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Deep Dive: Robinhood

  • Robinhood has been a popular stock trading app for Generation Z.
  • Here's a deep dive into the company, its products and recent controversies.
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Deep Dive: Robinhood

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Robinhood is an online stock brokerage that offers its customers commission free trading and investing. Robinhood users can invest and trade in stocks, exchange traded funds, options, and cryptocurrency. Customers can invest in over 5,000 stocks with Robinhood, including most U.S. equities and ETFs listed on U.S. exchanges. 

Robinhood Financial, LLC and Robinhood Crypto, LLC are wholly-owned subsidiaries of Robinhood Markets, Inc. All cryptocurrency holdings are held in Robinhood Crypto as opposed to Robinhood Financial. 

The company was founded in 2013 by Stanford roommates Baiju Bhatt and Vladimir Tenev. It has its headquarters in Menlo Park California and offices in the U.S and the UK. 

Account Types

Robinhood’s products are accessible through its three different accounts: Robinhood Instant, Robinhood Gold and Robinhood Cash.

Robinhood Instant

Robinhood Instant is the default Robinhood account which is a margin account that has access to extended hours trading and instant deposits. Robinhood Instant account users do not have to wait for funds to process while selling stocks or depositing up to $1000. 

Robinhood Cash

A Robinhood Cash account allows traders to place commission free trades during standard and extended hours trading sessions. Users do not have access to instant deposits or instant settlements.

Robinhood Gold

Robinhood Gold comprises a range of investing tools and premium products such as greater instant deposits starting at $5000 to a max of $50k, research from Morningstar on 1700 stocks, Level II Market Data from Nasdaq and more access to trading on margin. It has greater buying power and larger instant deposits as compared to the Robinhood Instant account.

Products

Cash Management

robinhood cash management
Source: Robinhood

Robinhood’s Cash Management feature is offered through the Robinhood brokerage account and allows users to spend and earn interest on swept cash. Users are provided a debit card issued through Sutton Bank to buy groceries, pay bills and send checks. Uninvested user cash is swept to Robinhood’s program bank network where it starts earning 0.30% annual percentage yield. Virtual debit card options through Google Pay, Apple Pay and Samsung Pay are also available.

In 2020, Robinhood’s Cash Management platform enrolled over 1 million customers who earned more than $2.5 million in interest.

Stocks and Funds 

Robinhood’s Stocks and Funds feature grants users mobile access to commission free investment in individual companies and ETFs.

Options

Robinhood allows customers to start commission free options trading with no per-contract fees. Options gives users the opportunity to employ sophisticated strategies such as iron condors, straddles and strangles.

Robinhood Crypto

Robinhood Crypto enables users to buy and sell bitcoin, Ethereum, Dogecoin, and other cryptocurrencies with zero commission. Cryptocurrency trading is done through an account with Robinhood Crypto, LLC. All cryptocurrency assets are held in a Robinhood Crypto account and not in a Robinhood Financial account. Robinhood Crypto is licensed to engage in virtual currency business activity by the New York State Department of Financial Services. Cryptocurrency investments are not products protected by either FDIC or SIPC.

Competitors

Robinhood’s competitors are major online trading platforms. 

  • SoFi
  • Fidelity 
  • Cash App
  • WeBull
  • Acorns
  • Betterment
  • Charles Schwab
  • TD Ameritrade
  • Public

Recent Mergers and Acquisitions

  • MarketSnacks: A daily newsletter and podcast that simplifies Wall Street headlines. The company has rebranded the product to Robinhood Snacks.

Funding 

In its Series G funding round in September, 2020, Robinhood raised $660 million and the company was valued at $11.7 billion. DST Global, Ribbit Capital, Andreessen Horowitz and Sequoia participated in the round. 

The company quickly raised $1 billion on January 29th, 2021 with an additional $2.4 billion on February 1, 2021 in order to meet capital requirements precipitated by the trading surge fuelled by amateur traders on the WallStreetBets subreddit. 

Business Model

Robinhood generates a significant amount of its revenue from payment for order flow. According to research from Alphacution, in 2018, Robinhood generated around $69 million in revenue from its payment for order flow, up 227 percent from the previous year. This revenue stream accounts for around 40 percent of the company’s overall revenue.

In the second quarter of 2020 Robinhood made around $180 million through payment for order flow. The company also generates money through its $5 monthly subscription fee for Robinhood Gold, lending margin securities to counterparties, income for depositing uninvested cash in interest bearing bank accounts, fees from program banks for sweeping cash to them and interchange fees from the Robinhood debit cards.

SPONSORED

Customers

Robinhood’s customers are mostly millennials with a median age of 31. Most of Robinhood’s customers have used the app to make their first stock purchase and are relatively new to trading and investments. It is especially popular among college students in the U.S. 

In May 2020, Robinhood claimed it had over 13 million customers, up from the 10 million reported earlier in 2019. According to an article from CNBC, the Robinhood app has seen a record number of increased downloads despite facing public outrage since the recent trading controversy.

Tearsheet Coverage

Diversity, Equity and Inclusion 

Robinhood has not disclosed its DEI status in its board activity, hiring practices and employee makeup on its website. Robinhood currently has a number of employee resource groups that are focused on promoting diversity, equity and inclusion within the company such as Latinhood for Robinhood’s Latinx employees, Rainbowhood for its LGBTQ members and allies along with Robinhood Veterans for its veteran employees. In 2019, Robinhood created Black Excellence (BEX) “to promote cultural diversity, professional development for its members, and provide a space for individuals of the African Diaspora at Robinhood.”

ESGs

Robinhood has not disclosed information regarding its ESG activity on its website. 

Controversies 

On January 28, 2021, Robinhood set trading restrictions on several heavily shorted stocks, including GameStop and AMC, after a retail trading frenzy was unleashed in the beginning of the week by day traders on the WallStreetBets subreddit. The decision angered many Robinhood customers and created public outcry against the brokerage for allegedly favoring hedge funds betting against the stocks. US lawmakers such as Alexandria Ocasio-Cortez and Ted Cruz spoke out against Robinhood’s decision. The app’s four-star rating plummeted to a one-star rating on Google Play with around 275,000 negative reviews, 100,000 of which Google had to remove to allow it to shoot back up to a 4.3 rating. 

On January 29, 2021, Robinhood raised around $1 billion to protect its balance sheet before allowing limited trading to resume on volatile stocks. Despite easing up on trading activity, Robinhood continued to uphold limitations such as allowing traders to buy one only one share of GameStop. It also expanded its list of restricted stocks from 13 to 50. 

google play robinhood 1 star review
Source: Google Play

On Feb 1st, 2021, Robinhood raised another $2.4 billion to shore up its capital reserves. Robinhood’s rating has slipped back again to 1.1 rating on Google Play. Google has refused to intervene this time as the new reviews are compliant to Google’s review policies. 

In December 2020, the SEC charged Robinhood for failing to disclose the firm’s receipt of payments from trading firms for routing customer orders to them, and for failing to satisfy its duty to seek the best reasonably available terms to execute customer orders. Robinhood agreed to pay $65 million to settle the charges.

Following the settlement, the company was sued in a class action lawsuit on similar charges for failing to disclose that its business operations rely extensively on payment for order flow. 

In June 2020, University of Nebraska student Alexander E. Kearns took his own life after seeing a negative balance of $730,000 in his Robinhood account. It was revealed later that the negative balance was temporary due to unsettled trading. In response to Kearn’s death, Robinhood provided eligibility changes, educational resources and upgrades on its options trading interface. 

Robinhood faced extensive power outages in March 2020, the first of which on March 2nd lasted for 17 hours. The company claimed at the time that the outages were caused by “stress on the app’s infrastructure.” As a result of the outages, a customer filed a lawsuit against Robinhood. 

In December 2019, FINRA fined Robinhood $1.25 million for best execution violations related to its customers’ equity orders and related supervisory failures that spanned from October 2016 to November 2017. 

In July 2019, Robinhood revealed a security breach which left user passwords exposed. The passwords had been stored in an unencrypted format. At the time, Robinhood stated that it did not find any evidence of abuse. In early October 2020, the company announced that almost 2,000 of its customer accounts were hacked. In January 2021, a hacking victim sued the company for not providing sufficient security measures for the protection of sensitive user data. 

Robinhood Leadership

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