Interest in the digital brokerage has dramatically increased during Covid-19. Here are the top-line bullets you need to know.
Media mentions of the Robinhood trading app soared in Q3’20.
Pandemic-induced market volatility drove retail investors to Robinhood’s DIY investing platform, and the massive usage wave triggered renewed focus on Robinhood’s business model and product approach.
Robinhood captured $180M in revenue in Q2’20 — a 98% increase from Q1’20 — by capitalizing on increasing millennial interest in day trading. The wealth tech unicorn also opened roughly 3M new accounts during the peak of Covid-19, 50% of which were first-time investors.
WHAT YOU NEED TO KNOW:
- Media interest spiked because of elevated trading volume, as well as platform glitches: Robinhood reported 4.3M daily average revenue trades in June — significantly higher than incumbents TD Ameritrade (3.8M) and Charles Schwab (1.8M). The higher-than-average trading volume has caused multiple outages that have prevented investors from accessing their accounts and making trades.
- Executives are paying attention: Earnings call mentions of Robinhood also hit new heights in Q3’20. Among these, market maker Virtu Financial discussed how large brokers like Morgan Stanley and E*Trade have adopted its client Robinhood’s zero-commission trading model. Cloud communications platform Twilio also discussed how a new partnership with Robinhood is helping the brokerage scale and adapt its customer support amid the pandemic.
- Robinhood’s zero-commission trading model has shifted the way large brokers make money: Recent earnings calls with financial services companies like U.S. Global Investors Inc. and NASDAQ suggest large brokers are undergoing a monetization shift to adapt to new trends in trading. Following Robinhood’s model, Charles Schwab and TD Ameritrade were the first incumbent brokers to eliminate commissions for stocks, ETFs, and options. They have aimed to make up for lost fee revenue by diversifying their revenue streams through cash deposits, margin lending, securities lending, and robo-advisory fees.
- Competitors should be aware of Robinhood’s near-term IPO plans: Robinhood is planning to go public in 2021 and has asked Goldman Sachs to act as lead advisor for the IPO, which could value the company at over $20B, according to Reuters. The IPO signals increasing industry confidence in Robinhood’s zero-commission model and accessible platform. The IPO announcement came soon after a $460M Series G tranche, which valued Robinhood at $11.7B.
- Expect Robinhood to gain more media attention in the aftermath of an SEC investigation: Robinhood generates most of its revenue through payment for order flow (PFOF), where the company sells investors’ orders to wholesale market makers like Citadel Securities. Although this type of business model is not illegal, an SEC case has claimed that Robinhood did not properly disclose how it sells investors’ orders to high-frequency traders. In December 2020, Robinhood agreed to settle the case, paying a $65M fine.