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How Robinhood Transformed Retail Trading Ahead of Its IPO | WSJ - YouTube
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- Trading platform Robinhood
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- And one of the most highly
anticipated IPOs of the year
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- That's a big deal
for the retail investor
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but it could also come
with some big risks.
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- [Narrator] Last year,
millions of investors traded
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on the brokerage app Robinhood.
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They were part of a trend.
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Since 2020, individual
investors bought billions
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of dollars in equities, driven by the rise
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in no-fee trading apps with
Robinhood leading the way.
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- Robinhood, when it came onto the scene,
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really upended the industry.
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- We believe that the more
people that have access
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to the markets and can
start investing earlier
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the better off our economy will be.
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- [Narrator] After a
year of dramatic growth,
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Robinhood filed for its IPO on July 1st.
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But the filing comes
as the brokerage faces
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a collision course with
regulators, including a new
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Securities and Exchange
Commission chairman
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over a controversial
practice that Robinhood uses
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to generate most of its revenue.
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Here's how Robinhood
went from startup to IPO
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in less than a decade and why it's facing
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so much turmoil as it
gears up to go public.
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In the '90s, brokerages
like E*Trade and Ameritrade
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started offering online trading
services which helped open
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up the stock market to retail investors.
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But it was expensive.
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- [Spokesman] Internet trade
for $8, Touch-Tone trade...
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- [Narrator] Trading fees
could add up to hundreds
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or even thousands of dollars a year.
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- That was one of the reason why we saw
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relatively muted levels
of individual investors
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in the market.
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- [Narrator] Caitlin
McCabe reports on Robinhood
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and retail investing for
the Wall Street Journal.
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- It was cost prohibitive
to try to be trading
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all the time with these fees.
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- [Narrator] That was the case until 2015
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when Robinhood released its trading app.
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- From the very beginning,
our mission has been
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to democratize the financial system.
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- [Narrator] This is Robinhood
co-founder, Baiju Bhatt.
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- And for us, this isn't a
headline, it's not a gimmick
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or a billboard ad, it's the central reason
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why we started the company.
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- [Narrator] To attract new
investors, Robinhood offered
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features that made
investing more accessible.
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It was one of the earliest brokerages
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to offer no-fee trading.
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It was also a pioneer in
fractional share trading.
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- So suddenly, you could buy
$10 of Amazon or $50 of Amazon.
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You could just buy, basically,
a slice of that stock
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and it just made it much
easier for investors
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to access the market in that way.
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- [Narrator] But price
wasn't the only thing
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keeping retail investors
out of the market.
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- So it was just really
intimidating to try to trade
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and to try to figure out charts
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and to understand what was
happening in the market.
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- [Narrator] Robinhood also
experimented with features
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aimed at keeping people engaged.
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When users would log on to the app
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and place their first trade,
it used to rain confetti,
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stock numbers turned like slot machines,
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and some of its messages
to investors used emojis.
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- And it was just a very
inviting app, it was very fun.
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They were just very
kind of on the forefront
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of trying to invite that
Millennial crowd into trading.
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And I think it worked, I think
that's part of the reason
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why Millennials liked the app.
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- [Narrator] Robinhood's
user base grew quickly
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which caught the attention
of its competition.
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By 2019, major brokerages
like Charles Schwab
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and TD Ameritrade had adopted
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zero commission trading, as well.
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- It was just recognition of kind of what
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Robinhood had built and
the market share that
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it had amassed and that
kind of was the genesis
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of this new trading era that we see today.
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- [Narrator] And then in early
2020, the COVID-19 pandemic
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took hold of the world.
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- We are looking at another
day of extreme volatility.
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Stocks opened just moments ago
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with the DOW down more than 600 point.
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- I think with the market
volatility, a lot of people said
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I think this is a good time for me
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to try to get into the market
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and that's where we've
really seen this explosion
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of activity from individual
investors ever since.
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- [Narrator] According to its IPO filing,
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Robinhood counted 18 million
users with funded accounts
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at the end of March
2021 and the brokerage's
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first quarter revenue more than
quadrupled to $522 million.
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But as Robinhood has grown,
so has criticism that
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some of the app's features,
the very ones that help
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make it successful could cause problems
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for inexperienced investors.
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Critics said the app's
interface which made it fun
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and easy to use actually gamified trading
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and put inexperienced investors at risk.
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- Trading's a challenging business.
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- [Narrator] Larry Tabb is
a financial markets analyst
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who has studied market
structure for over 25 years.
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- You're competing not only with some
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of the largest investors in the world,
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but you're trading with some of the guys
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with the biggest computers
and the fastest data feeds
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and the most sophisticated analytics.
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It's really difficult
to continually beat them
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day in and day out.
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- [Narrator] Over the
past year, Robinhood has
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also faced criticism over
how it makes its money
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and how it previously
communicated that with investors.
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In December 2020, Robinhood
agreed to pay $65 million
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to settle claims that it
didn't sufficiently disclose
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its business deals with
high-speed trading firms.
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And then there was GameStop.
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- Outrage erupting in this wild
and expensive battle that's
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playing out between Wall
Street heavyweights,
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small investors, and these
popular stock trading apps.
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- [Narrator] In January 2021,
Robinhood came under scrutiny
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after it restricted users
from buying GameStop
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as the company's share price surged.
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The trading blackout caused some investors
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to lose out on potential gains.
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About 50 class-action lawsuits,
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investigations by regulators,
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and multiple hearings with
members of Congress followed.
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Here's Robinhood CEO speaking
with the House Committee
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on financial services.
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- Despite the unprecedented
market conditions in January,
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at the end of the day, what
happened is unacceptable to us.
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To our customers, I'm
sorry and I apologize.
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- [Narrator] During the
hearings, lawmakers scrutinized
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Robinhood's use of a
financial practice called
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payment for order flow
which allows the brokerage
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to route customer orders through
high-speed trading firms.
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According to Robinhood's
IPO filing, the company made
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around 81% of its first quarter
revenue from this practice.
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Payment for order flow
has raised red flags
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with the SEC's new Chairman, Gary Gensler.
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- This inherent conflict is there
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and whether we can address
it enough through disclosure
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or it sort of implicates the
broader market structure.
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And I've asked staff to think about that
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broader market structure.
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- [Narrator] Gensler is
reviewing payment for order flow
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which could have implications
for the future of Robinhood
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and no-fee trading, in general.
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- This is part and parcel of Robinhood
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how they make money, so it
will be really interesting
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to see if Gensler decides to
be a one-man wrecking crew
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and really radically
reshift how the economics
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of the retail brokerage business.
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- [Narrator] Robinhood has faced
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other regulatory issues, as well.
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In June, the brokerage agreed
to pay nearly $70 million
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to resolve allegations
that it misled customers,
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approved ineligible traders
for risky strategies,
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and didn't supervise
technology that failed
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and locked millions out of trading.
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According to its IPO
filing, Robinhood continues
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to face a number of regulatory inquiries.
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Still, some industry veterans
say Robinhood will survive
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the SEC's review even if
regulations are imposed.
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(soft electronic music)
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