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Robinhood (company)

Robinhood (company)

Robinhood is a Palo Alto, California-based financial technology company founded in 2013. They offer free stock and equity trading and commission-free crytpo-trading.

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 U.S. Securities and Exchange Commission, and a member of the Securities Investor Protection Corporation (SIPC). The SIPC provide insurance on all Robinhood accounts.

History

The Robinhood mobile app initially launched on iOS in 2013 (available only in the U.S). The earliest version of the app allowed people to track stocks and share their predictions on the stock’s 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 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) where brokerage fees or commissions 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, or those who trade in volume, but which Robinhood co-founders thought would act as impediment or deemed unnecessary for the demographic they pitched their platform to: millennials – cash-strapped and market curious.

The oft-quoted “No-Frills” approach is supported by 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 which 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 often cited as a result of the small team which 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.

"Payment for Order Flow" Controversy

Robinhood’s business model is not a traditional brokerage business model. Robinhood’s marketing suggests there business model is made to support brick-and-mortar operations, large work forces, and address 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 which 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, 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 comapred 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). 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 Gold

Robinhood expanded in late 2016 with Robinhood Gold, a “freemium” portion of the app behind a paywall, where, for a fee, Robinhood offered 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.

Robinhood's involvement in the cryptocurrency industry

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 ryptocurrencies, 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 which appear in a cryptocurrency wallet and owned by the user.

Checking and saving accounts

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 U.S. Furthermore, they offered, through Mastercard and Sutton Bank, more ATM’s across the U.S. 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.

Cash Management account

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.

Funding

Seed

On December 1, 2013 Robinhood completed their seed funding round with $3 million in funding from Index Ventures (lead investor), Susa Ventures, Rothenberg Ventures, QueensBridge Ventures, Local Globe, IT Ventures, Tim Draper, Kevin Moore, and Howard Lindzon.

Series A

On September 23, 2014 Robinhood completed their series A funding round with $13 million in funding from Index Ventures (lead investor), Susa Ventures, Social Leverage, Slow Ventures, LAUNCH, Snoop Dog, Nasir Jones, Lee Linden, Jordan Mendell, and Jared Leto.

Series B

On May 7, 2015 Robinhood completed their series B funding round with $50 million in funding from New Enterprise Associates (lead investor), Vaizra Investments, Susa Ventures, Social Leverage, Machine Shop Ventures, Index Ventures, Nurzhas Makishev, and Jordan Mendell.

Series C

On April 26, 2017 Robinhood completed their series C funding round with $100 million in funding from DST Global (leading investor), Thrive Capital, Thirty Five Ventures, New Enterprise Associates, Index Ventures, Greenoaks Capital, and Arrive.

Series D

On May 10, 2018 Robinhood completed their series D funding round with $363 million in funding from DST Global (lead investor), Sequoia Capital, Kleiner Perkins, ICONIQ Capital, and CapitalG.

Series E

On July 22, 2019 Robinhood completed their series E funding round with $323 million in funding from DST Global (lead investor), Thrive Capital, Sequoia Capital, and New Enterprise Associates.

Timeline

October 2019

Robinhood raises a $50,000,000 series E round from DST Global.

July 22, 2019

Commission-free stock trading startup Robinhood said on Monday it has raised $323 million in a new round of funding that values the company at $7.6 billion.

July 22, 2019

Robinhood raises $323 Million Series E

The round brings the valuation of the company to $7.6 billion, post-money.

DST Global led the Series E financing as a returning investor; the firm, founded by Russian tech billionaire Yuri Milner, led both Robinhood's Series C and Series D rounds.

July 22, 2019

Robinhood raises a $323,000,000 series E round from Thrive Capital, Sequoia Capital, DST Global, New Enterprise Associates and Ribbit Capital.

April 2017

Robinhood raises a $110,000,000 series C round from Thrive Capital, DST Global, New Enterprise Associates, Ribbit Capital, Index Ventures and Greenoaks Capital.

May 7, 2015

Robinhood raises a $50,000,000 series B round from Machine Shop Ventures, Social Leverage, New Enterprise Associates, Jordan Mendell, Susa Ventures, Index Ventures, Rainfall Ventures and Nurzhas Makishev.

People

Name
Role
LinkedIn

Baiju Bhatt

Co-Founder

Gretchen Howard

COO

Jason Warnick

CFO

Vlad Tenev

Co-Founder

Further reading

Title
Author
Link
Type
Date

DST Global leads $363m round in Robinhood, valuation soars to $5.6b

Aparajita Saxena

Web

May 10, 2018

Free stock trading app Robinhood raises $323M at $7.6B valuation

Kate Clark

Web

July 22, 2019

Robinhood App Will Offer Zero-Commission Stock Trades Thanks To $3M Seed From Index And A16Z

Josh Constine

Web

December 18, 2013

Robinhood raises $110 million for stock trading app

Kia Kokalitcheva

Web

December 15, 2017

Robinhood Raises $13M To Democratize Stock Market With Zero-Commission Trading App

Josh Constine

Web

September 23, 2014

Zero-Fee Stock Trading App Robinhood Nabs $50M From NEA To Go Global

Aparajita Saxena

Web

May 7, 2015

Documentaries, videos and podcasts

Companies

Company
CEO
Location
Products/Services
+ Add new row

News

Title
Author
Date
Publisher
Description
Josh Constine
April 2, 2020
TechCrunch
What do you do if you're an event discovery startup and suddenly it's illegal to attend events? You lean into the cultural shift and pivot. Today, $11 million-funded calendar app IRL is morphing from In Real Life to In Remote Life. It will now focus on helping people find, RSVP for, plan, share, and chat [...]
Gregory Barber
March 9, 2020
Wired
The popular app Robinhood, which has raised nearly $1 billion, went down Monday for the third time in a week.
Jonathan Shieber
March 9, 2020
TechCrunch
Investors using the trading app from Robinhood were once again locked out of trading after the app went down on another heavy (bad) day of trading on Wall Street. After about an hour of downtime, functionality on the app has now been partially restored. Trading has been partially restored on Robinhood and our team is [...]
Anup Roy
March 2, 2020
@bsindia
The spread between the 10-year AAA-rated corporate and equivalent maturity government bonds have fallen to 108 bps
Jonathan Shieber
March 3, 2020
TechCrunch
Robinhood, the startup with a stock trading app valued upwards of at least $7.6 billion, suffered one of its worst outages on one of the busiest trading days of the year. As the Dow Jones Industrial Average enjoyed the single biggest point-gain in the history of the index, Robinhood's application fell prey to an error [...]
Reuters Editorial
March 2, 2020
U.S.
Trading on Robinhood, a stock trading app popular with millennials, was down on Monday, preventing its customers from buying and selling shares in a session that saw the market stage a major rebound from last week's slump.
Eric Eldon
February 22, 2020
TechCrunch
[Editor's note: Want to get this weekly review of news that startups can use by email? Just subscribe here.] How well do Robinhood's financials stack up against incumbent online brokerages? While we wait for the seven-year-old company's long-planned IPO, Alex Wilhelm examined Morgan Stanley's big $13 billion purchase of E-Trade for fresh data comparison points. Robinhood [...]
Josh Constine
February 20, 2020
TechCrunch
Before it was worth $7.6 billion, the original idea for Robinhood was a stock trading social network. At my kitchen table in San Francisco in 2013, the founders envisioned an app for sharing hot tips to a feed complete with a leaderboard of whose predictions were most accurate. Once they had SEC approval, they pivoted [...]
Alex Wilhelm
February 20, 2020
TechCrunch
Here's what the recently announced Etrade sale and its recent financial performance can tell us about Robinhood's valuation
Josh Constine
December 12, 2019
TechCrunch
One share of Amazon stock costs over $1700, locking out less wealthy investors. So to continue its quest to democratize stock trading, Robinhood is launching fractional share trading this week. This lets you buy 0.000001 shares, rounded to the nearest penny, or just $1 of any stock with zero fee. The ability to buy by [...]
Daniel Strauss
November 27, 2019
markets.businessinsider.com
Stock-trading platform Robinhood withdraws its application to become an official bank
Theron Mohamed
November 23, 2019
markets.businessinsider.com
'If I had made the right trade I would have been retired now' -- a Reddit user who exploited the Robinhood 'infinite money' glitch says he would do it again
Theron Mohamed
November 23, 2019
Business Insider
"It was an opportunity to be free from the chains of tuition and mortgages in one trade," Tomatotowers said.
Steve O'Hear
November 20, 2019
TechCrunch
It is approaching a year since TechCrunch broke news that Robinhood was stealthily recruiting for a London office ahead of plans to expand to the U.K. And in August the U.S.-based company, which pioneered "commission-free" stock-trading states-side, announced it had received regulatory approval to operate this side of the pond, signalling that a U.K. launch [...]
Rebecca Ungarino
November 19, 2019
Business Insider
Robinhood's $323 million Series E in July marked the biggest wealth-tech venture investment in the third quarter.
Yusuf Khan
November 7, 2019
markets.businessinsider.com
The Redditors who made millions on a Robinhood glitch are 'psychopaths,' says Ritholtz CEO Josh Brown
By James Pero For Dailymail.com
November 6, 2019
Mail Online
Premium users of the app - a mobile platform that lets people buy and sell stocks in addition to options trading - reported that a mere $4,000 deposit has allowed them to take a position worth $1 million.
Ben Winck
November 5, 2019
markets.businessinsider.com
Robinhood has a 'free money cheat' that allowed one user to grow $4,000 into $1 million through 'infinite leverage'
Josh Constine
October 8, 2019
TechCrunch
This time it actually has insurance. Zero-fee stock trading app Robinhood is launching Cash Management, a new feature that earns users 2.05% APY interest on uninvested money in their account with the ability to spend it through a special Mastercard debit card. The waitlist opens today in the US with the first users to be [...]
Anthony Ha
October 3, 2019
TechCrunch
Robinhood may be best known its free stock trading, but today it's rolling out a new version of the newsfeed, adding content from Reuters, Barron's and market coverage from The Wall Street Journal, with no paywall or additional charge. In addition, Robinhood is introducing video into the newsfeed, with ad-free videos from CNN Business, Cheddar and [...]
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References