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NEWSLETTERS & ALERTS
No Frills, No Commissions: Welcome to Robinhood Markets
A start-up broker-dealer called Robinhood Markets is taking on the big brokerage firms with its commission-free trading app, and appears to be making headway. Robinhood is a mobile-first stock brokerage for iPhone, Apple Watch, and Android, allowing customers to buy and sell stocks on U.S. exchanges with zero commissions. Since its introduction in December 2014, the app has attracted a million users and executed more than $30 billion in trades, up from $2 billion in 2015.
According to the FINRA CRD, the firm is headed by the following:
- Scott Friedman - President and CCO.
- Jason Lyons - FinOp,
- Nathan Rodland - COO and GSP.
SILICON VALLEY CONNECTIONS. Based in Palo Alto, CA. the firm was founded by Vladimir Tenev and Baiju Bhatt – 2 Stanford graduates who had previously built HFT platforms for financial institutions in NYC. That was from 2009 to 2012. Tenev and Bhatt realized that high-frequency traders and electronic trading firms pay effectively nothing to place trades on the market, which inspired them to bring existing technology to the retail brokerage market with Robinhood. So, in 2012, they returned to California, hired engineers, and spent the next 18 months building Robinhood. By the time the app began in the App Store in late 2014, it had a wait-list of a million people, most under the age of 30.
Tenev and Bhatt used their Silicon Valley connections to raise a total of $66 million in venture capital funding.
- $3 million in seed capital from Google Ventures, Andreessen Horowitz, Index Ventures, IT Ventures, Social Leverage, and Elefund.
- $13 million in Series A funding from Jan Hammer (Index Ventures); Ribbit Capital; Howard Lindzon (StockTwits and Social Leverage); Aaron Levie (Box); Dave Morin (Path); Jared Leto; Snoop Dogg; and, Nasir Jones (QueensBridge Venture Partners).
- $50 million in Series B funding from New Enterprise Associates; Index Ventures; Ribbit Capital; Social Leverage; and, Vaizra Investments.
OPERATIONS. At Robinhood, there is no minimum deposit to register an account, and there are no trading fees for customers who buy and sell United States-listed stocks and exchange-traded funds. To keep costs down, the company takes a no-frills approach. It has no storefront offices. It does not provide research reports, analytical tools, stock screening gizmos or options trading on its platform.
In addition to cash balances, the company makes money from “payment for order flow,” which refers to the money it receives for selling its orders to market makers to be executed.
“These revenue streams alone are not enough to sustain an online broker providing $0 trades - not even close,” said Blain Reinkensmeyer, the head of broker research at StockBrokers.com.
Recently, Robinhood introduced a Gold program, which offers margin accounts and after-hours trading, for a fee. “Robinhood Gold is where we anticipate the bulk of the revenues to come from in the future,” Mr. Tenev said. Robinhood charges Gold accounts a fixed monthly fee that works out to 5 to 6% interest on margin accounts, whether the customer uses the credit line or not.
PROBLEMS. Robinhood’s bare-bones business model has led to complaints about its customer service, with long waiting times by phone and emails that are not answered. Internet blogs are also filled with complaints about lengthy waits - up to 8 days - to transfer money from a Robinhood account to a bank or vice versa. Mr. Tenev said the company was looking to solve these problems.
And some customers are frustrated that the company doesn’t offer options trading, a website trading platform or automated transfers from other brokerage accounts. Mr. Tenev said that would change. “If you look down several years, we’ll offer all of these things,” he said.
One other problem is that "the illusion of being free encourages frequent trading, which is well known to be a cause of lousy investment returns,” said Tad Borek, an investment adviser at Borek Financial Management. “Is this just handing some free chips to gamblers?”
COMPETITION. Other start-ups have entered the territory to challenge Robinhood. They include Ustocktrade, which charges a $1-a-month membership fee and offers $1 trades, and Loyal3, which offers no-fee trades on a limited number of stocks, partial shares and initial public offerings.
So far, the big brokerage firms do not appear concerned about Robinhood. However, firms like TD Ameritrade and Schwab acknowledge that they are always looking for ways to stay competitive, and sometimes that means offering low-fee and no-fee trading promotions.