades on the NASDAQ exchange.

The company’s founders created Robinhood to democratize financial market access through no-cost trading. Robinhood users can buy and sell any asset available through the platform without paying commissions or fees. Since its launch, the Robinhood platform has become particularly popular with younger investors, especially those belonging to the millennial generation.

Robinhood generates most of its revenues through compensation benefits known as “payments for order flow” (PFOF). These payments mainly come from a class of investors known as “market makers,” who place high-frequency limit orders to buy and/or sell particular securities to earn the difference between the “bid” price (the highest price an investor will pay to fill a purchase order) and the “ask” price (the lowest price an investor will accept to fill a sell order). Brokerages assign the retail investors' buy and sell orders to a market maker who makes the trade in exchange for a small PFOF commission on each trade. According to a 2024 article published in Investopedia, Robinhood generated between 60 and 80 percent of its revenues through PFOFs, with the remainder coming from loan interest and subscriptions to the company’s premium accounts. However, Robinhood CEO Vlad Tenev denied such a large revenue stream from PFOFs and pushed back on the notion that such transactions create conflicts of interest or unfair conditions at the expense of traders and investors. Still, though the practice is banned in some countries and some US regulators have tried to limit PFOFs, attempts have been unsucessful.

In December 2022, the company announced Robinhood Retirement, the first IRA to offer a 1 percent match per dollar contributed, and Sherwood Media, LLC, a source of business and economics news and information. However, in the same year, the company also announced significant layoffs, sparking a drop in its stock value. The company was subject to several controversies at the start of the 2020s, including incidences of hacking, fines from various federal and state agencies, and industry trading politics. Despite these setbacks, in August 2024, the company had $143.6 billion in assets under custody with 24.3 million monthly users with $3.3 million in net deposits. Over one million users began using the platform between 2023 and 2024.

History

Robinhood was founded in 2013 by entrepreneurs Baiju Bhatt and Vladimir Tenev. Bhatt and Tenev met while attending California’s Stanford University, where they were roommates. After graduating from Stanford, Bhatt and Tenev relocated to New York, where they established two fintech ventures that distributed specialized software solutions for hedge funds. They realized that major Wall Street brokerages paid almost nothing to execute trades while charging commissions on every buy and sell order placed by retail investors. This provided the inspiration for Robinhood, which they envisioned as a trading platform that would extend the no-fee market access enjoyed by institutional players to individual retail investors. The company and its eponymous software application draw their name from the famous hero of British folklore, who was known for “taking from the rich to give to the poor.”

Returning to Silicon Valley, Bhatt and Tenev raised the capital to develop their idea into a mobile app. To generate interest in the platform, the entrepreneurs restricted access to the new platform and built anticipation by creating a waiting list. Users on the waitlist were offered the opportunity to advance closer to the top by referring others. By the time Robinhood debuted on Apple’s App Store in 2014, more than one million people had joined the waitlist.

With its no-commission trading model and gamified interface, Robinhood quickly gained a large following among younger users. In 2015, the app won an Apple Design award, making it one of only a dozen software products to do so that year. By 2019, Robinhood had soared to a valuation of $7.6 billion after securing almost $1 billion in venture capital investment. As a response to the app’s success, numerous major brokerages, including TD Ameritrade, Merrill Lynch, Wells Fargo, and Charles Schwab began offering commission-free trading.

Robinhood responded to the competitive challenge by developing novel user-end features, most notably the ability to buy fractions of stock shares. It then became one of the first major fintech players to offer retail investors access to cryptocurrencies through its Robinhood Crypto platform. Robinhood allows users to trade popular cryptocurrencies including Bitcoin, Dogecoin, Ethereum, and Litecoin. Users can purchase these assets in fractions valued as low as $1.

The company’s core trading accounts include three main options: Robinhood Cash, Robinhood Gold, and Robinhood Instant. Robinhood Cash and Robinhood Instant are both free to use, while Robinhood Gold charges users a small monthly fee in exchange for an expanded suite of features and services.

Impact

Robinhood has been credited with making investing accessible and enjoyable to a large and fast-growing base of younger users. It has helped propel the rise of a novel investing culture driven by online communities such as Reddit’s Wall Street Bets, in which retail traders collaborate to share tips, information, and opportunities.

Despite earning praise for democratizing market access and its flashy, fun-to-use app, Robinhood has also been at the epicenter of numerous controversies since it gained widespread popularity in the late 2010s. Some fintech analysts opine that while Robinhood has historically excelled at image-building and marketing, its PFOF-oriented business model functionally achieves the opposite of what the company claims to be its founding mission. Market makers often earn enormous profits by capturing the trades placed by small retail investors, which Robinhood exploits by catering to wealthy institutional traders in generating the majority of its revenues.

The platform’s purpose-built appeal to inexperienced investors has also proven to be a source of controversy for the company. In June 2020, a twenty-year-old University of Nebraska student took his own life after mistakenly believing that an options trade he placed through the platform had resulted in a $730,000 loss. In actuality, the loss displayed in the student’s account represented an unsettled balance on trades that had not yet fully resolved. The situation resulted in congressional scrutiny for Robinhood, which intensified in 2021 after Robinhood was implicated in a trading saga involving the Wall Street Bets online community that became one of the biggest financial stories in many years.

In early 2021, Wall Street Bets community members led a retail trading frenzy that sent the values of several embattled stocks, including GameStop and AMC Entertainment Holdings, soaring to unprecedented levels. This triggered what is known in investing circles as a “short squeeze” on several hedge funds, which had overcommitted to market positions that mistakenly anticipated the companies’ share prices would go down. The saga resulted in billions of dollars in losses for Wall Street institutions. Robinhood controversially intervened in the unfolding events by restricting its users’ ability to trade shares of GameStop and several other stocks, prompting major backlash that significantly damaged the company’s public image.

In 2024, Robinhood launched a version of its application in the United Kingdom, and six months later, it began offering margin trading, which allows investors to borrow cash to leverage or boost their trade. The method has been controversial as it can lead novice investors into debt. However, the company claimed they instituted numerous guardrails in order for costumers to invest smartly and safely, including eligibility criteria.

Bibliography

Browne, Ryan. “Robinhood Rolls Out Margin Trading in the UK after Regulator Nod.” CNBC, 21 Oct. 2024, www.cnbc.com/2024/10/21/robinhood-rolls-out-margin-trading-in-the-uk-after-regulator-nod.html. Accessed 18 Nov. 2024.

Gonzalez, Oscar, and David Priest. “Robinhood Backlash: What You Should Know about the GameStop Stock Controversy.” CNET, 17 Mar. 2021, www.cnet.com/personal-finance/investing/robinhood-backlash-what-you-should-know-about-the-gamestop-stock-controversy. Accessed 18 Nov. 2024.

“How Does Robinhood Markets Make Money?” Forbes, 23 July 2021, www.forbes.com/sites/greatspeculations/2021/07/23/how-does-robinhood-markets-make-money. Accessed 18 Nov. 2024.

Kauflin, Jeff, and Antoine Gara. “The Inside Story of Robinhood’s Billionaire Founders, Option Kid Cowboys and the Wall Street Sharks that Feed on Them.” Forbes, 19 Aug. 2020, www.forbes.com/sites/jeffkauflin/2020/08/19/the-inside-story-of-robinhoods-billionaire-founders-option-kid-cowboys-and-the-wall-street-sharks-that-feed-on-them. Accessed 18 Nov. 2024.

Klebnikov, Sergei, and Antoine Gara. “20-Year-Old Robinhood Customer Dies by Suicide after Seeing a $730,000 Negative Balance.” Forbes, 17 June 2020, www.forbes.com/sites/sergeiklebnikov/2020/06/17/20-year-old-robinhood-customer-dies-by-suicide-after-seeing-a-730000-negative-balance. Accessed 18 Nov. 2024.

“Robinhood.” CrunchBase, 2021, www.crunchbase.com/organization/robinhood. Accessed 18 Nov. 2024.

“Robinhood Markets, Inc. Reports August 2024 Operating Data.” Robinhood - Investor Relations, 9 Sept. 2024, investors.robinhood.com/pressreleases/news-details/2024/Robinhood-Markets-Inc.-Reports-August-2024-Operating-Data/default.aspx. Accessed 18 Nov. 2024.

“Robinhood Reports Fourth Quarter and Full Year 2022 Results.” Robinhood, 8 Feb. 2023, s28.q4cdn.com/948876185/files/doc‗financials/2022/q4/Q4-2022-Robinhood-Exhibit-99.1-vDISTRIBUTION.pdf. Accessed 18 Nov. 2024.

Thompson, Cedric. “Payment for Order Flow (PFOF): Definition and How It Works.” Investopedia, 10 Sept. 2024, www.investopedia.com/terms/p/paymentoforderflow.asp. Accessed 18 Nov. 2024.