Trading app Robinhood said 9.5 million customers traded cryptocurrency during the first quarter of 2021, soaring from 1.7 million crypto traders on the platform in the last quarter of 2020.
Robinhood shared the figure in a blog post on Thursday in which it highlighted its Robinhood Crypto platform that it launched in 2018. “This year in particular has been a big one,” it said about activity in 2021.
There’s been a pickup this year in the number of financial institutions and other companies saying they will allow their customers to use or to gain access to cryptocurrencies and the blockchain technology that backs them. Investment bank Goldman Sachs is looking into ways to support their clients’ desire to own cryptocurrencies and other digital assets, CEO David Solomon said Tuesday in a CNBC “Squawk Box” interview. Tesla’s CEO Elon Musk last month said the electric vehicle maker will accept bitcoin as payment.
Robinhood said its customers have access to seven tradable coins including bitcoin, dogecoin and ethereum.
“The prospect of an open and decentralized global financial system, one where everyone can have access to financial services, strongly aligned with Robinhood’s mission–so democratizing cryptocurrency trading felt like a natural next step,” said Robinhood.
The ongoing fiasco that grew out of online broker Robinhood’s decision to limit customers’ ability to buy “meme stocks” like GameStop in January has produced a lot of noise, but also a silver lining.
Robinhood’s move, which angered customers and some online commentators, also brought attention to how retail brokers like E*Trade, Charles Schwab, TD Ameritrade and Robinhood handle orders on behalf of their retail customers.
When a customer attempts to buy or sell a share of a stock or other security brokers have a legal and moral obligation to provide their customers with “best execution,” which means that these companies must give their customers the best price “reasonably available.” But this certainly is not happening in US securities markets today.
Retail customer orders with commission-free broker-dealers like Robinhood – that do not charge customers a fee to execute their trade – are sold to high-speed market makers like Citadel Securities and Virtu Financial in a scheme called “payment for order flow.” In essence, Robinhood and other brokers do not actually match a buyer and a seller to complete a full stock trade.
Instead, Robinhood sells their customers “orders” by the millions to market makers like Citadel, who do the hard work of lining up buyers and sellers in exchange for a fee. These high-speed market makers process massive amounts of trades every day and have taken over the market. By paying billions of dollars in kickbacks to retail brokers, on a typical day Citadel processes 40% of all retail securities orders in the US stock market, making Citadel the most powerful middleman on Wall Street.
Citadel, Virtu, and Robinhood claim to benefit the retail investor by offering better prices than they might get on exchanges. It is true that Citadel sometimes gives retail investors a better price than the National Best Bid and Offer (NBBO), basically what regulators have determined to be the best selling and buying price for each security, displayed by the Securities Information Processor (SIP). But the NBBO SIP is a slow data feed that provides incomplete information on buy and sell orders displayed on exchanges.
The NBBO benchmark Citadel and Virtu use is widely understood to be outdated and incomplete. But brokers selling their order flow and the market makers who buy that flow and execute their trades have a strong incentive to ignore non-displayed orders because poor execution quality for retail investors translates directly into profits for them.
The best execution requirement requires best execution. It is not sufficient to provide a slight improvement on an inferior price. To illustrate how the market works, suppose that the displayed NBBO SIP for a stock is a bid, the highest price a buyer is willing to offer, of $10.00 and an offer, the lowest price at which a seller is willing to sell, of $10.30.
A Robinhood customer sends an order to sell 100 shares to Robinhood, which sells the order to Citadel. Citadel might, at its discretion, give a sort of imaginary “price improvement” over the NBBO SIP and buy the 100 shares from the seller at $10.01, a one penny improvement over the “best” bid of $10.00. This gives the retail seller price improvement of ($0.01 x 100 shares) $1.00 over the best displayed bid on the SIP.
But Robinhood’s customers are entitled to more than a discretionary increment of price improvement over the NBBO. They are entitled to the best price “reasonably available,” which means that they should have access to the vast swathes of the market that are not displayed on the NBBO SIP, but are available Citadel and Virtu through their network of systems that track buy and sell orders that are not displayed on the SIP.
In particular, it often is possible to execute a trade at the midpoint between the NBBO best bid and the best offer. Midpoint pricing would have given the Robinhood seller $10.15 for their shaper share price improvement of $15.00 rather than just $1.00. That extra $14.00 represents the profit that Citadel makes on the trade minus whatever pennies Citadel paid for the order flow.
Of course, if payment for order flow were eliminated, commissions for discount brokers likely would return, but even with commission of $7.00 per trade the retail customer is better off without payment for order flow.
In a nutshell, Citadel is in direct competition with the retail investor for the best prices and has paid retail brokers like Robinhood billions of dollars to help them cover up this conflict. In fact, on March 11, Virtu CEO Douglas Cifu admitted in a TV interview that retail customers of brokers like Fidelity, who don’t pay for order flow get better execution quality than customers on venues like Robinhood.
The biggest question facing Gary Gensler as he takes the helm of the Securities and Exchange Commission is whether Citadel and Virtu have a duty to seek the best price in the market or whether the “duty of best execution” has been truncated to mean that customers are only entitled to the NBBO SIP.
At present, Virtu and Citadel decide what, if any, price improvement to give to customers. Price improvement is arbitrary and discretionary. And it’s a zero sum game. The better the deal the retail gets, the less money that Citadel and Virtu make.
Robinhood is getting rid of one of its most controversial features, the company announced Wednesday.
The stock trading website is redesigning the look of its interface, and that includes dumping one of its trademark features: a confetti animation that pops up after users make their first trade.
“In the past, we used the same confetti design to celebrate firsts with customers,” Robinhood said in a blog post. “Those included customers’ first trades, their first steps with cash management, and successful referrals of friends and family. Now, we’re introducing new, dynamic visual experiences that cheer on customers through the milestones in their financial journeys.”
The free stock trading app has caught heat from critics who say it makes investing too much like a game, enticing novice investors to trade obsessively and place bigger bets than they should. Robinhood’s easy-to-use, flashy platform leads some inexperienced users to play the market compulsively, Insider previously reported.
Robinhood, for its part, rejects the notion that it gamifies investing, saying instead that its sleek interface helps people invest more easily.
“Robinhood was designed to help investing fit easily into people’s lives. That’s why our app is simple, easy-to-use, bright-maybe even delightful,” the company said in Wednesday’s blog post.
Starting next week, Robinhood will roll out new animations to mark actions like making an inaugural trade, depositing money, or signing up for Robinhood’s paid offering, Robinhood Gold.
The changes come as Robinhood faces heightened scrutiny over how traders use its app. In January, users pushed GameStop and other so-called meme stocks to record highs. The move comes as Robinhood prepares to go public.
Robinhood traders boosted the market’s recovery by adding 1% to the aggregate US stock market valuation in the second quarter of 2020, a study by the Swiss Finance Institute found. Traders also added 20% to the value of small-cap stocks.
The study, first reported by Bloomberg, also revealed that Robinhood traders had an impact five times the size of their assets in the second quarter. Retail traders on the platform, according to researchers Philippe van der Beck and Coralie Jaunin, also alleviated the stock market crash during the first quarter of last year by 0.6%. The paper was published in SSRN, a publisher of scholarly and academic research, in January 2021.
“The price impact of Robinhood traders is concentrated towards small-cap stocks and the consumer staples industry.” the pair wrote. “However, they are able to affect the price of some large companies, which are being held primarily by passive investors.”
The pair concluded that individual retail investors react more strongly to price changes.
“We show that when institutions react sluggishly to non-fundamental price changes, the mechanism stifles and retail demand shocks can have substantial impacts on stock prices,” the pair wrote.
Moving forward, the researchers found that if the role of Robinhood, “facilitated by novel fintech solutions,” continues to grow, the “extraordinary volatility observed during the pandemic may turn out to be the new normal.”
“The prominent role of Robinhood traders in driving returns evokes concerns about the future role of retail trading in equity markets,” the pair said.
The rapid rise of retail investors has been a powerful force in the stock market, enabled by a range of factors including commission-free trading, distribution of government stimulus checks, and heightened pandemic boredom as many people continue to work from home.
Robinhood is looking to allow its users to buy directly into initial public offerings, including its own, alongside institutional investors, Reuters first reported.
While the popular trading app – which confidentially filed IPO paperwork on March 23 – could easily implement this for its own debut, it remains to be seen how other companies will react to this move, knowing how limited allocations are to investors during new listings.
Further, Robinhood would still need to get the approval of US regulators and negotiate with companies and their brokerages, sources told Reuters.
Robinhood users and retail traders are currently not able to buy stocks of newly listed companies until they start trading, unlike Wall Street investors. If this initiative succeeds, it will be considered a win for retail traders as shares often trade higher when they debut in what is commonly known as a first-day pop.
Millennials in India might be changing the country’s stock market.
Driven by quarantine boredom, many 20- and 30-something Indians have turned to stock trading during the pandemic, reported Bloomberg. The stock market rally and rise of trading apps and social media has lured these young investors, Bloomberg wrote, many of whom are day trading for the first time.
The influx of young investors is a similar story around the world, but an especially positive sign for India’s economic development, as active investor accounts increased to a record 10.4 million in 2020. Only 3.7% of the country’s 1.36 billion people invest in equities, per Bloomberg, compared to 12.7% in China and 55% in the US.
“India could easily equal China’s market cap in the next five to 10 years because going forward, growth in India’s market will probably be faster,” emerging-market investor Mark Mobius told Bloomberg. “China, because of its size, will probably grow more slowly.”
It also signals that internet adoption is extending to areas of the country beyond the big cities of Mumbai and New Delhi. Securities firm Angel Broking told Bloomberg that more than 50% of its new customers in its fourth quarter were from “smaller cities and towns.”
Indian millennials are more likely to take market risks, a departure from other investors’ traditional investments in bank deposits and physical assets like real estate and gold, the latter of which served as an “insurance policy and a retirement plan in a country that lacks robust social welfare systems or widespread access to formal credit,” Bloomberg wrote.
This appetite for risk-taking is common in other markets’ experience of millennial investing, though, pointing to a more volatile economy as younger participants join the stock market.
Robinhood, the trading app popular among retail investors, selected Nasdaq as the venue for its listing, according to Bloomberg. Robinhood is also said to be keeping its listing plans open to change. It’s been eyeing an IPO since as early as 2018. The company had more than 13 million users at the end of 2020.
The app’s rapid rise to prominence peaked during the GameStop short-squeeze saga in late January as an army of Reddit day traders sparred with hedge funds to push shares of the video-game retailer to dizzying highs.
Robinhood achieved an $11.7 billion valuation in a funding round last year. It also raised financing this year that will convert to equity upon the completion of an IPO, Bloomberg reported in February. A first tranche will convert at the lower of a $30 billion valuation or a 30% discount to the IPO, with the second at the lower of the 30% IPO discount or a $33 billion valuation, according to Bloomberg.
Robinhood hired Goldman Sachs in December to lead its IPO.
It feels like a fever dream now, but for one week in late January all anyone in the media could talk about was Gamestop’s skyrocketing stock prices.
In case you’ve already driven the episode out of your memory, here’s a brief recap: A Wall Street hedge fund had placed a big bet that America’s biggest chain video game retailer was on the verge of failure, and users from a subreddit called WallStreetBets rushed in to buy stock and force the hedge fund to cover their positions, thereby costing the fund billions of dollars in the process and driving the stock price up in what’s called a “squeeze.”
Before Robinhood throttled the stock-buying craze, the internet was full of pundits claiming that the little guy was finally striking back against Wall Street, that the age of hedge funds had come to an end, and that a new economic order was dawning. But now that GameStop’s share price has declined considerably (though it remains quite erratic,) those hot takes all seem like empty hyperbole. Hedge funds made fistfuls of money off the GameStop stock fad, and the stock-trading revolution didn’t materialize. The rich got richer – and everyone else, by and large, either lost money or coasted along.
Khanna has some harsh words for Robinhood’s decision to disable its users capability to buy certain meme stocks without any explanation. “Even if you don’t think there’s any nefarious motive – my sense is it was a liquidity issue and they didn’t have the money required to meet the clearinghouse collateral requirements – you wonder why they didn’t have to have disclosure,” Khanna said.
“They had no disclosure to their investors. They took no provisions to have loans or other capital available if they ever ran into that situation,” Khanna continued, adding that Robinhood also was selling customer data to a hedge fund called Citadel Securities, which then likely profited from the use of that information.
“It does create questions about whether these conflicts of interest should really exist,” Khanna said, “and whether people should be allowed to trade on your data when you have a relationship with someone who has a different financial interest than the investors trading on the site.”
Robinhood, then, seems to be built on two separate models of exploitation. Not only does it serve as a low-friction entry point to the rigged casino of Wall Street, where the house always wins and the little day trader always loses, but it also apparently has the privacy issues of a Facebook or a Tiktok, in which users may not realize that their every move is being scrutinized, packaged, and sold to the highest bidder. Both types of exploitation have thrived under decades of deregulation, and they’re likely to only get worse without some form of government intervention.
On a broader scale, Khanna calls the GameStop craze a potent reminder “of the over-financialization of our economy.”
Some 55% of Americans aren’t invested in the stock market at all, “The fact that so much attention is being paid to this gambling as opposed to investing in building things – battery storage plants or electric vehicle plants – should make us pause about what’s going on in our economic system and why,” Khanna said.
Wall Street’s disconnect
The past year, in which the stock market climbed ever higher throughout the pandemic, even while more and more Americans lost their jobs and financial stability, offers even more proof that Wall Street has become unmoored from the average American’s experience.
Financial success has less and less to do with the creation of solutions to everyday problems and more and more to do with stripping value and leveraging profits away from existing assets. To flip Mitt Romney’s 2012 leaked fundraiser speech on its head, rather than making products and services with real-world value, finance has become about taking assets away from the average American.
Or, as Hanauer asked late in the episode, “Why in the world would you want to make it more lucrative for a highly talented person to rub money together to make more money, rather than go crack some medical problem, or invent some gizmo that could actually increase human welfare?”
It’s a fundamental economic question, and one that will only become more pressing as hedge funds and tech startups continue to run amok. Is the point of capitalism for a select few to make as much money as possible, no matter who gets hurt in the process? Or should the forces of capitalism be directed through regulation toward building concrete benefits for all society?
The next time these two dueling economic philosophies come into conflict, much more than a chain retailer’s flagging stock price might be at stake.
Robinhood Markets CEO Vlad Tenev defended the mission of his trading platform, which seeks to “democratize finance for all” amid backlash from lawmakers, regulators, and Wall Street firms blaming the mobile app for luring inexperienced investors and “gamifying” the stock market.
“Investing should be as ubiquitous as shopping online,” Tenev told Bloomberg. “It should just be something that people do.”
The Menlo Park, California-based company has faced scrutiny for its role at the center of the GameStop frenzy in January. This includes complaints that the mobile app used “aggressive” tactics to lure young and inexperienced investors with commission-free trades.
A five-hour congressional hearing in front of the House Financial Services Committee was held on February 18, scrutinizing the role the company played.
“This is what I signed up for,” Tenev said. “Any time you’re causing change in society and kind of upending the status quo, it’s probably not going to be the most comfortable process.”
The 34-year-old founder also rebuffed comments from various experts on the addictive nature of trading apps like Robinhood. The app has attracted over 13 million users since 2013, many of whom are younger retail traders.
“I reject the idea that investing in the US capital markets is gambling,” Tenev said. “We’d be happy to have the conversation, but of course we understand that investing is a serious thing.”
“The facts will come out and it will bear out that Robinhood is a customer-focused company that’s operating with the highest standards of integrity,” Tenev said.
In the February hearing, Tenev maintained that Robinhood has created opportunities for a new generation of investors. The CEO told lawmakers that the assets of his platform’s users have collectively grown by more than $35 billion, a claim challenged by some, including Rep. Jim Himes.
GameStop shares jumped as much as 19% on Wednesday, as retail investors piled into meme stocks once again.
The video-game retailer’s stock price soared as high as $294 – a 550% increase in the space of 11 trading days. A key catalyst for the rally was the news that activist investor and Chewy cofounder Ryan Cohen will spearhead GameStop’s e-commerce transformation.
Several other stocks that are fan favorites on Reddit’s Wall Street Bets forum posted gains on Wednesday. AMC Entertainment shares rose as much as 15%, Express gained 30%, and Koss jumped 65%.
Despite their recent gains, GameStop shares are still down from their peak this year. They skyrocketed more than 2,500% in January, from about $17 at the start of the year to an intraday high of $483 on January 28.