Robinhood Markets Inc., is an online brokerage company with a stock trading and investing app aimed at younger retail investors. The company, an early adopter of zero-commission trades, filed for a confidential initial public offering (IPO) on March 23, 2021…
A confidential IPO allows a company to submit an initial draft of its S-1 to the Securities and Exchange Commission (SEC), which only needs to be made public 15 days before any promotional roadshow or, if there’s no roadshow, 15 days before the IPO.2 The advantage of filing confidentially is that the company has more control over its IPO date and can make changes to its IPO filing without needing to manage public relations.
This means Robinhood has not released the expected date, price range, share count, and total valuation of its IPO. However, its other financials disclosures can help give us context while we wait.
Robinhood’s eponymous app lets users trade over 5,000 stocks and seven cryptocurrencies on its platform. In addition, they can trade in American Depository Receipts (ADRs) for 650 globally-listed companies and options contracts for stocks listed on U.S. exchanges and exchange-traded funds (ETFs).
- Robinhood is a California-based fintech company with a stock trading and investing app targeted at younger retail investors.
- It filed for a confidential IPO in March 2021. Robinhood has not made the details of the offering public yet.
- Robinhood has raised a total of $5.6 billion from private investors and was reportedly valued at $40 billion at its most recent funding round in February 2021.
- Robinhood was charged by the SEC in December 2020 for delivering sub-par trade execution to its customers.
- Robinhood has been in the news extensively in 2021 due to its popularity with traders involved in the GameStop short squeeze.
Robinhood Founding and History
Robinhood was founded in 2013 by Stanford graduates Vlad Tenev and Baiju Bhatt.3 The duo had prior experience on Wall Street before launching Robinhood, having previously founded Celeris, a trading technology firm, and Chronos Research, which sold fintech software to investment banks.
The Robinhood app started in April 2013 as an app for tracking stocks, in an attempt to create an equivalent to Yahoo Finance for mobile devices.4 Yahoo and Google Finance went mobile, pushing Robinhood out of that space, so Robinhood raised $16 million from well-known venture capitalists, including Andreessen Horowitz and Ribbit Capital, and pivoted to become a brokerage.
Robinhood as we now know it was formally launched in Apple’s App Store in December 2014. Since then, it has grown in popularity and has more than 13 million users on its platform.
Robinhood has been in the news extensively in 2021 due to its popularity with the retail investors who carried out the Gamestop short squeeze. Increased trading activity on its platform, however, led to rising demand for margin and the app halted trading activity for Gamestop’s stock on its platform. The company was also forced to raise additional capital from investors to meet its capital requirements.
That incident brought Robinhood under criticism and regulatory scrutiny and its chief executive officer and co-founder Vlad Tenev had to testify before Congress Robinhood’s role in the controversy.
How Does Robinhood Make Money?
Robinhood is a commission-free brokerage, meaning users did not have to pay fees to trade stocks on its platform. This was the traditional way brokerages made money, without this, it has had to find other ways to generate revenue.
Payment for Order Flow (PFOF)
Robinhood’s biggest source of revenue is from a practice called payment for order flow (PFOF). Payment for order flow refers to money that brokerages receive for directing its customers’ trades to particular market makers. Market makers are firms which match buyers and sellers of stocks or other securities. They make money by pocketing the difference between how much the buyer of a stock pays for the stock and how much the seller sells it for. In order to ensure that there are always buyers and sellers to match up, they pay brokers like Robinhood to send orders to them.
While Robinhood has not released its full financials, it does disclose its revenue from PFOF. During the first and second quarters of 2020, it reported revenues of $91 million and $180 million from PFOF. In its latest filing, Robinhood stated that those numbers has swollen to $331 million in the first quarter of 2021.8910 Options trading order flow accounted for $198 million of the total amount while equity trades were responsible for $133 million.
Brokerages are obligated to find the best execution of trades for their customers, primarily meaning that they try to get the best price for trades done in the most timely manner. PFOF presents the possibility for a conflict of interest, because a brokerage may be paid more to send orders to a market maker who will give worse prices to their customers. Robinhood says that it still gets best execution for its customers, writing on its website that payments from market makers “aren’t considered when your brokerage orders are routed.”
However, in December 2020, the SEC found that “Robinhood falsely claimed in a website FAQ between October 2018 and June 2019 that its execution quality matched or beat that of its competitors. The [SEC’s] order finds that Robinhood provided inferior trade prices,”.12 The SEC said that this practice cost its customers $34.1 million, even when accounting for the savings customers gained by not having to pay commissions. While Robinhood did not admit or deny the SEC’s filings, it did agree to pay a $65 million to settle the charges.
The current SEC Chairman Gary Gensler has said there is a “little bit of conflict of interest” in the payments from order flow practice and his agency is looking into it.
Membership Fees: Robinhood Gold
In addition to PFOF, Robinhood also makes money from membership fees. Robinhood offers two tiers of membership – Basic and Gold. The former is free and the latter costs $5 a month. While both types of membership allow commission-free trading, the Gold membership also provides, among other things, access to reports from investment research firm Morningstar research reports and the ability to trade on margin. However, Robinhood does not disclose how many of its users have Gold accounts and how many have Basic ones.
Robinhood also gains additional revenue from interest charged to accounts trading on margin and from interest it gets from users’ uninvested cash.
How Much Is Robinhood Worth?
According to online public database Crunchbase, Robinhood has raised a…
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