As the company’s founders have told the public over and over again for the last few years, the ultimate goal of Robinhood /zigman2/quotes/228268942/composite HOOD +2.97% has always been to “democratize finance.”
That lofty goal created a company that attracted more than 30 million users at its height, forced the brokerage industry to adapt to its zero-commission business model, and allowed it to go public at a $32 billion valuation.
By getting those untapped traders into ‘stonks,’ Robinhood might have actually democratized finance to some extent, but those traders kept educating themselves and that newly earned awareness may be killing Robinhood slowly.
When Vlad Tenev and Baiju Bhatt gave up their lucrative business providing financial firms with high frequency trading software in 2013, they built a platform that would attract millennials curious about playing the stock market and let them fool around with small sums until they gained the experience and confidence to make bigger moves.
It worked. The interface was fun, brokerage rates were low and the market went up and up and up turning a whole group of Regular Joes into Armchair Chads, sharing stock tips and investment theses, much to the condescending delight of Wall Street.
But between the beginning of 2016 and the end of 2019, things changed a lot for Robinhood and its users.
Users were offered higher tier memberships that gave them access to margin accounts and Robinhood’s curated data. They were granted access to options accounts and fractional shares, and they were trading Bitcoin /zigman2/quotes/31322028/realtime BTCUSD +3.37% and Ethereum /zigman2/quotes/108573964/realtime ETHUSD +1.76% in 6 U.S. states.
In short, the Armchair Chads were getting out of their armchairs and into a desk chair, adding a screen and going full “Beautiful Mind” on a stock market that had detached itself from financial fundamentals.
Meanwhile, Robinhood had become a juggernaut disruptor of tech-enabled hipster finance; a multi-billion dollar outsider force that looked impossible for institutional Wall Street to stop, forcing suits and fleece vests alike to look at Robinhood’s user growth and make the decision to evolve or die.
By the dawn of 2020, almost every major online brokerage had given up their sweet flow of trade execution fees in delayed acknowledgment of the app’s new and sudden domination.
And in case that seems hyperbolic, we’ll invite you to recall that in February 2020 Morgan Stanley /zigman2/quotes/209104354/composite MS +3.30% bought E*Trade for $13 billion , or $2,500 per customer .
Robinhood had The Street running scared.
And then, the rest of 2020 happened.
With billions of people finding themselves stuck at home with only overwhelming boredom, existential dread, and “Tiger King” to keep them company, tens of millions decided maybe it was time to play the incongruously surging stock market, and Robinhood’s interface of virtual confetti fun just made it all the more welcoming.
More than 9 million users joined up with Robinhood in 2020, according to the company’s data, an amount that was almost equal to its entire user growth up until that point.
When shares of bankrupt car rental operator Hertz suddenly surged in May 2020 , a wider awareness of Robinhood’s increasing power began to percolate in people’s consciousness as it was clear that retail investors had jumped into Hertz stock taking big Wall Street short sellers like Carl Icahn by surprise…which was objectively kind of fun.
But with that kind of growth comes some pain.
Robinhood’s platform crashed twice in March 2020 as a tsunami of users attempted to buy into an unprecedented market bounce back from pandemic lows, regulators started to take an interest in how much the company was making from selling its order flow to high frequency traders, and a 20-year-old user in Illinois took his own life after misinterpreting a $730,000 loss on an unsettled options trade.
And all the while, retail traders were getting a clearer sense of the virtual world around them.
Then came 2021.
We’ve touched on it a bit before in this column, but there was a January short squeeze on GameStop /zigman2/quotes/203755179/composite GME +5.60% , AMC Entertainment /zigman2/quotes/200235402/composite AMC +7.40% and other meme stocks, and it brought Robinhood’s influence to the forefront of the American consciousness.
Users had become sophisticated enough, using options and margin and all the other stuff Robinhood had given them, to launch a multi-pronged attack on institutional Wall Street, causing losses for hedge funds and plunging professional traders into panic.