
Robinhood Is Set to Raise at Least $200 Million in New Funding - jason_zig
https://www.bloomberg.com/news/articles/2019-05-24/robinhood-is-set-to-raise-at-least-200-million-in-new-funding?srnd=premium
======
yding
Robinhood has more customers than ETrade
[https://www.investors.com/news/robinhood-app-has-more-
custom...](https://www.investors.com/news/robinhood-app-has-more-customers-
than-online-broker-etrade/) and I bet it's growing much faster too, so no a 7
billion dollar market cap is not insane when ETrade has a market cap of 11
billion.

The problem with Robinhood, like many startups, is an issue of profitability
and monetization. They've been switching up Robinhood Gold to try to get more
customers to sign up. I'm sure that's where a lot of their effort is being put
as they approach "have to IPO" valuations.

This low dollar amount round is also an indication that while they are still
burning money, they may not be burning as much as they may have in the past.
If I were to guess, turning on self clearing was a big part of that.

~~~
dtwest
From your source: "However, a Robinhood spokesperson said not all 4 million
accounts are funded. The brokerage did not disclose total assets under
management, average account size or typical starting balance."

They did not disclose the metrics that are important. You would need AUM
information to effectively support your statement.

~~~
yding
OK, let's just be super conservative and say only 50% of Robinhood's accounts
are funded. So they are valued at 3,500 per funded account. Let's assume
you're right and that ETrade's accounts are all funded. So they would be
valued at 3,081 per funded account.

Would you pay 13.5% more per account for a company that's growing at least 5x,
if not 10x as fast? I know I would in a heartbeat, all else being equal.

Now, not all else is equal, so you can make an argument either way, but I
wouldn't call Robinhood's valuation "insane."

~~~
BinaryIdiot
> OK, let's just be super conservative and say only 50% of Robinhood's
> accounts are funded

I mean, we're all just guessing here but 50% seems _super generous_ to me.
It's really easy to sign up for a Robinhood account. I'd love to know what the
real numbers are :)

~~~
thekyle
Yeah, and of those accounts that are funded I'd guess that many don't have
more than $100. Personally I know my Robinhood account only has a couple of
bucks in it and I just haven't bothered to close it. I use TD Ameritrade and
M1 Finance for the bulk of my actual shares.

~~~
ackbar03
Just curious, why don't you though? I thought Robinhood would be more
economical

~~~
ac29
If you're buying non-trivial amounts of stock and holding it, paying a couple
dollars a trade isn't a relevant concern.

~~~
mehrdadn
> If you're buying non-trivial amounts of stock and holding it, paying a
> couple dollars a trade isn't a relevant concern.

What becomes more relevant in that case?

Also I thought the fees are more like $7 rather than $2... have they
decreased?

~~~
jandrewrogers
I use an old school brokerage and haven't paid trading fees in many years, and
most of the ancillary fees have also evaporated over time. The race to the
bottom was going on long before Robinhood.

But the OP's point is correct: even with trading fees, the cost is below the
noise floor. Brokerages can make quite a bit of money off of how they
structure trade execution, so the top-line trade cost isn't everything.

~~~
perl4ever
I was reading an article recently about Charles Schwab from the point of view
of an investor in SCHW and it argued that Robinhood is not that great of a
threat, because Schwab already makes most of their money from things other
than commissions. Therefore if they have to cut commissions to zero to
compete, so be it. Brokers can make money from loaning stock to short sellers,
and from interest on customer cash balances. Not to mention selling order flow
- getting paid by markets to give them customer orders to execute. Schwab is
trying a tactic where they encourage you to use an automated "robo-advisor"
that tells you how to invest, and the advice includes a significant portion of
cash, which allows them to collect the interest.

------
nawtacawp
The no commission model RH is providing is awesome and if they found a way to
sustain that business model, great. The amount they have saved me (an avg
trader with 25-50K) is well worth them selling my trade data to other firms.
Sometimes their system is a bit glitchy. I'm sure as time goes by things will
get tightened up. I mostly trade derivatives. If I open a 4 legged trade with
400 contracts that would cost me $300 in commissions on my old broker (TD
Ameritrade) to open and an additional $300 to close it. Totally free with RH.

~~~
arcticbull
They're selling your _trades_ not your trade data. They sell the orders you
place to HFT firms which arbitrage them and kick back a commission to
Robinhood to fund their business. It kinda costs you, actually, you just don't
see it. [1] With low trade volumes/order sizes you may end up ahead but I
don't have data to back that up.

[1] [https://seekingalpha.com/article/4205379-robinhood-making-
mi...](https://seekingalpha.com/article/4205379-robinhood-making-millions-
selling-millennial-customers-high-frequency-traders)

~~~
tylerhou
> It kinda costs you, actually, you just don't see it.

Except not: see Matt Levine's explanation:
[https://www.bloomberg.com/opinion/articles/2018-10-16/carl-i...](https://www.bloomberg.com/opinion/articles/2018-10-16/carl-
icahn-wants-to-fight-dell-again)

The conclusion:

> So by selling its customers’ orders to market makers, Robinhood is actually
> stealing from two sets of “the rich”: Rich market makers like Citadel are
> paying it directly for the orders, while rich hedge-fund managers are
> getting worse execution on public stock exchanges so that Robinhood
> customers can get better executions off those exchanges. Big institutions
> are paying to subsidize free trades for Robinhood’s customers. It feels
> pretty Robin-Hood-y! If I were Robinhood I would advertise that!

~~~
manigandham
A market maker will _never_ buy orders without making a profit. What they pay
RH is nothing compared to what they make on the spreads.

~~~
tptacek
The profits MMs take here aren't zero sum between you and the MM, because
there are other participants in the market. An MM can profitably quote a more
generous spread to a retail trader, because retail order flow isn't going to
wipe out their book and expose them to inventory risk.

Essentially: you are cheaper to make a market for than a giant fund is, and
you, Citadel, and Robinhood can split the savings.

~~~
manigandham
Why would they pay for the order flow and create smaller spreads which makes
them less money? They have no reason to do so. I don't see what you mean by
savings - if they're making less money, how does that translate into savings
for anyone?

~~~
Lazare
> Why would they pay for the order flow and create smaller spreads which makes
> them less money?

Competition. Why does Coca-Cola spend money on advertising, driving up their
costs and (seemingly) ensuring they make less money? Retail order flow is
essentially free money for the market maker who gets it, and they compete with
each other to obtain it. That competition shows up in a mixture of tighter
spreads (ie, better than the "best price" for the customer), and payment for
order flow. And payment for order flow, in turn, shows up as some mixture of
lower fees or higher margins for the broker.

At a big picture level, retail orders are valuable, and that value will be
split between the market maker, the broker, and the customer, with the exact
split depending on a number of factors.

> I don't see what you mean by savings - if they're making less money, how
> does that translate into savings for anyone?

Keep in mind, market makers make money by being _extremely_ efficient at
buying stocks when people want to sell, and selling them when people want to
buy, minimising the stocks they hold at any given moment, making a tiny amount
on every transaction, and making it up on volume. If the incoming orders are
"uninformed", ie, it's just a dentist in Milwaukee daytrading his retirement
account, then this is very safe. If the incoming orders might be "informed",
ie, it might be the first indication of a fundamental shift in the value of
the stock, then this is _not_ safe, because every trade _could_ just be noise,
or it _could_ be the start of some hedge fund shifting a billion dollars into
or out of the stock.

The NBBO (National Best Bid and Offer) is the best available price for "mixed"
order flow, that captures the risk to the market maker that, if they fill the
order, they might be about to get run over by a bus. The more they can get
order flow which is safer than that, the more they can afford to beat that
"best price". They do this because they believe that, on average (and after
adjusting for risk), they will be making _more_ money, not less.

This is all pretty concrete, nothing here is new, every broker does this, and
it's all very well understood. If the current best ask is $X, and you can
promise that you're an uninformed idiot who has no clue what's going on and
just wants to buy 50 shares, then you can find someone who'll give you a
better rate than $X. If you're Bridgewater and you want to buy 50 million
shares, you won't.

------
docker_up
There is no way that Robinhood is worth this much money. I admire them, but $7
billion for 2 million customers is insane. I'm assuming they are targeting
being the "Financial Amazon" for millenials, I'm just not convinced even if
they achieved it it's worth this much. Stock trading is a dying business, and
after the next stock market crash or recession, they will lose the majority of
their customers. Moving into financial services might make sense, but I don't
think these founders have the acumen to do this, as exhibited by their
embarrassing attempt recently with their "checking and savings" account.

What Uber's IPO has shown is that VC funding is far too overly delusional.
They buy their own bullshit about how growth trumps all but investors want
profits and you won't see the real reaction until it starts trading for real,
like Uber and Lyft. Until then, all you see is VCs talking their book and lazy
tech writers repeating everything they say without actually thinking about it.
So, sure some investors were stupid enough to invest $200M at $7B valuation,
but I doubt Robinhood will grow into such lofty valuations that are reflected
by the markets unless something drastically changes. 2M customers simply isn't
enough.

~~~
harryh
Charles Schwab is currently worth ~57 Billion

TD Ameritrade: ~29 Billion

E-Trade: ~11.5 Billion

Fidelity Investments is privately owned, so harder to value, but is probably
worth 50-75 Billion

~~~
benburleson
I think the target market is the problem; older people have the money, and
they're not moving from the places they know and trust.

~~~
harryh
Give it time. Millennials are now the largest generation in the country. Soon
enough, they will have the most money.

~~~
malandrew
Every generation will eventually "have the most money". The question that
matters is "when?". Will they get the most money because they've earned it or
because all prior generations have died off enough for them to inherit it.

I can't think of any mechanism by which wealth owned by the rich (i.e. old)
can skip a generation.

The only way this proves to be false is if we eventually discover the secret
to healthful immortality and end up with a generation that never dies, and
therefore never bequeaths its wealth to younger generations. The longer people
live, the longer it will take younger generations to inherit the wealth of
older generations.

The only other way this proves false is if there is a massive wealth
destroying event such as war, revolution, ecological collapse, etc. such that
there isn't much wealth to inherit.

~~~
perl4ever
"I can't think of any mechanism by which wealth owned by the rich (i.e. old)
can skip a generation."

The IRS can!

See: [https://en.wikipedia.org/wiki/Generation-
skipping_transfer_t...](https://en.wikipedia.org/wiki/Generation-
skipping_transfer_tax)

~~~
malandrew
Fascinating. Thanks for the link.

That said, I was talking about a generation collectively across all of
society, not a specific family.

------
rburhum
I can only speak from personal experience, but I love Robinhood.

I am an amateur trader for pure hobby because of Robinhood.

Many years ago, I tried to create an etrade account and it was an insanely
long process (it may have changed now). I don't even remember what I did after
I got an invite from a friend, but I was up and running right away.

I started trading $300 just to see what it was like. The first three months, I
learned a bit and lost some money. Fast forward 1 year to now, and I have
around 54k in there and am up 16.05% - and that includes the crazyness of
December. I have invited some friends and they all trade between $300 to 10k
AFAIK. I am in no way rich, but I compare the performance of my retirement
portfolio to what I do with a few ETFs, and honestly it has demystified the
whole process. Before, I used to login to Clash of Clans when I had a few
minutes to spare, now I spend that time browsing Robinhood. To _me_ Robinhood
was a game changer for this and many other reasons.

~~~
hn_throwaway_99
I'm trying to not be condescending, but I have a strong feeling that will
change when the market eventually crashes.

I say this because I honestly don't see how anyone who is serious about
financial planning can use Robinhood for anything besides "play market". Case
in point: the graphs in Robinhood show no y-axis values. This is _insane_ if
you actually care to see how your portfolio has been doing. Yet this is
obviously intentional by Robinhood, so it must be designed to obfuscate what
is really going on.

When things really start to go south (which they inevitably always do) there
is going to be a run on the bank at Robinhood.

~~~
rburhum
So people will do that, but why would I just not sit out and keep stocks like
my Berkshire or SP500 ETFs during it? Why would I just not double down and
wait a few more years during those dips? Or am I not expected to do that
because I bought it in Robinhood as opposed to having bought it in E-trade?

------
warp_factor
They make me extremely nervous. Most people I know that use Robinhood seems to
use it as they would play dices in Vegas. They have no ideas on the stock
fundamentals or why and how the prices change. Most of them are playing a big
amount of their savings too which is extra concerning.

What makes me even more nervous is that Robinhood seems to deliberately cater
to those crowds of uneducated emotional day traders.

I said this before but they seem to become the "facebook of finance" with the
same "break things and go fast" mission. I would never use them for any
significant amount of money. That being said, I use them occasionally for
options because the fees of traditional brokers are such a joke (20$ typically
to sell and buy).

~~~
el_cujo
Those risks are present in the market in general, independent of robinhood.
Should a platform be discouraged because its benefits don't discriminate
between fools and people who know what they're doing?

~~~
Traster
I don't know what it's like in the US, but in most countries gambling is very
highly regulated for good reason. Buying stocks on the stock market with
little to no information is basically gambling, the difference is that you
have no idea what your odds are, often the cash out terms are unclear and the
broker has no financial restrictions on letting you bet more than you can
afford.

In fact, I know in the US you need to be an accredited investor for some times
of investment for exactly this reason - it is so easy to get ripped off.

------
AJRF
That's an insane evaluation for 2m customers, most of which are probably
playing with small "if-this-goes-im-too-scared-and-no-longer-a-customer"
amounts of money.

Robinhood are also hilariously inept; See the _box-spread fiasco and the
checkings and savings account.

_
[https://www.reddit.com/r/OutOfTheLoop/comments/ah2x2t/what_i...](https://www.reddit.com/r/OutOfTheLoop/comments/ah2x2t/what_is_the_deal_with_wallstreetbets_box_spreads/)

~~~
travisjungroth
Robinhood wasn’t legally allowed to open checking or savings accounts, but no
one said anything about checking _and_ savings accounts. I mean, until the SEC
and SIPC did. They said no.

------
cheriot
woohoo, leveraged derivative trading democratized! /s

More seriously, I love the price pressure on brokerages, but I shudder to
think what will happen to its users in the next recession.

~~~
thepangolino
Recession would be alright. What would cause trouble would be a market crash.

------
vessenes
This was such a good investment by Mickey and the Ribbit team: in 2013 Mickey
told me that the history of retail brokerages points to fee revenue going to
zero.

That the team went out and built a company for that reality is just stellar,
and it’s fun to see insights like that turned into something real.
Congratulations.

~~~
yding
I'm still not completely convinced that a zero commission brokerage can be run
profitably, although mad props to the team for executing.

People often focus on the HFT payments for order flow, but another important
leg of the stool (along with stock lending, and the premium tier/margin
lending) is the interest rate differential.

If rates were going to 5%, that'd be one thing, but with rates at 2-2.5 and a
couple of cuts being priced in, that's going to decrease profits there.

Also it's kind of hard to launch a 3% cash management account when the ten
year is yielding 2.3%.

------
rb808
Pity the guys at WSB can't buy calls on this.
[https://www.reddit.com/r/wallstreetbets/](https://www.reddit.com/r/wallstreetbets/)

------
phil248
In recently started using Robinhood as an alternative to Ally (formerly
TradeKing). Ally provided very little extra value to me in exchange for their
transaction fees. And as a buy-and-hold investor, I don't really need much
more than limit orders anyway.

What I do still need are better research tools, but my impression is that none
of the consumer trading platforms provide anything very impressive on that
front.

~~~
cheerlessbog
If you're a buy and hold investor why does it matter if your occasional
transaction costs $10?

~~~
trustfundbaby
Because it's $10 that I could be using to buy actual stock and not gifting it
to some broker for basically doing nothing.

~~~
cheerlessbog
I guess to me that $10 is a suggestion that they are competing on execution
price instead of transaction fee.

------
omfgwhat
How are the unit economics in favor of Robinhood? This has been tried before
and failed. What's changed? [https://qz.com/330015/robinhoods-free-stock-
trading-app-and-...](https://qz.com/330015/robinhoods-free-stock-trading-app-
and-its-long-odds-of-survival/)

~~~
docker_up
They have very low cost of acquisition of customers. This is opposite to some
brokerages like TDAmeritrade that recently pulled their marketing budgets
because they saw literally no uptick from marketing spending.

But that's not enough to justify their valuations.

------
rhegart
Revolutionary to young retail investors in getting them to save. Now someone
do real estate lower commissions

~~~
bobthepanda
Isn't that just Redfin?

~~~
gowld
It was, until Redfin realized their customers like them better because they
don't like talking to a human agent, so they raised their prices to be almost
the same price as everyone else.

~~~
scrumbledober
sounds like the perfect time for a new redfin to bring in some competition.

~~~
V99
On the sell-side, our family has used revinre.com for several recent houses
and paid 0% to a "seller's" agent, plus a few hundred dollars for them to send
someone out and take better pictures than you're going to. I think they're
just in Phoenix but presumably others will pop up.

------
dawhizkid
I have a hard time rooting for their success when their
marketing/brand/aesthetic is all about encouraging high risk behavior among
younger retail investors...

------
numbers
I've learned a lot through Robinhood, trading from a couple of hundred bucks
to about $15k (not all gains, a lot of it is deposited), I've gained
confidence and knowledge as the platform has grown.

Not sure if $7B is valid but the company is disrupting the status quo of
commission based trading.

~~~
maxxxxx
Just remember that you are trading in an upmarket. All your knowledge will be
worth nothing in a downturn. It's a totally different game. Learned that in
2000 :-)

~~~
icelancer
> All your knowledge will be worth nothing in a downturn.

If you're lucky.

------
atemerev
They are the company who figured out the ways of selling their customers’ flow
to hedge funds directly, so the latter could adapt their market making
algorithms for guaranteed profit?

Stealing from the poor and giving to the rich, genius!

------
walrus01
The only people I've seen who actually _use_ robinhood are the people at
reddit.com/r/wallstreetbets , who seem like a cohort of dilettantes.

~~~
omarchowdhury
They seem like that because none of them want to share any edge, but I might
be generous in my assessment.

------
lemony_fresh
My tin foil hat theory is that this is a conspiracy to keep dumb money at the
table.

------
Causality1
It seems like a predatory business model. Robinhood encourages amateurs to
compete with professional stock traders and charges them a fee for the
privilege. I'd like to see numbers for how much money the median Robinhood
user loses.

~~~
ericd
Which makes their name incredibly ironic.

------
Kyragem
They sell your trading data to large high speed trading banks in real time, so
stock price movements are much more volatile than when you trade through other
platforms.

~~~
manigandham
They sell order flow itself, not data. The data is already public.

~~~
atomical
So HFT's can see my limit orders that haven't completed?

~~~
patio11
If you have an unfilled limit order which is resting on the book at a stock
exchange, anyone with L2 data (available for single-digit dollars per month
from InteractiveBrokers, among others) will be able to see it, though it won't
be linked to you.

This is how order books work. If you don't want counterparties to see the fact
that you want to buy or sell stock, your options include a) not telling a
stock exchange to advertise your willingness to buy or sell stock by putting
in limit orders, b) using a dark pool, or c) become more sophisticated with
respect to your execution strategy, such as e.g. using repeated Immediate-or-
Cancel orders, etc.

------
algaeontoast
The more users they have the easier it is to incentivize actual " accredited
investors" to screw them in the market long term lmao. Unless of course they
get users to sell more reflexively and schizophrenically...

