Robinhood Is Set to Raise at Least $200 Million in New Funding

https://www.bloomberg.com/news/articles/2019-05-24/robinhood-is-set-to-raise-at-least-200-million-in-new-funding?srnd=premium

by jason_zig • 7 years ago

153 176 7 years ago

bloomberg.com

nawtacawp• 7 years ago

The no commission model RH is providing is awesome and if they found a way to sustain that business model, great. The amount they have saved me (an avg trader with 25-50K) is well worth them selling my trade data to other firms. Sometimes their system is a bit glitchy. I'm sure as time goes by things will get tightened up. I mostly trade derivatives. If I open a 4 legged trade with 400 contracts that would cost me $300 in commissions on my old broker (TD Ameritrade) to open and an additional $300 to close it. Totally free with RH.

cwkoss• 7 years ago

Be sure to use limit orders! It feels like the execution price of their market orders can be looser than expected at times.

yding5• 7 years ago

Doubly true if it's outside market hours. Unlike every other broker Robinhood doesn't (always) warn you when the markets are closed. I've had fills come in dollars off the last trade simply because the market order was placed before or after hours.

TaupeRanger2• 7 years ago

Yes. It's amazing how many people don't know how to use limit orders, though entirely unsurprising since RH is a very beginner friendly platform.

arcticbull• 7 years ago

They're selling your trades not your trade data. They sell the orders you place to HFT firms which arbitrage them and kick back a commission to Robinhood to fund their business. It kinda costs you, actually, you just don't see it. [1] With low trade volumes/order sizes you may end up ahead but I don't have data to back that up.

[1] https://seekingalpha.com/article/4205379-robinhood-making-mi...

tylerhou• 7 years ago

It kinda costs you, actually, you just don't see it.

Except not: see Matt Levine's explanation: https://www.bloomberg.com/opinion/articles/2018-10-16/carl-i...

The conclusion:

So by selling its customers’ orders to market makers, Robinhood is actually stealing from two sets of “the rich”: Rich market makers like Citadel are paying it directly for the orders, while rich hedge-fund managers are getting worse execution on public stock exchanges so that Robinhood customers can get better executions off those exchanges. Big institutions are paying to subsidize free trades for Robinhood’s customers. It feels pretty Robin-Hood-y! If I were Robinhood I would advertise that!

the_pwner224• 7 years ago

Every other brokerage that sells services to normal people also does this.

stygiansonic• 7 years ago

I was under the impression that pretty much all retail brokerages (especially online discount brokerages) sell your trades (i.e. "payment for order flow") so I'm not sure if this would create a material difference whether you went with RH or some other retail brokerage?

manigandham7• 7 years ago

Nothing is ever free. Robinhood sells order flow, meaning your trades are executed by a real market maker but with slower fills, larger spreads and more restrictions on trades.

tptacek3• 7 years ago

Most retail brokerages sell order flow to internalizers, so if you're paying fees to trade, you're probably not getting anything back for that money.

Lazare2• 7 years ago

Robinhood sells order flow

True!

meaning your trades are executed by a real market maker but with slower fills, larger spreads and more restrictions on trades.

Incorrect. Retail customers who have their orders routed like this obtain instant execution at prices at least as good as, and sometimes better, than the best available price on public markets, and in the case of Robinhood, they also pay zero fees.

In other words, everything you said is wrong. They don't get slower fills, they get tighter spreads, and lower fees. This is strictly good for the retail investors.

vessenes• 7 years ago

This was such a good investment by Mickey and the Ribbit team: in 2013 Mickey told me that the history of retail brokerages points to fee revenue going to zero.

That the team went out and built a company for that reality is just stellar, and it’s fun to see insights like that turned into something real. Congratulations.

yding5• 7 years ago

I'm still not completely convinced that a zero commission brokerage can be run profitably, although mad props to the team for executing.

People often focus on the HFT payments for order flow, but another important leg of the stool (along with stock lending, and the premium tier/margin lending) is the interest rate differential.

If rates were going to 5%, that'd be one thing, but with rates at 2-2.5 and a couple of cuts being priced in, that's going to decrease profits there.

Also it's kind of hard to launch a 3% cash management account when the ten year is yielding 2.3%.

cheriot2• 7 years ago

woohoo, leveraged derivative trading democratized! /s

More seriously, I love the price pressure on brokerages, but I shudder to think what will happen to its users in the next recession.

thepangolino• 7 years ago

Recession would be alright. What would cause trouble would be a market crash.

TaupeRanger2• 7 years ago

Maybe nothing. The next recession might be over 5 years away. Who knows if RH will even exist then.

rhegart• 7 years ago

Revolutionary to young retail investors in getting them to save. Now someone do real estate lower commissions

bobthepanda• 7 years ago

Isn't that just Redfin?

gowld• 7 years ago

It was, until Redfin realized their customers like them better because they don't like talking to a human agent, so they raised their prices to be almost the same price as everyone else.

RIMR• 7 years ago

It's marketed as "the way young people get rich", and it's got a heavy focus on cryptocurrency.

I don't know if I would call it revolutionary so much as potentially exploitive.

phil248• 7 years ago

In recently started using Robinhood as an alternative to Ally (formerly TradeKing). Ally provided very little extra value to me in exchange for their transaction fees. And as a buy-and-hold investor, I don't really need much more than limit orders anyway.

What I do still need are better research tools, but my impression is that none of the consumer trading platforms provide anything very impressive on that front.

geekone• 7 years ago

thinkorswim might be worth checking out for research/tools/charting/news. I believe it is free without a TD Ameritrade account if you do a "paper money" account. I think the only negative of that is the paper trading account is delayed a bit.

nyrulez• 7 years ago

I am trying to make a difference in the problem area you mention. Would something like https://CoinQuanta.com (Alpha version) / https://StockQuanta.com (unreleased) be helpful towards your research needs?

Very curious to know what you're thinking when you think of better research tools

countryqt30• 7 years ago

I'm just starting on Youtube for that exact matter!

99% of American's don't understand the stock market. So I made a video with McKinsey and UBS to explain it in 10 minutes: https://www.youtube.com/watch?v=G6EoPlaPO5c&t=20s

cheerlessbog2• 7 years ago

If you're a buy and hold investor why does it matter if your occasional transaction costs $10?

jldugger• 7 years ago

Cuz that's all that's left to optimize. If you've got a spare thousand to shift into brokerage, 10 bucks is a hefty 1 percent fee.

trustfundbaby• 7 years ago

Because it's $10 that I could be using to buy actual stock and not gifting it to some broker for basically doing nothing.

Kyragem• 7 years ago

They sell your trading data to large high speed trading banks in real time, so stock price movements are much more volatile than when you trade through other platforms.

manigandham7• 7 years ago

They sell order flow itself, not data. The data is already public.

atomical• 7 years ago

So HFT's can see my limit orders that haven't completed?

algaeontoast• 7 years ago

The more users they have the easier it is to incentivize actual " accredited investors" to screw them in the market long term lmao. Unless of course they get users to sell more reflexively and schizophrenically...

docker_up4• 7 years ago

There is no way that Robinhood is worth this much money. I admire them, but $7 billion for 2 million customers is insane. I'm assuming they are targeting being the "Financial Amazon" for millenials, I'm just not convinced even if they achieved it it's worth this much. Stock trading is a dying business, and after the next stock market crash or recession, they will lose the majority of their customers. Moving into financial services might make sense, but I don't think these founders have the acumen to do this, as exhibited by their embarrassing attempt recently with their "checking and savings" account.

What Uber's IPO has shown is that VC funding is far too overly delusional. They buy their own bullshit about how growth trumps all but investors want profits and you won't see the real reaction until it starts trading for real, like Uber and Lyft. Until then, all you see is VCs talking their book and lazy tech writers repeating everything they say without actually thinking about it. So, sure some investors were stupid enough to invest $200M at $7B valuation, but I doubt Robinhood will grow into such lofty valuations that are reflected by the markets unless something drastically changes. 2M customers simply isn't enough.

harryh2• 7 years ago

Charles Schwab is currently worth ~57 Billion

TD Ameritrade: ~29 Billion

E-Trade: ~11.5 Billion

Fidelity Investments is privately owned, so harder to value, but is probably worth 50-75 Billion

benburleson• 7 years ago

I think the target market is the problem; older people have the money, and they're not moving from the places they know and trust.

YjSe2GMQ• 7 years ago

Interactive Brokers ~23 Billion. So between the 5 companies and Robinhood the latter would take ~4% of the market cap.

It's not that much, but I feel you.

vonmoltke• 7 years ago

All of those are more than just brokerages. They all have consumer banks (in the case of TD Ameritrade, a decent-sized one). Schwab manages their own mutual funds. Fidelity is one of the top providers of 401k services in the US (and also manages their own mutual funds).

Each of these companies is far more diverse than Robinhood, and their valuations are not comparable.

sonnyblarney3• 7 years ago

I'd imagine Robin Hood will sell insurance, their own funds, mortgages through a broker i.e. everything that those people need and would get anywhere else.

'RobinHood' is just a portal for sales to a generation.

Also, FYI, this name 'RobinHood' i.e. a brand created to make people think somehow they are 'good' (and all of their 'occupy wallstreet we wanted to do somethiong' BS) is laughable rubbish and kind of stain on a generation. Robin Hood is the same as anything else in a different config. Nike is not somehow 'moral' because they take some arbitrary stand on their billboards. They still pay people pennies to make shoes. It's a sad statement to think any of this marketing actually works. It's fine to 'want to do good' but if people can't understand that it's only 'talk' ... well, very naive.

thewastesadtime• 7 years ago

no ethical consumption under capitalism, and all that

malandrew4• 7 years ago

The thing that is odd about Robinhood is how it's a myth that has evolved pretty dramatically in how it is popularly interpreted and understood.

Previously it was about a world where the productive class had their wealth usurped by the taxman and a man who took that money back to give it to those that produced that wealth.

Now it's interpreted as a story about a man that takes from the rich and gives to the poor. There is no longer any consideration for who generated the wealth in the first place.

Nowadays, your wealth still goes to either the taxman involuntary by threat of licit force by the state or to voluntarily people that provide you goods and services that you deem beneficial. The difference is the Robinhood now steals from the latter instead of the former.

carlsborg• 7 years ago

Interactive brokers actually publishes its numbers every month. Currently at a mere 630k accounts. But a whopping $150 Billion in Client Equity, and the other metric this industry uses is DARTs or daily average revenue generating trades, which is close to 800k. Robinhood probably sells most of its flow to HFTs at lower than what IB charges on commissions and IB is valued at 3x or $22B

https://investors.interactivebrokers.com/ir/main.php?file=la...

tenpies• 7 years ago

Stock trading is a dying business, and after the next stock market crash or recession, they will lose the majority of their customers.

Is there historical evidence to back this up on older brokers?

We've been in a ~10 year - largely unprecedented - bull market where you could throw darts and make money. Recessions usually destroy the returns of index funds and broad ETFs that millennials have been sold on. When the market's rising tide isn't raising every ship, picking ships becomes important.

If anything a recession should increase the number of retail traders because their index ETF is getting destroyed, but there are a handful of companies or positions that are flourishing. In the past, at least we've had advisors who while glorified salesman you can at least call and will get you to calm down. Now we're going to have a generation of retail investors watching their investments tank 20% across the board with only Robinhood support to tell them to calm down? Is that going to be enough to stop them from liquidating their ETF and taking a more active role investing in recession-safe companies?

scarface742• 7 years ago

Do you have any cites of any 10 year period when more than 50 percent of managed funds beat their respective indexes?

scarface742• 7 years ago

What Uber's IPO has shown is that VC funding is far too overly delusional

VC investors were perfectly logical. The people who get in early on a Ponzi scheme often make out like bandits. It’s the people who bought in the public market who were the bigger suckers.

mudil• 7 years ago

"Stock trading is a dying business."

On what planet?!

omfgwhat• 7 years ago

How are the unit economics in favor of Robinhood? This has been tried before and failed. What's changed? https://qz.com/330015/robinhoods-free-stock-trading-app-and-...

docker_up4• 7 years ago

They have very low cost of acquisition of customers. This is opposite to some brokerages like TDAmeritrade that recently pulled their marketing budgets because they saw literally no uptick from marketing spending.

But that's not enough to justify their valuations.

yding5• 7 years ago

Robinhood has more customers than ETrade https://www.investors.com/news/robinhood-app-has-more-custom... and I bet it's growing much faster too, so no a 7 billion dollar market cap is not insane when ETrade has a market cap of 11 billion.

The problem with Robinhood, like many startups, is an issue of profitability and monetization. They've been switching up Robinhood Gold to try to get more customers to sign up. I'm sure that's where a lot of their effort is being put as they approach "have to IPO" valuations.

This low dollar amount round is also an indication that while they are still burning money, they may not be burning as much as they may have in the past. If I were to guess, turning on self clearing was a big part of that.

docker_up4• 7 years ago

Read that more carefully. 4 Million accounts, not all are funded. How much are funded? We don't know because they didn't say. I have an unfunded Robinhood account for the stock quotes.

E-trade is a public company so all its numbers are GAAP. Their account numbers are funded. So it's not an apples to apples comparison. Plus they are profitable, so the valuation numbers make Robinhood look even worse.

prklmn• 7 years ago

GAAP is so overrated. It's 2019. The goal is to acquire users, not to make money. Unprofitability is sexy. In all seriousness this might as well be 1998 and I just hope they go public before the next big market swing down so I can short it.

dtwest2• 7 years ago

From your source: "However, a Robinhood spokesperson said not all 4 million accounts are funded. The brokerage did not disclose total assets under management, average account size or typical starting balance."

They did not disclose the metrics that are important. You would need AUM information to effectively support your statement.

yding5• 7 years ago

OK, let's just be super conservative and say only 50% of Robinhood's accounts are funded. So they are valued at 3,500 per funded account. Let's assume you're right and that ETrade's accounts are all funded. So they would be valued at 3,081 per funded account.

Would you pay 13.5% more per account for a company that's growing at least 5x, if not 10x as fast? I know I would in a heartbeat, all else being equal.

Now, not all else is equal, so you can make an argument either way, but I wouldn't call Robinhood's valuation "insane."

el_cujo2• 7 years ago

"a 7 billion dollar market cap is not insane" is already a soft statement, I think enough info is present that you can say the valuation isn't impossible.

novok2• 7 years ago

They could make a fixed fee robo-advisor service for example, and start competing with businesses like wealthfront.

ackbar032• 7 years ago

Personally I think this whole robo adviser thing is just bs. It's a marketing gimmick at best, not much real value

astura4• 7 years ago

This is what Acorns is

anonu• 7 years ago

At E-Trade you can actually make money off the customer. Customers pay for a service. At Robinhood they get paid by the liquidity providers. And margins continue to shrink there

rb808• 7 years ago

Pity the guys at WSB can't buy calls on this. https://www.reddit.com/r/wallstreetbets/

AJRF• 7 years ago

That's an insane evaluation for 2m customers, most of which are probably playing with small "if-this-goes-im-too-scared-and-no-longer-a-customer" amounts of money.

Robinhood are also hilariously inept; See the box-spread fiasco and the checkings and savings account.

https://www.reddit.com/r/OutOfTheLoop/comments/ah2x2t/what_i...

travisjungroth• 7 years ago

Robinhood wasn’t legally allowed to open checking or savings accounts, but no one said anything about checking and savings accounts. I mean, until the SEC and SIPC did. They said no.

numbers• 7 years ago

I've learned a lot through Robinhood, trading from a couple of hundred bucks to about $15k (not all gains, a lot of it is deposited), I've gained confidence and knowledge as the platform has grown.

Not sure if $7B is valid but the company is disrupting the status quo of commission based trading.

drocer88• 7 years ago

In September 2018, Logan Kane, a contributor to Seeking Alpha, stated that Robinhood's payment for order flow generated ten times the revenue as other brokers receive from market makers for the same volume. Bloomberg has analyzed Robinhood's reports to the Securities and Exchange Commission (SEC), and calculates that Robinhood generates almost half of its income from payment for order flow. Robinhood's lack of transparency on this issue is troubling. Beyond that, payment for order flow is slowly being regulated out of existence, so a brokerage that depends on generating income by selling order flow to market makers will find itself in trouble within 5 years.

https://www.investopedia.com/articles/active-trading/020515/...

maxxxxx• 7 years ago

Just remember that you are trading in an upmarket. All your knowledge will be worth nothing in a downturn. It's a totally different game. Learned that in 2000 :-)

icelancer• 7 years ago

All your knowledge will be worth nothing in a downturn.

If you're lucky.

ambicapter• 7 years ago

What have you learned?

brewdad• 7 years ago

From the first dot com crash, I learned that a given stock can always drop another 10%. Until it hits zero, that is.

rburhum5• 7 years ago

I can only speak from personal experience, but I love Robinhood.

I am an amateur trader for pure hobby because of Robinhood.

Many years ago, I tried to create an etrade account and it was an insanely long process (it may have changed now). I don't even remember what I did after I got an invite from a friend, but I was up and running right away.

I started trading $300 just to see what it was like. The first three months, I learned a bit and lost some money. Fast forward 1 year to now, and I have around 54k in there and am up 16.05% - and that includes the crazyness of December. I have invited some friends and they all trade between $300 to 10k AFAIK. I am in no way rich, but I compare the performance of my retirement portfolio to what I do with a few ETFs, and honestly it has demystified the whole process. Before, I used to login to Clash of Clans when I had a few minutes to spare, now I spend that time browsing Robinhood. To me Robinhood was a game changer for this and many other reasons.

codethief• 7 years ago

Are you actively trading ETFs?

ng12• 7 years ago

and that includes the crazyness of December

You mean when the market dipped and completely recovered in two months? Hardly crazy.

rburhum5• 7 years ago

Well, everyone in my family thought I was crazy for constantly looking at Robinhood during Christmas to snatch good deals.

hn_throwaway_99• 7 years ago

I'm trying to not be condescending, but I have a strong feeling that will change when the market eventually crashes.

I say this because I honestly don't see how anyone who is serious about financial planning can use Robinhood for anything besides "play market". Case in point: the graphs in Robinhood show no y-axis values. This is insane if you actually care to see how your portfolio has been doing. Yet this is obviously intentional by Robinhood, so it must be designed to obfuscate what is really going on.

When things really start to go south (which they inevitably always do) there is going to be a run on the bank at Robinhood.

rburhum5• 7 years ago

So people will do that, but why would I just not sit out and keep stocks like my Berkshire or SP500 ETFs during it? Why would I just not double down and wait a few more years during those dips? Or am I not expected to do that because I bought it in Robinhood as opposed to having bought it in E-trade?

sigstoat• 7 years ago

I have around 54k in there and am up 16.05%

and where would you be if you'd just stuffed all your original cash into VTI and not fiddled with things?

n-exploit• 7 years ago

15.52, according to Yahoo.

im3w1l• 7 years ago

+1 on easy sign up. Robinhood was the third platform I tried. The first one refused me for being on a work visa. The second had a very complicated process where I would have to send in dead-tree forms. Robinhood was just simple and easy.

Unlike the stereotypical Robinhood user, I buy and hold a 1-fund portfolio, and I think it works pretty well for that.

warp_factor• 7 years ago

They make me extremely nervous. Most people I know that use Robinhood seems to use it as they would play dices in Vegas. They have no ideas on the stock fundamentals or why and how the prices change. Most of them are playing a big amount of their savings too which is extra concerning.

What makes me even more nervous is that Robinhood seems to deliberately cater to those crowds of uneducated emotional day traders.

I said this before but they seem to become the "facebook of finance" with the same "break things and go fast" mission. I would never use them for any significant amount of money. That being said, I use them occasionally for options because the fees of traditional brokers are such a joke (20$ typically to sell and buy).

cosmodisk• 7 years ago

The idea of beimg able to trade stocks quickly is appealing, however this is a slower version of say trading,which is as difficult as it can possibly get. Ability to buy and sell stock often is a death kiss for 99% of amateur traders.

el_cujo2• 7 years ago

Those risks are present in the market in general, independent of robinhood. Should a platform be discouraged because its benefits don't discriminate between fools and people who know what they're doing?

Traster2• 7 years ago

I don't know what it's like in the US, but in most countries gambling is very highly regulated for good reason. Buying stocks on the stock market with little to no information is basically gambling, the difference is that you have no idea what your odds are, often the cash out terms are unclear and the broker has no financial restrictions on letting you bet more than you can afford.

In fact, I know in the US you need to be an accredited investor for some times of investment for exactly this reason - it is so easy to get ripped off.

walrus01• 7 years ago

The only people I've seen who actually use robinhood are the people at reddit.com/r/wallstreetbets , who seem like a cohort of dilettantes.

omarchowdhury• 7 years ago

They seem like that because none of them want to share any edge, but I might be generous in my assessment.

lemony_fresh• 7 years ago

My tin foil hat theory is that this is a conspiracy to keep dumb money at the table.

Causality1• 7 years ago

It seems like a predatory business model. Robinhood encourages amateurs to compete with professional stock traders and charges them a fee for the privilege. I'd like to see numbers for how much money the median Robinhood user loses.

ericd4• 7 years ago

Which makes their name incredibly ironic.

dawhizkid• 7 years ago

I have a hard time rooting for their success when their marketing/brand/aesthetic is all about encouraging high risk behavior among younger retail investors...

atemerev• 7 years ago

They are the company who figured out the ways of selling their customers’ flow to hedge funds directly, so the latter could adapt their market making algorithms for guaranteed profit?

Stealing from the poor and giving to the rich, genius!

Robinhood Is Set to Raise at Least $200 Million in New Funding

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