Assignment 3: Robinhood – “In ten years, people might think it’s crazy we used to pay to trade stocks when all it takes is a few taps.”

“In ten years, people might think it’s crazy we used to pay to trade stocks when all it takes is a few taps.” Josh Constine via TechCrunch

Robin Hood is a heroic outlaw found in English folklore who is often portrayed as “robbing from the rich and giving to the poor”. The app ‘Robinhood’ does not rob from the ‘rich’, but it does give ‘poor’ (or ‘economical’) people a better opportunity to explore the stock market. Tech Revolution was probably a late in the stock trading business. Most of the trading houses have very manual processes for executing, managing and reporting trades. Be ready to dish out about $30 if you wish to talk to a trader to execute a trade. But it is understandable as a real person is spending time with you and he needs to get paid for his time. But even if you execute a so called ‘online’ trade, trading sites charge anywhere from $6 to $10 per trade.

Robinhood plans to capitalize on this opportunity. By automating everything that is needed to execute a trade, they will minimize the overhead costs to a limit which allows them to offer free trades. Although spending $10 on a trade does not seem like much, but if you are a newbie like me, you’d want to try buying and selling multiple stocks over a small period to get a hang of the market. If you try doing that on a traditional platform, the cost quickly adds up. Robinhood will provide the flexibility to invest small amounts in multiple stocks as there is no overhead in buying and selling.

In addition, stocks generally move very quickly. It is very difficult to sit in front of a computer waiting for prices to change before you see or buy. This problem has been addressed traditionally by setting a ‘limit order’ which only executes if the stock hits the price you have set. This has it’s own challenges. If the stock is on an upward trend and  you had set you stocks to sell based on limit order, when you review your portfolio end of day, you will not feel successful. If only you could have seen the trend and held off on selling the stocks, you could have made more money. Robin hood addresses this point by making it a mobile app. You have access to all the market related information, at any time, on your phone. This combined with ability to buy or sell in a few clicks makes it easier to execute a trade while you are shopping for groceries.

Now the million dollar (or 16M dollar) question is, if Robin hood lets users trade for free, how will they make money? Is it all for goodwill? The answer is No. There are smart guys running the company who are planning on getting rich. They are targeting multiple avenues to generate revenues. First, they will make money from something called “payment for order flow”. They will get compensated by the stock exchanges where they direct their orders as they are boosting the trade volume on that exchange. Second, they will charge for the API, so anyone trying to build apps on Robinhood API will pay them. Third, they plan on investing the money that investors leave idle in their Robinhood account, and make money on that. Fourth, they will charge interest on money that investors borrow while they are waiting for the cash from their sales to land in their account. And I think at some point they might add some advertisements on the app which will be allow them to access to another steady revenue stream. Net net, they have a plan to make money.

There are challenges that Robinhood has to look out for and be ready to deal with. If RobonHood can make an app, what is stopping other entrepreneurs to make one of their own. Granted Robinhood has first mover advantage, but if it does not keep up with technology and upgrades, it will leave opportunities for other tech entrepreneurs. As of today, Robinhood only has an app for iOS. The Android and Windows phone markets are still up for grabs if someone can take the leap. And the challenge that is bigger than tech entrepreneurs, are the big trading houses like Fidelity, Charles Schwab,  Ameritrade, Scottrade. They already have an established brand and business model. All they need to do is get their IT department in order, automate things and build an app and viola! Robinhood has a competitor.

The sign up line is long (366,126 + me) and is growing. People are ready to give a chance to Robinhood. Now we wait and watch if this modern era Robinhood is up for the challenge!

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Image Credits: Robinhood.com

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