Robinhood is a commission and brokerage-fee free trading platform headquartered in Palo Alto, California that was founded in 2013 by Vladimir Tenev and Baiju Bhatt. The company is approved by the Financial Industry Regulatory Authority (FINRA), registered with the US Securities and Exchange Commission, and a member of the Securities Investor Protection Corporation (SIPC). The SIPC provides insurance on all Robinhood accounts.
The Robinhood mobile app initially launched on iOS in 2013 (available only in the US). The earliest version of the app allowed people to track stocks and share their predictions on their stocks' performance. Users were able to follow a stock’s performance relative to their predictions, helping them improve their understanding of markets. The app had trouble gaining popularity because Yahoo Finance developed a similar mobile app and was able to gain greater interest based on their higher levels of public recognition. Instead of competing directly with Yahoo Finance's app, Robinhood pulled their app from the IOS App Store.
In order to re-launch their mobile app as a brokerage, regulators required Robinhood to hold a certain amount of capital. To achieve the capital requirements of a brokerage, Robinhood raised three million dollars in seed funding from from Index Ventures (lead investor), Google Ventures and Andreessen Horowitz. In 2015, Robinhood relaunched their fee-free brokerage app with limited access to S&P 500 stocks and exchange traded funds (ETF’s). Their public launch began with a website advertising commission-free trading with a button for signing up. An unknown leak placed them on Hacker News, where they launched to number one trending topic. Vladimir Tenev has talked about this moment as an exciting early momentum builder for the app’s launch.
Through the app, Robinhood paired their no-fee approach with a simple user interface, which focused on ease of use for the consumer. This simple interface and fee-free approach is the most-often referenced benefit to trading on Robinhood’s platforms—which have grown to include a website, crypto-trading and a freemium model—rather than trading on more traditional platforms.
The more traditional platforms (IE: Charles Schwab, TD Ameritrade or E*Trade) carry brokerage fees or commissions and are the standard and often come in anywhere between five to ten dollars USD. These platforms are often cluttered with research, market indicators, and advanced metrics, which are useful for more advanced traders and those who trade in volume, but which Robinhood co-founders thought would act as an impediment and unnecessary for the demographic they pitched their platform to: millennials, who tend to be cash-strapped and market curious.
The oft-quoted “No-Frills” approach explains Robinhood’s lack of storefront offices, research reports, analytical tools, and stock screening. The “traditional” brokerages offer these services to varying degrees. Furthermore, there have been complaints about wait times for customer service calls and emails that are never returned. There is no automated brokerage transfer feature on Robinhood and any transfer has to be conducted through Automated Customer Account Transfer Service (ACATS). Both are often cited as a result of the small team that supports Robinhood’s operations.
Robinhood expanded their offerings to options and crypto-currencies. For an additional fee, users can trade Canadian and European stocks. The app offers a few multi-leg strategies, such as iron condors, straddles, strangles, call and put debit spreads and call and put credit spreads. They also offered after-hours and margin trading through Robinhood Gold. There are greater options on their web platform, which launched in late 2017. Robinhood does not allow you to trade IPO’s, futures, mutual funds, fixed incomes nor does it allow you to place short sells on any of their platforms.
Robinhood’s business model is not a traditional brokerage business model. Robinhood’s marketing suggests their business model is made to avoid brick-and-mortar operations, large work forces, and address what they believe are inefficiencies within the brokerage industry.
Robinhood does earn interest on non-invested cash in customer accounts, as most brokerage firms do, they earn interest on their premium Gold accounts, offer broker assisted trades via telephone for ten dollars and assist in foreign stock transactions for $35-50; and engage in a practice known as Payment for Order Flow.
Payment for Order Flow is a controversial, although common practice in the current finance industry, where a brokerage firm will sell their orders to a High Frequency Trader (HFT) or Market Maker such as Citadel Securities, Two Sigma Securities or Virtu Financial. The High Frequency Trader will take those orders and sell at market for a profit. Usually these profits are tenths of a penny per share which present real value in scale.
Most brokerages use HFT’s strive for price improvement, meaning they want to reduce the spread of the HFT and get their user the best price possible. For example, if a user wanted to purchase a share for $200, the market order might be placed at $200.20 and the HFTs may wait to fill the order at $200.30. Whereas it seems Robinhood users, who seem to be paid much higher than their peers, do not seek price improvement. In the above example, it seems orders through Robinhood at the $200.2 valuation are filled in at $200.5, for the sake of this example, individual shares are small but scaled to the roughly 6 million users on the platform, and the $150 billion in volume traded since the companies founding, the company is making a profit on their trading activity.
There is some confusion through the Securities and Exchange mandatory filing on Payment for Order Flow as Robinhood reports their earnings in a different manner compared to other brokerages, such as E*Trade or TD Ameritrade, which makes a direct comparison of overall earnings difficult.
The biggest critic of Payment for Order Flow is the Securities and Exchange commission (SEC). The SEC has advocated for a “trade-at” rule to combat the behavior of High Frequency Traders.
Further, the criticism of Robinhood’s relationship with HFTs comes from their no-fee approach, and the income derived from the practice, which suggests the investor is not the customer but the product. Robinhood has denied such allegations and said their price performance is equal to their peers and better than what those users would see were they to take their orders to the market themselves.
It is important to note that not all trading platforms, such as apps, websites, or brick-and-mortar, use HFT’s. Some will even allow the investor the ability to pick which markets their orders are routed to, an ability Robinhood lacks.
Robinhood expanded in late 2016 with Robinhood Gold, a “freemium” portion of the app behind a paywall, where for a fee, Robinhood offers market research and news, tools to see live bids and Nasdaq Level II Market Data, after-hours trading, instant deposit, and the ability to trade on margin. There are no account minimums to start a Robinhood Gold account. There is a base monthly fee of five dollars. Otherwise, trades through Robinhood Gold remain commission and fee-free.
To trade on margin, the account does need a minimum deposit of $2,000, which is a regulatory requirement for all brokerages offering margin. There had been criticism of Robinhood’s handling of their margin accounts, where they assessed an interest charge on the amount of margin available rather than the amount of margin used—which is the industry standard. They have since changed this practice. The five-dollar fee gives a user access to $1,000 margin, and margin loans exceeding $1,000 dollars are assessed an annual interest of 5%—which is below industry average.
Even with the new tools, more detailed graphs and market data, Robinhood Gold does not offer the detailed analysis, reports or educational resources found on other trading platforms.
In 2019, Robinhood opened a new service on their application called Robinhood Crypto. Users from California, Massachusetts, Missouri, Montana and New Hampshire were initially able to trade Bitcoin and Ethereum without paying commission fees.
Since its initial launch, Robinhood Crypto has expanded to trading seven different cryptocurrencies, which include: Bitcoin, Bitcoin Cash, Bitcoin SV, Ethereum, Ethereum Classic, Dogecoin, and Litecoin. Their platform offers real-time market data on a ten more cryptocurrencies, and the service has expanded to thirty-nine states.
In late 2018 the co-founder of Robinhood, Vladimir Tenev, went on record with CNBC saying "Robinhood was not looking to expand their platform to trade cryptocurrencies." Less than a year later, their stance changed, and they introduced Robinhood Crypto.
Furthermore, critics have noted the language around Robinhood Crypto is different than around their traditional equities trading platform; on their traditional platform, trades are marketed as free—although the payment for order flow scandal does place free in invisible quotation marks—whereas trading cryptocurrencies is marketed as “commission-free." This small semantic difference is important in the volatile cryptocurrency markets.
The fine print of the user agreement for Robinhood Crypto mentions the volatility of the cryptocurrency marketplace and the lack of controls or customer protections. Furthermore, they state in the same fine print that any fees, charges, or fines levied at Robinhood through cryptocurrency purchases are passed on. These aren’t clearly shown in the app unlike on similar platforms such as Coinbase. The fees are hidden in the cost of the coin. There is also a lack of clarity over whether cryptocurrency bought through Robinhood is owned by the purchaser, or if Robinhood owns the cryptocurrency. This is different from other cryptocurrency platforms where a purchase of cryptocurrency is represented in keys that appear in a cryptocurrency wallet and owned by the user.
On December 13, 2018 Robinhood’s co-founder Baiju Bhatt announced their plans to launch a checking and savings account in the US with a Mastercard debit issues through Sutton Bank. These accounts were going to be fee free (no monthly fee, no overdraft fee, no foreign fee and no card replacement fee), without a minimum deposit and offer a 3% interest. This would have been the highest interest rate for a bank account in the US. Furthermore, they offered, through Mastercard and Sutton Bank, more ATMs across the US without fees than any other bank. And Bhatt and Tenev assured those interested the accounts would be insured and fully protected by the SIPC for up to $250,000.
Robinhood Checking and Savings is offered through Robinhood Financial LLC. Robinhood Checking and Savings is an added feature to existing Robinhood accounts and is not a separate account or a bank account. The Robinhood Debit Card is issued pursuant to a license from Mastercard International, Inc.
It turned out the SIPC would not cover their Checking and Savings accounts. Rather, as they did appear and were intended to act as bank accounts, they needed to be protected under the FDIC and Robinhood needed to go through more regulatory hurdles. They pulled the announcement, removed any mention of the Checking or Saving accounts and published an apology for the misunderstanding on their blog. There has been some outcry against Robinhood for what some have seen as willful misunderstanding which cumulated in a letter to congress expressing outrage at their actions.
Robinhood does plan to launch what they are calling a Cash Management account which they clarify is not a bank account. The account will be a feature on users existing accounts. It is so far unclear what their Cash Management account will be aimed at, although Robinhood COO Gretchen Howard commented on Robinhood’s plans to expand their brokerage business. They have also filed for a Federal Bank Charter.
DST Global leads $363m round in Robinhood, valuation soars to $5.6b
May 10, 2018
Free stock trading app Robinhood raises $323M at $7.6B valuation
July 22, 2019
How To: Set Up Your Robinhood Account
January 7, 2022
Robinhood App Will Offer Zero-Commission Stock Trades Thanks To $3M Seed From Index And A16Z
December 18, 2013
Robinhood raises $110 million for stock trading app
December 15, 2017