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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 crypto-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 US Securities and Exchange Commission, and a member of the Securities Investor Protection Corporation (SIPC). The SIPC provides insurance on all Robinhood accounts.

History

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.

"Payment for Order Flow" Controversy

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 Gold

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.

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 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.

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 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.

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

July 29, 2021
Robinhood (HOOD) IPO: Stock falls 8% in Nasdaq debut.
July 29, 2021
Robinhood raises a $1,890,000,000 initial public offering.
July 1, 2021
Robinhood files S-1 to go public.

This afternoon Robinhood, the investing app for consumers filed to go public. The company intends to list on the NASDAQ under the symbol “HOOD." Robinhood’s public offering document includes a placeholder $100 million raise figure

August 17, 2020
Robinhood raises a $200,000,000 series G round from D1 Capital Partners.
July 13, 2020
Robinhood raises a $320,000,000 series F round from Institutional Venture Partners, Sutton Capital Partners and TSG Consumer Partners.
May 2020
Robinhood raises a $8,300,000,000 series F round from 9Yards Capital, New Enterprise Associates, Ribbit Capital, Sequoia Capital and Unusual Ventures.
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 DST Global, New Enterprise Associates, Ribbit Capital, Sequoia Capital and Thrive Capital.
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Funding rounds

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

News

Title
Author
Date
Publisher
Description
STAN CHOE
October 5, 2021
ABC News
It's one of the downsides of apps that make things like ordering food or buying stocks and cryptocurrencies easier: What happens when something goes wrong
The Associated Press
October 5, 2021
CTVNews
Robinhood, the app that helps more than 22 million people trade stocks and cryptocurrencies, announced Tuesday that it's offering 24/7 phone support for its customers to cover almost every issue.
By STAN CHOE
October 5, 2021
AP NEWS
NEW YORK (AP) -- It's one of the downsides of apps that make things like ordering food or buying stocks and cryptocurrencies easier: What happens when something goes wrong?It's often a frustrating chase, tapping through menu after menu in hopes of reaching a person to fix the problem.
September 5, 2021
The Economic Times
In a career filled with other bad trades, missed opportunities and judgment errors, some decisions stand out, not just for the lost money, but for the lessons learned, writes Barry Ritholtz.
JD Alois
August 30, 2021
Crowdfund Insider
Click HERE to find out ⭐ Green Shoe: Robinhood Says Partial Exercise of IPO Over Allotment. | Crowdfund Insider: Global Fintech News, including Crowdfunding, Blockchain and more.
August 19, 2021
The Economic Times
Robinhood also said Wednesday that it lost $501.7 million, or $2.16 per share, compared with a profit of $57.6 million, or 9 cents per share, in last year's second quarter. Most of the loss was due to accounting changes related to a fundraising round it undertook early this year.
The Associated Press
August 18, 2021
ABC News
After helping a new generation of investors get into stocks, Robinhood is increasingly doing the same for cryptocurrencies
August 18, 2021
AP NEWS
NEW YORK (AP) -- After helping a new generation of investors get into stocks, Robinhood is increasingly doing the same for cryptocurrencies.More than $4 of every $10 that Robinhood Markets Inc.
Erin Griffith
August 18, 2021
www.nytimes.com
Robinhood lost $502 million, compared with a profit of $58 million a year prior.
Sarah Magnus-Sharpe
August 12, 2021
phys.org
Stock trading volumes in the United States have soared over the last year and much of it seems to be driven by retail investors. With thousands of stocks to choose from, what factors influence investors' decisions?
Priyanka Pani
August 11, 2021
Crowdfund Insider
Retail investing and trading service app Robinhood said it would acquire Say Technologies for $140 million in an all-cash deal.
Richard Dal Porto
August 10, 2021
TechCrunch
Hello friends and welcome to Daily Crunch, bringing you the most important startup, tech and venture capital news in a single package.
Alex Wilhelm
August 10, 2021
TechCrunch
The deal is notable because it is Robinhood's first major purchase since going public in July, and because it illustrates where Robinhood may look to invest some of its newly liquid equity wealth.
August 8, 2021
The Economic Times
New listings on Wall Street are appealing to Indian investors. Robinhood, the largest retail brokerage in the US, made its debut on Wall Street late last month and quickly became the talking point of various Reddit groups in India.
JD Alois
August 5, 2021
Crowdfund Insider
Click HERE to find out ⭐ Whiplash: Robinhood Files Registration Statement to Sell 98 Million Shares, Price Drops. | Crowdfund Insider: Global Fintech News, including Crowdfunding, Blockchain and more.
Richard Dal Porto
August 4, 2021
TechCrunch
Hello friends and welcome to Daily Crunch, bringing you the most important startup, tech and venture capital news in a single package.
Matt Phillips and Coral Murphy Marcos
August 4, 2021
www.nytimes.com
Robinhood became a publicly traded company only last week. Its stock stumbled in its first day of trading on Thursday, finishing down more than 8 percent.
JD Alois
August 4, 2021
Crowdfund Insider
Click HERE to find out ⭐ Robinhood Gets Some Investor Love as Shares Jump in Price. | Crowdfund Insider: Global Fintech News, including Crowdfunding, Blockchain and more.
Alex Wilhelm
August 4, 2021
TechCrunch
The wild swing in the price of Robinhood today appears from our vantage point to be another stonk moment.
Walter Thompson
August 3, 2021
TechCrunch
Square paid around a quarter of its present-day value for Afterpay. That seems like a lot. But was it too much?
SHOW MORE

References

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