Once you finish reading this article, I suggest listening to the Supermode song Tell me why

Efi Pylarinou is the founder of Efi Pylarinou Advisory and a Fintech/Blockchain influencer – No.3 influencer in the finance sector by Refinitiv Global Social Media 2019.

I had not planned to write two posts on two high growth, two valuation Fintechs in an atmosphere that has turned sour because of the demise of Wirecard and its potential domino effect. And of course, I am unhappy that such business practices have been adopted from Fintechs and especially publicly traded ones. Wirecard was part of the DAX index and was also included in several large ESG ETFs because of this[1].

Last week I wrote about my disappointment with certain business practices of the digital bank Revolut. Today I will focus on Robinhood and will make every effort not to discuss the very emotional suicide incident triggered from a very common issue with forward and option trading (i.e. position netting is delayed).

There is clear evidence that retail trading overall has been on the rise since 2019 and spike during Q1 2020. This is due to so much cash sitting around (M2 in the US is up 23% and we have to believe that some of it found its way into the stock market) and of course to what I have been calling the `Robinhood effect`. In plain words, the extreme commoditization of stock trading.

Scott Galloway is a clincal professor of marketing at NYU Stern university and a serial entrepreneur and wrote last week a great article Robinhood Has Gamified Online Trading Into an Addiction Tech’s obsession with addiction will hurt us all. According to his estimates of the online trading activity rise (mostly based on the rise of account openings not the size of the trades or volume) it is clear that Robinhood is leading this trend. The increase for Robinhood is x3 times, Schwab is x1.6 times, TD Ameritrade is x2.5 times, and Etrade is x2.7 times.

I have not found any figures that support the narrative floating around that retail trading has had a significant or even leading contribution to the stunning US stock market rally since its bottom in mid-March.

The figures that we can report is that the order flow business was very strong in Q1 2020 and Robinhood`s revenues from selling order flow is leading the pack.

Alphacution was the first to report Robinhood`s hidden revenue stream last year. I wrote about this in October 2019 in `What has triggered the explosion of payments for order flow? Not Fidelity`.

Now, starting 2020 there has been a new disclosure requirement around order flow business practices. As a result, we have concrete figures in hand from the entire industry, incumbents, and fintechs.

Frank Chaparro reported in mid June `New filing shows Robinhood brought in close to $100 million by offloading order flow in the first quarter`. So, Q1 revenues were $100million for Robinhood and Alphacution estimated $69miilion for the entire year of 2018.

I have two problems with these increased figures. One is a lack of transparency in terms of the Robinhood`s business proposition and monetization strategy. The narrative that has been left floating for years, is that Robinhood makes money from margin accounts and interest on cash. No Robinhood manager contradicted that or presented proudly their growing order flow business. And of course, since everybody else does it (except Fidelity) why not Robinhood. And this is where the irony comes in. How is Robinhood different than incumbents?

The second problem I have is that the details of the order flow disclosures (see here) show clearly that most of these revenues come from option trades rather than plain vanilla stock order. Needless to say that option trading requires more education and sophistication and is more risky than plain vanilla stock trading. And again all this didn’t matter, until it did.

In addition, back in December 2019 when Robinhood got fined by FINRA for violation of best execution practices, it didn’t matter. The question is when will it matter?

I rest my case, as I have always had a big question mark next to the value proposition of Robinhood. Evidently, it is around democratization of retail trading. But I have always struggled to come up with a solid argument on `Why` is this kind needed. I have yet to answer it. I do understand the `Why` for fractional shares, I do understand micro-savings into investing, crowd investing, social trading etc. and other propositions that over time develop better personal financial habits around investing.

I also understand various DIY offerings but this Instagram like tool does not address any core financial need. We need to manage budgets, invest wisely, save, plan retirement. What big need is Robinhood and its future roadmap solving?

[1] Failed Wirecard held by ethical ETFs

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Source: https://dailyfintech.com/2020/06/30/the-missing-why-of-robinhood/