Robinhood has radically reshaped the brokerage industry with a free, easy-to-use app that has brought in droves of new retail investors to the market, but as a private company its own finances have been closely watched.
That changed on Thursday with the release of the prospectus for its initial public offering, which provided the first comprehensive overview of its business fundamentals, profits and potential risks to investors.
Average revenue per customer
in the first trimester
Robinhood has been criticized for what one regulator has called the ‘gamification’ of investing – the use of rewards, bonuses, push notifications, and other prompts on its easy-to-use app, which encourage frequent exchanges from customers. Critics say it is targeting vulnerable retail investors by making stock trading a game like gambling.
But it also seems effective. The prospectus shows that investors on the platform are trading larger amounts and more often than ever. Robinhood’s revenue per user grew 65% in the first three months of 2021, from nearly $ 83 per customer with an account funded during the same period in 2020, to $ 137.
Robinhood makes more money the more its customers trade. The number of accounts funded on the platform increased from 5.1 million at the end of 2019 to 12.5 million at the end of last year, and jumped again to 18 million at the end of March.
The most lucrative cohort of investors listed in the prospectus is the one that joined in 2020: they deposited 45% of the money on the platform.
Payment for order flow
$ 720 million
in turnover in 2020
Robinhood’s core business is a controversial practice known as Payment for Order Flow, or PFOF. The brokerage sells clients’ trades to market makers, such as Citadel Securities, who in return promise to execute the trade at the current market price or at a better price.
In 2020, Robinhood achieved nearly $ 720 million in sales with customers, accounting for 75% of its revenue. This share rose to 81 percent in the first quarter of this year.
Paying for Order Flow helps brokers offer commission-free trades to clients, but the practice is banned in the UK and Canada and the US Securities and Exchange Commission is reviewing it. SEC Chairman Gary Gensler expressed concern that PFOF is not resulting in best execution for clients.
Any regulatory change could seriously damage Robinhood’s business model, the prospectus acknowledges. While other brokerages such as TD Ameritrade and Charles Schwab also sell user transactions, they represent less than 10 percent of their revenue, according to BrokerChooser.
$ 11.6 billion
crypto assets in custody
Cryptocurrency trading proved lucrative for Robinhood during the recent boom, commanding a growing share of the business.
The company said crypto jumped to 17% of revenue in the first quarter, down from just 4% in the previous quarter. Customers traded around $ 88 billion worth of cryptocurrency through Robinhood in the first three months of the year.
As a result, assets under custody in cryptocurrencies at the end of the quarter were more than 24 times higher than a year earlier, at $ 11.6 billion.
Robinhood warned that a substantial part of the increase in activity was in dogecoin, a joke currency championed by Elon Musk. Dogecoin trading accounted for 34% of cryptocurrency revenue in the first quarter, Robinhood said.
Robinhood has clashed with regulators on several occasions over what has been likened to Silicon Valley’s ‘go fast and break things’ business approach.
The prospectus named seven US state and federal agencies investigating the company and revealed previously unknown investigations. These include a lawsuit brought by the California Attorney General’s Office and a lawsuit by the New York State Department of Financial Services regarding anti-money laundering and anti-money laundering issues. cybersecurity which Robinhood said would likely result in a financial penalty of at least $ 10 million.
On Wednesday, the Financial Industry Regulatory Authority imposed its highest ever fine on Robinhood – $ 70 million – for causing “widespread and significant harm” to customers over a period of more than five years. In the prospectus, Robinhood said the Wall Street regulator’s investigation was continuing and that it included more financial penalties.
In addition to Finra, Robinhood is also the subject of an investigation by the SEC and state regulators for platform outages, communication with customers, and errors in viewing user account balances.
Meanwhile, nearly 50 class actions and three individual client actions have been filed against Robinhood for suddenly placing restrictions on trading in “memes stocks,” including GameStop at the height of the investor frenzy in January.
$ 4.8 billion
cash flow on Robinhood’s balance sheet
The GameStop saga shed light on Robinhood’s financial situation, as he was forced to impose trade restrictions when he couldn’t invest enough of his own money to support customer transactions.
In order to restore trade, the company rushed to raise $ 3.5 billion in convertible debt within days.
The company had amassed $ 4.8 billion in cash and cash equivalents on its balance sheet as of the end of March, according to the prospectus. In April, he also secured a $ 2.2 billion revolving line of credit that can be used to fund margin loans and other business activities.
The cash cushion and credit facility could help Robinhood meet clearing house deposit requirements in the event of a new trading peak.
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