Robinhood shot to fame with a slick mobile app that allowed investors to trade stocks with no fees. But the coronavirus stock market volatility has brought new scrutiny to Robinhood app while casting a shadow over its lofty valuation and the highly anticipated Robinhood IPO.
Online brokers Fidelity, Charles Schwab (SCHW), TD Ameritrade (AMTD), E-Trade Financial (ETFC) and Interactive Brokers (IBKR) all moved to no-fee online stock, ETF and options trades in the last quarter of 2019. That put Robinhood investing app on notice to prove it can stay competitive as free stock trades proliferate. The challenge came as it geared up for a buzzed-about IPO and sought to recover from a series of black eyes tied to glitches and missteps.
Its performance in the extreme coronavirus market turmoil has only fueled more doubts about its future. A series of technical outages on March 2, 3 and 9 sidelined users, including during one of the best days for the U.S. stock market in years. Irate Robinhood stock app customers threatened to close accounts, defect to rivals and sue the company.
On March 23, Robinhood emailed users to apologize and say it has improved its infrastructure and fixed engineering issues that caused the outages. That included capacity of an internal messaging system, which had come under strain.
Robinhood App Lags In Best Online Brokers Survey
A survey indicates Robinhood app users already were well aware of its shortcomings. In Investor's Business Daily's recent eighth annual Best Online Brokers study, the free stock trading app claimed the top spot for low commissions and fees and low cost/free ETF trading, but it didn't crack the top three spots in 12 other performance categories including mobile trading apps and platforms.
In fact, it came in dead last for website security, trade reliability, customer service, research tools, choice of investments, investment research, portfolio analysis and reports, and educational resources. It was next to last, or near last, out of 10 major brokers in site performance, equity trading tools, options trading platform and trade ideas.
Overall, Robinhood earned dismal ratings from its customers who took part in IBD's poll. The Menlo Park, Calif.-based company declined an interview.
"Robinhood is definitely hurting because zero-commission trades was their claim to fame," CFRA equity analyst Pauline Bell told Investor's Business Daily in February. "Now that price is taken out of the picture and it is no longer a differentiator, players like Robinhood have to look for other revenue streams."
After the March outages, Bell added that the stock trading app's failure was "very damaging" to Robinhood.
"I view the failure as a setback for the startup, especially for its valuation," Bell said. "As the early investors look for an exit, the chances of a successful IPO are dimming for Robinhood, with a higher possibility of the firm being sold to a competitor, like Interactive Brokers, at a stiff discount."
Bell also noted younger, millennial customers embraced the "sleek" Robinhood app. As those users become more wealthy and experienced, she wonders how "sticky" they will turn out to be.
"Some of their customers might graduate to a more sophisticated brokerage like Schwab ... when they're looking for a financial advisor or for more safe products such as fixed income, which is not one of the strengths of Robinhood," Bell said.
One user has a wait-and-see approach. Brian Weaver of Ohio said Robinhood app helped him make the leap from "paper trading" to using real money. He appreciates being able to start off small — the app has no account minimums — as well as the ability to buy or sell stocks with a single swipe. (Other brokers have added such features.)
But as the 43-year-old aviation mechanic has grown from novice to intermediate investor, so have his needs. And for even the basic charting tools, research tools and stock screeners, he finds Robinhood lacking.
"You can't add indicators to the charts like the 50-day or 200-day (moving average)," Weaver said.
Even before the March 2 outage, Weaver had been mulling moving his brokerage account to Fidelity, which holds his retirement and health savings accounts. "I'm monitoring how they (Robinhood) handle the situation," he said on March 3. "I moved my positions to cash last week to wait out this volatility, so I wasn't affected."
Fidelity, Charles Schwab and TD Ameritrade also had technical difficulties amid the coronavirus volatility. But Robinhood's outage was far more severe and lasted longer, setting off the angriest customer backlash online.
"An entire platform being down for an entire day and experiencing continued problems the next day is unprecedented in this space," Bell said. "We (expect to) see a sizable amount of the company's clients voting with their feet as they question Robinhood's 'plumbing.' "
How Robinhood Investing App Plans To Stay Competitive
Robinhood stock app launched in 2015 and got new and first-time investors into the stock market by removing cost barriers to trade. As of December 2019, the app had 10 million accounts — more than double its 4 million customers as of May 2018. That's also double the 5 million retail brokerage accounts at E-Trade Financial, which has been around 38 years.
As investors salivated over Robinhood's user growth, they pushed its valuation to $7.6 billion as of July 2019, even though the fintech startup does not disclose how many accounts are funded, average account size or typical starting balance.
Robinhood investing app is intent on keeping users within its growing ecosystem. In 2019, it launched a cash management feature, which pays users 0.3% interest on their uninvested cash. The feature currently has a waitlist. It also announced fractional share trading, or buying fractions of a stock, so even pricey stocks such as Apple (AAPL) and Tesla (TSLA) are within a novice investor's reach.
But Robinhood didn't stop there. Last year, it expanded its cryptocurrency trading program to 46 states and its margin investing program to include Morningstar research reports on 1,500 stocks. Its $5 monthly Gold margin investing program includes Level 2 Nasdaq markets data, showing real-time bids and asks for any stock.
This year, Robinhood is headed to the U.K., the first step in a planned international expansion. To stay competitive, the free stock trading app on Feb. 20 added new features including custom profiles, portfolio insights and multiple watchlists. Stock watchlists were a highly requested feature among customers, a Robinhood spokesperson said.
Pitchbook analyst Robert Le expects no long-term impact as online brokers all cut trading commissions to zero.
"Robinhood is able to roll out product and innovate faster than customers migrate," he said. "We think they have the potential to build out a more robust trading platform and research offerings. They already have that with Robinhood Gold."
Le also sees Robinhood app building up its own ETF business, similar to fellow fintech SoFi. And as Robinhood's millennial investors get more savvy, he sees the potential to branch into futures, bonds, managed portfolios and customized portfolios.
For now, Robinhood makes money off margin loans to customers, investing their idle cash, and selling their order flow to broker-dealers. (Many investors do not realize there are hidden trading costs tied to trade execution.)
"They have to continue to roll out innovative products without hiccups" to compete, Le said.
Online Brokers Strike Back
Robinhood has had more than a hiccup or two, starting well before the early March outages. In 2018, Robinhood botched the launch of no-fee checking and savings accounts, which eventually relaunched as the cash management feature.
Then in November 2019, a bug allowed Robinhood Gold users to trade with excess borrowed funds, essentially giving them free money. The following month, the company was fined $1.25 million by FINRA for sending customer trading orders to four broker-dealers without guaranteeing the best price.
And while Robinhood's zero-fee strategy shook the brokerage industry, it set off a fee war that ultimately led top dog Charles Schwab to agree to acquire TD Ameritrade, while Morgan Stanley (MS) agreed to buy E-Trade. The mergers mean far more fierce competition for Robinhood down the road.
Now CFRA's Bell is looking for Robinhood app to offer a "full product suite." She expects it would span everything from stock and ETF trading to banking and cash management to financial advice — akin to formidable incumbent Schwab.
"They were the disrupter to the incumbents like TD Ameritrade and Schwab," she said. "Now with Schwab making the (zero-fee) move, they're the disrupter to players like Robinhood."
Moreover, with "almost no details" still available on Robinhood stock app's backup plan for systems failure or volume surges, Bell warned the investing app could land in further hot water with FINRA.
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