- Trading platform Robinhood
- And one of the most highly anticipated IPOs of the year
- That's a big deal for the retail investor
but it could also come with some big risks.
- [Narrator] Last year, millions of investors traded
on the brokerage app Robinhood.
They were part of a trend.
Since 2020, individual investors bought billions
of dollars in equities, driven by the rise
in no-fee trading apps with Robinhood leading the way.
- Robinhood, when it came onto the scene,
really upended the industry.
- We believe that the more people that have access
to the markets and can start investing earlier
the better off our economy will be.
- [Narrator] After a year of dramatic growth,
Robinhood filed for its IPO on July 1st.
But the filing comes as the brokerage faces
a collision course with regulators, including a new
Securities and Exchange Commission chairman
over a controversial practice that Robinhood uses
to generate most of its revenue.
Here's how Robinhood went from startup to IPO
in less than a decade and why it's facing
so much turmoil as it gears up to go public.
In the '90s, brokerages like E*Trade and Ameritrade
started offering online trading services which helped open
up the stock market to retail investors.
But it was expensive.
- [Spokesman] Internet trade for $8, Touch-Tone trade...
- [Narrator] Trading fees could add up to hundreds
or even thousands of dollars a year.
- That was one of the reason why we saw
relatively muted levels of individual investors
in the market.
- [Narrator] Caitlin McCabe reports on Robinhood
and retail investing for the Wall Street Journal.
- It was cost prohibitive to try to be trading
all the time with these fees.
- [Narrator] That was the case until 2015
when Robinhood released its trading app.
- From the very beginning, our mission has been
to democratize the financial system.
- [Narrator] This is Robinhood co-founder, Baiju Bhatt.
- And for us, this isn't a headline, it's not a gimmick
or a billboard ad, it's the central reason
why we started the company.
- [Narrator] To attract new investors, Robinhood offered
features that made investing more accessible.
It was one of the earliest brokerages
to offer no-fee trading.
It was also a pioneer in fractional share trading.
- So suddenly, you could buy $10 of Amazon or $50 of Amazon.
You could just buy, basically, a slice of that stock
and it just made it much easier for investors
to access the market in that way.
- [Narrator] But price wasn't the only thing
keeping retail investors out of the market.
- So it was just really intimidating to try to trade
and to try to figure out charts
and to understand what was happening in the market.
- [Narrator] Robinhood also experimented with features
aimed at keeping people engaged.
When users would log on to the app
and place their first trade, it used to rain confetti,
stock numbers turned like slot machines,
and some of its messages to investors used emojis.
- And it was just a very inviting app, it was very fun.
They were just very kind of on the forefront
of trying to invite that Millennial crowd into trading.
And I think it worked, I think that's part of the reason
why Millennials liked the app.
- [Narrator] Robinhood's user base grew quickly
which caught the attention of its competition.
By 2019, major brokerages like Charles Schwab
and TD Ameritrade had adopted
zero commission trading, as well.
- It was just recognition of kind of what
Robinhood had built and the market share that
it had amassed and that kind of was the genesis
of this new trading era that we see today.
- [Narrator] And then in early 2020, the COVID-19 pandemic
took hold of the world.
- We are looking at another day of extreme volatility.
Stocks opened just moments ago
with the DOW down more than 600 point.
- I think with the market volatility, a lot of people said
I think this is a good time for me
to try to get into the market
and that's where we've really seen this explosion
of activity from individual investors ever since.
- [Narrator] According to its IPO filing,
Robinhood counted 18 million users with funded accounts
at the end of March 2021 and the brokerage's
first quarter revenue more than quadrupled to $522 million.
But as Robinhood has grown, so has criticism that
some of the app's features, the very ones that help
make it successful could cause problems
for inexperienced investors.
Critics said the app's interface which made it fun
and easy to use actually gamified trading
and put inexperienced investors at risk.
- Trading's a challenging business.
- [Narrator] Larry Tabb is a financial markets analyst
who has studied market structure for over 25 years.
- You're competing not only with some
of the largest investors in the world,
but you're trading with some of the guys
with the biggest computers and the fastest data feeds
and the most sophisticated analytics.
It's really difficult to continually beat them
day in and day out.
- [Narrator] Over the past year, Robinhood has
also faced criticism over how it makes its money
and how it previously communicated that with investors.
In December 2020, Robinhood agreed to pay $65 million
to settle claims that it didn't sufficiently disclose
its business deals with high-speed trading firms.
And then there was GameStop.
- Outrage erupting in this wild and expensive battle that's
playing out between Wall Street heavyweights,
small investors, and these popular stock trading apps.
- [Narrator] In January 2021, Robinhood came under scrutiny
after it restricted users from buying GameStop
as the company's share price surged.
The trading blackout caused some investors
to lose out on potential gains.
About 50 class-action lawsuits,
investigations by regulators,
and multiple hearings with members of Congress followed.
Here's Robinhood CEO speaking with the House Committee
on financial services.
- Despite the unprecedented market conditions in January,
at the end of the day, what happened is unacceptable to us.
To our customers, I'm sorry and I apologize.
- [Narrator] During the hearings, lawmakers scrutinized
Robinhood's use of a financial practice called
payment for order flow which allows the brokerage
to route customer orders through high-speed trading firms.
According to Robinhood's IPO filing, the company made
around 81% of its first quarter revenue from this practice.
Payment for order flow has raised red flags
with the SEC's new Chairman, Gary Gensler.
- This inherent conflict is there
and whether we can address it enough through disclosure
or it sort of implicates the broader market structure.
And I've asked staff to think about that
broader market structure.
- [Narrator] Gensler is reviewing payment for order flow
which could have implications for the future of Robinhood
and no-fee trading, in general.
- This is part and parcel of Robinhood
how they make money, so it will be really interesting
to see if Gensler decides to be a one-man wrecking crew
and really radically reshift how the economics
of the retail brokerage business.
- [Narrator] Robinhood has faced
other regulatory issues, as well.
In June, the brokerage agreed to pay nearly $70 million
to resolve allegations that it misled customers,
approved ineligible traders for risky strategies,
and didn't supervise technology that failed
and locked millions out of trading.
According to its IPO filing, Robinhood continues
to face a number of regulatory inquiries.
Still, some industry veterans say Robinhood will survive
the SEC's review even if regulations are imposed.
(soft electronic music)