To say that this wave of popular fried chickens in the technology industry listed last year is the most miserable today, Robinhood, an online brokerage with the slogan of "robbing the rich and helping the poor", must be on the list.
Once Robinhood was enshrined as an altar by retail investors. It has killed a bloody road among established brokers in the mode of zero commission, and single-handedly rewritten the trading system of the whole industry; with a simple and convenient online trading model, it has captured Generation Z, and eight out of ten young people in the United States may use it for stock trading.
With the ambition of "giving everyone access to the financial markets", in just a few years, Robinhood has advanced from an obscure Internet broker to a technology rookie with a monthly active 20 million, and the market value after the listing was close to $80 billion to hang a number of old Wall Street brokers. It can be said that Robinhood was one of the fastest-growing, most influential and most high-profile technology companies in Silicon Valley in recent years.
But in the past, how beautiful it was, if you look at it, how lonely it is. After experiencing the retail vs. institutional incident at the beginning of last year, Robinhood's reputation among retail investors took a sharp turn for the worse, and it was instantly targeted from the pride of heaven, and the listing plan was once postponed. Last July, it landed on the NASDAQ, but after only a few days of glory, the stock price began to plummet, and now the market value of about 12 billion is less than one-sixth of the peak.
Robinhood's stock price as of January 19
The collapse of Robinhood is also, to some extent, a microcosm of silicon valley's innovation dilemma: the increasing lack of disruptive technological innovation has given birth to many lightweight "model innovations"; startups want to achieve rapid growth with the slogan of "serving the public", but when they are getting larger, they are moving towards the opposite side of the public.
For Robinhood, who has already started badly, the bad luck of 2022 may be yet to come.
| the loss of the untied, can not retain the user
Since officially landing on the US stock market, Robinhood has publicly released two financial reports so far, but each time it has been issued a hammer on its stock price.
The first earnings report issued in August last year was not satisfactory. Revenue and profit growth are less than expected, and throughout the second quarter, the only bright spot may be active users who continue to maintain rapid growth. But by the third quarter, Robinhood had lost even that single bright spot, delivering an even uglier earnings report. Revenue was only 35% year-over-year, down 35% sequentially, and net loss was $1.32 billion, 100 times the net loss for the same period last year. On top of that, subscribers began to churn, with monthly active users falling from 21.3 million in the second quarter to 18.9 million.
Robinhood's monthly active users in recent quarters, image from Robinhood
After the release of the first earnings report, Robinhood plunged 8% after hours. After the release of the second earnings report, it plunged 9% after hours.
According to Robinhood itself, the significant expansion of losses and the loss of users is mainly due to the decline in the popularity of cryptocurrencies and "MEME" stocks. Its chief financial officer, Jason Warnick, said cryptocurrency revenue was $51 million in the third quarter, down 78 percent sequentially. "The decline in the popularity of cryptocurrencies, especially Dogecoin, has led to a significant reduction in new funding accounts."
While Robinhood dumped the pot on cryptocurrencies, it wasn't the root cause of the massive flight of investors. According to the third-quarter financial report, Robinhood's operating costs increased significantly, up 502% year-on-year, and spent a total of 87 million yuan on marketing in the quarter, accounting for as much as 24% of total revenue. It can be seen that although Robinhood is trying to attract customers, users just don't buy it.
As a former retail base camp, Robinhood has not been supported by retail investors after its listing, but many retail investors continue to call for short Robinhood. On the day of the listing, Robinhood fell below the issue price, and although the stock price soared by more than $70 in the following days, it soon collapsed under various bearish factors. So far, its stock price has fallen by more than 60% from its highs, and investors have truly experienced a "bloodbath" feeling.
Reports that retail investors are not interested in Robinhood stocks, image from CNET, Barron's weekly
Therefore, Robinhood's biggest crisis at present is not the temporary rise and fall of cryptocurrencies, but its loss of the hearts of retail investors as a former retail spokesperson, shaking the foundation of its development.
| is contrary to the original intention of "Rogue"
As we all know, Robinhood's name is derived from the folklore of Robin Hood the Rogue. Robin Hood robbed the rich and the poor, acted heroically, specialized in rectifying violent officials, and used the money he obtained to help the poor people. From the very beginning of Robinhood, their mission was to lower the bar for stock trading and give everyone access to the financial markets.
In the course of these years, Robinhood has indeed adopted some innovative practices that are superficially closer to retail investors, such as taking the lead in implementing a "zero commission" trading system, such as allowing users to buy and sell stocks with small amounts of "split", such as allowing retail investors to participate in IPOs. It is precisely because Robinhood, which is considered "deviant" in the eyes of established brokers, has captured the hearts of a large number of retail investors, especially young retail investors, making them a loyal follower of Robinhood.
In the hearts of retail investors, Robinhood was once a place where the rights of leeks could be extended, and a platform for them to fight against big capital. But then it was gradually discovered that Robinhood itself was also a member of big capital.
Robinhood's main business model is called Order Flow Payment (PFOF), which accounts for more than 80% of Robinhood's total revenue. The so-called order flow payment refers to the customer's order information packaged to the upstream market maker, and then through the form of market maker rebates to make money, the whole process is actually to earn information difference and time difference. What does that mean?
In other words, the orders you place in Robinhood are not actually sent directly to the New York Stock Exchange and NASDAQ exchanges for execution, but are packaged by Robinhood and sent to high-frequency trading market makers such as Citadel Securities, Virtu Financial, Susquehanna and so on. Since the stock market is volatile in real time, these market makers earn bid-ask spreads through algorithms and time differences and trade in dark pools.
In this model, market makers don't always give investors the best price for a stock. For example, if you want to buy 100 shares of Nokia stock at the price of 4 yuan per share, this order is received by robinhood and sent to the market maker, the market maker buys it at a price of 3.98 yuan, and then earns a difference of 2 yuan and Robinhood profits.
In other words, customers may end up buying stocks at a higher price, or selling them at a lower price. Although this spread tends to be very small, the larger the number of users and the more frequent the transactions, the more substantial the profit generated by the accumulation.
The operation mode of order flow payment, the image is from the Promise of a plan, and the copyright belongs to the original author
At this time, the retail investor group absorbed by Robinhood has produced a natural "advantage", they are not like the average institutional investors can calm down and do long-term investment, but as soon as there is a wind and grass, they frequently trade, which also makes Robinhood and market makers earn a lot of money.
Therefore, the order flow model can reduce the transaction commission to zero, but the wool is out of the sheep, and in the end, it is actually paid by the user himself. Although Robinhood is under the slogan of "robbing the rich and helping the poor", it essentially uses retail investors as a source of its own harvest of profits, while exacerbating the inequality of market information resources.
For Robinhood, the model of their survival is to encourage people to trade frequently, so they actually liked the situation of "retail war institutions" last year, and even contributed to it for a while. However, when the authorities got out of control, Robinhood was also the first to "abandon" retail investors: after receiving official warnings, it immediately restricted the trading of related MEME shares, resulting in a large number of retail investors losing their money.
It was also after this incident that many retail investors began to announce boycotts of Robinhood, and even filed a lawsuit against Robinhood. The altar of retail households gradually ceased to be "god".
| hidden dangers one after another, Robin Hood's road ahead is difficult to walk
Nowadays, when we take a closer look at Robinhood, we will find that many of the current explosions of thunder were actually buried at the beginning of the company's development.
For example, its core order flow payment profit model has actually been stepping on the red line of the law. Order flow payments were not invented by Robinhood, but were proposed as early as the 1990s, but were not widely adopted because this model actually harmed the natural flow of the market, provided rent-seeking space, and violated the broker's obligation to provide the best buy or sell order execution for its clients. As early as many years ago, the United Kingdom, Canada and other countries have banned the order flow payment model, and any transaction that is paid through the order flow will be judged illegal.
In November last year, news broke that the European Union was about to issue a decree banning the order flow payment model, causing Robinhood's stock price to fall. In the United States, the new chairman of the Securities and Exchange Commission, Gary Gensler, is also advancing a series of tough regulatory programs, the most important of which is a complete ban on order flow payment transactions. Once enacted, this bill will undoubtedly be a "catastrophe" for Robinhood.
The image comes from Lun Weekly
In addition, the practice of online trading software such as Robinhood inducing users to over-trade is also being reviewed by the SEC. According to data, more than half of Robinhood's nearly 20 million users are first-time investors, with a median age of only 31 years old, and young people tend to "gamify" their investments due to users' lack of financial expertise and trading experience. Previously, a 20-year-old American youth chose to commit suicide because the misoperation of the account showed that it generated $730,000 in debt, which caused an uproar. Some commentators have argued that Robinhood's flooding of a large number of inexperienced young people into the stock market is tantamount to encouraging gambling and is a highly irresponsible practice.
In addition to regulatory issues, Robinhood is now plagued by various lawsuits and worries, including being hacked and causing 7 million user data to be leaked, the platform to be continuously down, and various lawsuits by the official and private sectors.
What is currently in the most public spotlight is the U.S. Financial Supervisory Authority's just-released judgment on the appeal of a 27-year-old truck driver.
On January 6, the Financial Services Authority ruled that retail investor Jose Batista had filed an appeal against Robinhood in May against robinhood over significant investment losses suffered by certain meme stock exchanges that had been restricted in the retail war, and the judgment required Robinhood to pay the truck driver a total of $29,460.77 in damages.
Image courtesy of The Verge
While less than $30,000 in damages isn't a lot, the judgment is the first case of compensation to retail investors for Robinhood's trading restrictions, and is likely to have a ripple effect in the future, allowing a large number of retail investors to launch lawsuits against Robinhood.
All indications are that the troubles of Robinhood in 2022 seem to have just begun. In the fourth quarter performance guidance provided by Robinhood, pessimistic predictions are still continued. The Company believes that "lower trading activity" may result in fourth-quarter revenue of no more than $325 million and full-year revenue of no more than $1.8 billion.
From the limelight of the past to today's crisis, Robinhood's experience may also tell us that the lightweight scientific and technological innovation that can only tell stories is doomed to not last long, and under the guise of promoting the flow of information, it is only increasing in the story of creating more information and uneven resources, and the story of the dragon slayer teenager becoming a dragon will only increase.