Robinhood in Reverse (1): Rise To Glory
On January 28th, 2021, led by millennials’ favorite mobile trading app Robinhood, multiple online trading platforms placed restrictions on transaction activities involving the GameStop (GME) stock. The move immediately sparked a public outcry among day traders, with hundreds of thousands of individual investors rallying to both online and offline forms of protests against the company. Some gathered outside Robinhood’s headquarters in Menlo Park, while others took their discontent to the mobile app store by giving more than 100,000 negative reviews, bringing the app’s average rating down to almost one star. In the span of a few days, Robinhood went from a fan favorite to the public enemy. This event not only drew the attention of international investors, but also US lawmakers as regulators are facing growing public pressure to conduct further investigation. In this article, we’ll walk through Robinhood’s rise to fame as the first episode of the series.
Robinhood was founded in 2013 by two high-frequency trading experts who had built trading platforms for financial institutions on Wall Street. The company’s mission is “to democratize finance for all” and it believes that “the financial system should be built to work for everyone”, thus giving it the name “Robinhood”. Throughout the 2010s, innovation in financial technology (FinTech) took off by bringing with us a wave of disruption that completely transformed the financial industry globally. Robinhood was one of those FinTech pioneers that demonstrated this “disruptive force” — an act of utilizing new technologies to enable solutions that will help us better accomplish traditional tasks, making things more efficient, affordable, and accessible. When the company officially launched its app in March 2015, it was the first of its kind to offer zero commission fees with no minimum deposit on your stock trading account, which was followed by other mainstream trading platforms at later times. Robinhood introduced a brand new alternative to stock investing for everyday investors with small portfolio sizes. The app even gives away one share of free stock when you open an account. By the first quarter of 2020, Robinhood had already accumulated more than 13 million users, mostly consisting of millennials around the age of 30. To put the number in perspective, this is about 16% of the millennial population and 4% of the total population in the US. Although Robinhood still lags behind its competitors in assets under management (AUM), the company announced that it had already topped the brokerage industry in daily average revenue trades (DARTs) in June 2020, beating major brokerage firms like E-Trade and Charles Schwab.
If you happen to be born in the 90s, chances are you can find at least a friend or two actively using the app around you. Some even go as far as having two or three monitor screens at home tracking their investments from various sources in real-time. Besides the low trading costs, what makes Robinhood so successful is its simplicity to use and flexibility to move funds. The app has a friendly interface and only displays information that users need to know about their portfolios, simplifying the data and charts presented to investors. Customers also get instant access to their deposits and funds. This is crucial to newcomers in the stock market who desire to trade in small quantities, usually in fractional shares or cryptocurrencies. As a result, Robinhood became an easy and friendly testing ground for first-time investors who have little-to-none experiences in investment research and analysis.
To say that Robinhood is the godfather of investing for millennials isn’t an overstatement. Since the outbreak of Covid-19, most of the millennials are stuck at home with no way of spending their money. Many decided to turn to stock investing. The pandemic became a strong supporting force to the app’s rising number of downloads and usage. This influx of cash from the millennials into the stock market also served as one of the main factors for the record market highs throughout the pandemic. Although millennials are known as the most risk-averse generation according to some of the latest studies, Robinhood is on track to change that for this generation. This is the scale of impact this company could achieve.
Moreover, once the greatest generational wealth transfer in American history takes place, it was only a matter of time that Robinhood dominated in all other categories in the brokerage industry…until the GameStop saga happened. This incident came in as a wake-up call for the millennial investors after months of enjoyable investment experiences, reshaping their mindsets on how our financial system works with one question in mind to ask: Is Robinhood really the Robinhood we think it is?
The GameStop saga occurred at a time when our society is more polarized than ever — the rich vs. the poor, the majority vs. the minority, the old vs. the new, etc. Is this going to bring down the millennials’ risk appetite even lower and drive them to hoarding cash again? In the next episode, we will walk through Robinhood’s fall from grace, and potential afterlife following the GameStop saga.
