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Robinhood: The miracle of the passionate retail investor

W3.Hitchhiker

22-07-01 10:00

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Original title: "Passionate Retail Miracle -- Robin Hood"

Author: David, W3.Hitchhiker; Revision: Evelyn, W3.Hitchhiker

Robin Hood was a latecomer to the brokerage industry, but quickly became an upstart in the century-old business by lowering barriers, gamifying trading and event marketing. Controversy aside, Robin Hood's development provided a clear model for strategic overtaking for subsequent industry game-breakers.

Key points:

User surge: Since its launch in 2013, Robin Hood has become one of the most popular and influential fintech apps in the world. It now has more than 22.8m gold-holding accounts, up from 300,000 in 2015.

Buzz: Robin Hood has been the subject of a lot of attention, including retail trading mania, a record $70 million FINRA fine, ongoing congressional scrutiny, trading outages and growing customer service issues.

Retail platform: Robin Hood users are around 30 years old, they like games, the median account is 240 USD, the average account is 5000 USD (over 70,000 USD), and the acquisition cost is 12 USD (over 170 USD).

Trading data is opaque: Most brokers publish their trading statistics to help investors compare payments in order flows. Robin Hood was unable to disclose this information to the public because of its use of PFOF (Payment for Order Flow) to execute transactions. American regulators have already levied several fines against Robin Hood for PFOF as well, and are considering new regulations to ban PFOF altogether.

Wave one and wave three: How to capture the Long Tail in a bottom-up way

The first wave of user surge (300,000 to 5 million) : significant lowering of transaction barriers

Robin Hood's early exit from commission-free services (typically $8- $10 per lot) and lack of minimum account capital requirements make it easier for first-time investors on low incomes to start trading. Users can also trade fragmentary shares -- pieces * of a company's single shares (which can be as small as 1/1000000), rather than whole shares. That makes it easier to invest in stocks like Apple or ETFs.

This accessibility greatly expands the platform's total potential market, shifting trading users from typically older, wealthier individuals (with at least some investment knowledge) to younger, less experienced, and poorer people. For example, the average Robin Hood client is 31 years old, while the average Charles Schwab client is about 50 years old. Most 20-somethings have their first chance to get in a car and trade securities.

* Fragmentary shares can only be transferred between Robin Hood accounts and cannot be transferred out, forcing the transfer will result in fragmentary shares being sold.

Ps: How do customers trade on Robin Hood

Before users can start trading on Robin Hood, they must apply for a stockbroking account. That's because the SECURITIES and Exchange Commission requires all brokers operating in the U.S. to collect and verify personal information about individuals trading on their platforms, including their net worth and Social Security numbers; At the same time, the customer also needs to provide their bank account number for deposit and withdrawal.

Second wave of user surge (5 million to 12.5 million) : simple, gamified experiences

After opening a securities account, the user will enter the following page. The Robin Hood trading page is simpler than the average brokerage account. Account holders' positions are summarized in green (up) or red (down), providing an overview of their entire portfolio. To buy and sell stocks or cryptocurrencies, just double click on the ticker symbol. Transactions show up as simple transactions in a user's account history, in much the same way that a banking application displays deposits and withdrawals.

Once the customer starts interacting with the application, the gamification element begins. One of Robin Hood's promises is that new accounts will receive free stock -- a single share in a randomly selected company. While new users could theoretically get shares in companies such as Apple or Tesla, this is unlikely in practice. New users have a 98% chance of getting stock worth between $2.50 and $10 to drive user growth.

Robin Hood uses the same psychological motivations that drive game behavior to build uIs to please those unfamiliar with active investing. The interface is chock full of emojis, push notifications, digital confetti and supportive confirmation emails. Its "game loop" makes trading stocks easy while providing sensory feedback.

By pleasing his audience, Robin Hood created players, not investors. This helps them ignore the fact that speculative investing is very difficult and can cause them to lose a lot of money - even if they are professionals who spend hours and days reviewing companies and deals.

The addition of this gaming experience, along with home quarantine due to the COVID-19 pandemic and the US government finding money for its citizens, is thought to have contributed to Robin Hood's surge of about 3 million new users in the first four months of 2020. In the first quarter of 2020, these so-called "COVID-19 stock traders" traded nine times as many shares as e-Trade users and 40 times as many as Schwab users. Robin Hood traded 88 times as many options contracts as Charles Schwab users in the same period.

Discussion: Pros and cons of gamification of trading

Eventually, evidence emerged that Robin Hood's traders underperformed institutional investors. Independent studies by Oklahoma State University and Emory University found that, on average, stocks bought by Robin Hood traders did not perform well over the next three to 20 days.

"We found that the change in Robin Hood ownership was not related to future returns, so we flagged Robin Hood users as" noise traders "in the market. However, Robin Hood may still have real value. The app provides the average retail investor with an opportunity to try trading -- for just $1."

"The Robin Hood APP makes Wall Street feel like a game to win -- not a place where you can lose your life savings in a minute."

Wave three (12.5 million to 22.5 million) : hit event marketing

WSB ordered Meme shares, Musk ordered Dogecoin

Spurred on by members of the WallStreetBets subreddit, Trading in Meme stock exploded in early 2021. Amateur day traders pushed up the stock prices of struggling companies like GameStop, AMC and Best Buy, partly to cover hedge fund short positions, partly for fun and partly to make money.

A large proportion of these traders turned to Robin Hood to execute these trades, possibly due to the low cost of opening an account, resulting in the Robin Hood app receiving so many orders in such a short period of time that it was forced to stop trading -- which later attracted regulatory scrutiny.

In January of '21, Robin Hood opened more accounts than all other institutions combined.

The company has also been a big beneficiary of the surge in the cryptocurrency market. The app allows investors to buy and sell seven digital currencies, including Bitcoin, Bitcoin Cash, Dogecoin, Ethereum and Litecoin. Among them, Dogecoin is the largest traded coin, contributing more than 60% of crypto revenue in the second quarter of last year's peak and 25% of annual revenue. It has to be said that dogcoin surged 20 times in the second quarter of last year, which is also the credit of Musk's orders and Robin Bingham's influx of retail investors chasing high prices.

The result of Robin Hood's three waves of growth is, first, its emergence as a new pole in a brokerage market that has been stable for decades.

Second, the rise of retail investors has become an important force that financial institutions and listed companies must take seriously. In 2020, Schwab estimates retail traders' total assets at $50 trillion, or 20% of all U.S. stock trading volume, double what it was in 2010. The emergence of Robin Hood has facilitated and accelerated the retailization of investors. Sensitive companies have begun to value the integration of IR and PR.

Finally, the line between investment goods and consumer goods is becoming more blurred. Between 2015 and 2021, more than half of the capital accounts were from novices. The entry of a younger generation affects not only the complexity of the market, but also the investment culture. The NFT mania of the past year can be traced to this very young group of investors, as investing and equity became means of self-expression.

Status: Mad cow gone, not good

In the first quarter of this year, monthly active users fell 25% year on year, while platform revenue fell 47% year on year. Shares have fallen 80% from their IPO highs last year.

Two, Robin Hood typical user portrait

With more than 13 million users with an average age of 31, Robin Hood is positioning itself as the ideal choice for young investors who want to get in on the game -- even if it means making a small investment through piecemeal shares.

According to Vladimir Tenev, CEO of Robin Hood, the median customer account size is $240, while the average account size is about $5,000. By comparison, e-Trade's average brokerage account was estimated to be worth about $69,000 before it was acquired by Morgan Stanley in 2020. Morgan Stanley's average account value is even higher, at about $175,000.

In terms of customer acquisition costs, Robin Hood's average cost to access a new funding account fell 60% from $53 in fiscal 2019 to $20 in fiscal 2020. In the first quarter of 2020 and 2021, the average cost of acquiring a passenger halved from $32 to $NBSP; 15 The dollar.

In 2018, E-Trade spent $170 million to buy more than 1 million brokerage accounts (representing $18B in assets) from Capital One Financial, which were valued at about $170 each. Speaking about the deal on a conference call, an e-Trade executive said it was "well below our typical customer acquisition costs for a broad group of customers that meet our target profile," indicating that E-Trade's acquisition costs are typically higher than what it pays per brokerage account. 170 The dollar.

Robin Hood Transaction encryption service

Robinhood Crypto was launched in 2018 and competes directly with cryptocurrency brokers like Coinbase. Robinhood has the advantage of offering commission-free trading. In 1Q21, 9.5 million customers traded cryptocurrencies such as Bitcoin, Ethereum and Dogecoin on the platform -- up 458% from the previous quarter. At the end of the first quarter of this year, the amount of cryptocurrency assets deposited on the company's platform reached nearly $20 billion, compared to $256 billion deposited on Coinbase during the same period. Where Robinhood Crypto is relatively weak is in its lack of money transfer or withdrawal capabilities: customers currently can't move their Crypto assets in and out of their accounts.

The main pros and cons of Robin Hood versus Coinbase trading cryptocurrencies are as follows:

Both platforms operate similarly, allowing users to create accounts using a simple registration process and similar verification measures. Robin Puts trades to market makers to execute and charges investors a fee for order flow. After connecting a bank account, customers can buy cryptocurrencies, but they can't transfer them to a digital wallet until they sell them for cash.

By contrast, Coinbase is an online cryptocurrency exchange where customers have full control over their tokens and can withdraw them at any time into a digital wallet or cold wallet.

4. Order Flow (PFOF) transaction mode

Robin Hood uses PFOF (Payment for Order Flow) to execute transactions. PFOF is a controversial practice in which brokers instruct third parties known as "market makers" to execute trades on their behalf. For Robin Hood, the process is as follows:

First, investors use the Robin Hood app to buy and sell stocks or cryptocurrencies.

Robin Hood then passes the order on to market makers such as Citadel Securities or Coinbase, which actually executes the trade. Market makers pay Robin Hood a rebate fee - usually a fraction of a cent - for these orders.

Finally, the trades are executed by market makers, who profit by buying shares at slightly lower prices than they were sold.

According to the SEC, market makers "generally have more information and processing power than retail dealers and brokers". In theory, this makes them ideal middlemen for big deals. But PFOF, started by disgraced former investment banker Bernie Madoff, is controversial for its lack of transparency.

Under SEC Rule 605, market makers are legally obligated to provide the best possible quality of execution for each trade. "Execution quality" refers to how close the strike price (the actual cost of a security, as opposed to its theoretical price) is to the purchase or sale price of the security. But while market makers are legally compelled to seek the best possible execution for their clients, they are not compelled to offer the best possible prices. This can lead market makers to execute trades at prices that are favorable to them, but may not be in the trader's best interest.

Robin Hood is not the only broker using PFOF. Other brokerage firms, such as Charles Schwab and E-Trade, also make money from PFOF, though much less than Robinhood -- PFOF accounts for just 3 percent of Schwab's revenue and 17 percent of E-Trade's. Before it was acquired by Schwab in 2019, TD Ameritrade reported order flow payments of about 0.1 cents per share, while E-Trade reported similar figures.

Robin Hood's heavy reliance on PFOF caused it serious legal problems. In December 2019, the Financial Industry Regulatory Authority (FINRA) fined Robin Hood $1.25 million for "best execution violations," and in December 2020, the SEC charged the company with misleading its customers and fined it $65 million.

Appendix 1: Accounting arrangements for crypto assets

From Robin Hood's 2021 Annual Report:

We act as a proxy for users in their cryptocurrency transactions. We have determined we are agent, because we do not control the encrypted before delivery to the user currency, we are not primarily responsible for provide encryption currency to our users, we will not risk caused by the following factors of encryption monetary market price fluctuations before delivery to the customer, we do not set the prices charged by the user.

After purchasing cryptocurrencies on the platform, users are their legal owners, and we and the cryptocurrencies managed by users have all the rights and interests of ownership, including the right to appreciate and depreciate cryptocurrencies. As a result, cryptocurrencies held in custody on behalf of our users are not reflected in our balance sheet.

Appendix 2: Robin Hood Cryptographic Wallet and Robin Hood 3

With Rabinham 3, users can SELF CUSTODY their cryptocurrencies, but users can use mnemonics via Rabinham; At the same time have CEX silky experience; In addition, users can experience cryptocurrency transactions, P2P transfers and DEFI functions through the tactile experience of the interface.

Appendix 3: Investors

During Robin Hood's multiple rounds of funding, which raised about $5.74 billion, they attracted a number of legendary venture capital firms, including Andreesen Horowitz, Sequoia, Kleiner Perkins, and Google Ventures.