Robinhood has been in the news a lot this year, but a lot of that news has been negative in nature. Although most of the dissenters are still blaming Robinhood for halting buy orders on Gamestop and other meme stocks back in Q1, there are a couple of looming questions that remain unanswered about RH and similar easy-to-use brokerage apps.
Is all publicity good publicity?
Robinhood started back in 2014 with just 700,000 early users. Since then, its growth pattern has gone from steady to exponential, jumping from 2 million to 6 million in 2018, and from 7.2 million funded accounts in March of 2020 to over 18 million at the time of their recent IPO, a 151% growth rate to nearly $100 billion AUM in just a year.
Industry counterparts like Webull, Public, have also grown significantly over the last couple years, but still lag behind the biggest name in the league which is, of course, Robinhood.
Anything wrong with these apps?
The appeal of apps like RH and Webull is the ease of access to trading. The barrier to entry has been lowered significantly in several ways. Without commissions dissuading regular people from investing small amounts of money, the concept of trading becomes more appealing. With user interfaces that don’t look like the cockpit of an airplane for no reason, anyone can do it.
But, is it too good to be true? There’s no definitive answer to that. If you ask someone who made thousands off of meme stocks earlier this year, they’d say absolutely not. If you ask someone who lost a similar amount due to controversial trade halts done by these very brokerages, then...you get the picture.
Ultimately, here are the concerns.
The Citadel, market maker conundrum. With a large majority of Robinhood’s orders being routed through the market maker Citadel, which was ultimately the shot-caller in deciding to halt buy orders on certain stocks earlier this year, theorists contest that this relationship could represent a conflict of interest, or that MMs like Citadel and others could use data from partner brokerages to their advantage, and against retail traders.
PFOF: This leads us to our next potential pitfall, which is the fact that brokerages like Robinhood derive a large portion of their revenue from payment for order flow. Payment for order flow, or simply PFOF, is simply a small fee brokerage firms receive from market makers in exchange for routing orders through them. A fraction of a cent adds up over billions of trades. The problem? PFOF is already illegal in Canada, the UK, and Australia, and it’s a big reason brokerages are able to allow commission-free trading. This also represents about 75% of Robinhood’s total revenue in 2020, which brings into question the sustainability of it and other brokerage firms leveraging PFOF.
And of course, data: The controversy of selling user data is something usually associated with social media, but it’s relevant with investing too. They say if you don’t have to pay for the product, you are the product, and if Robinhood is allowing market makers to be privy to retail investors’ trades, this would be a prime example of that.
At the end of the day, whether or not using brokerage apps like this is beneficial or detrimental to someone is highly circumstantial and subjective. Whether or not they’re sustainable though? That’s something that remains to be seen.