How Robinhood Revolutionized Trading For A New Generation

The stock market has been volatile this year. That's an understatement. It's making billionaires even wealthier. Companies like Apple, Facebook, Amazon, Tesla, and Google are on absolute hot streaks, and day traders are taking notice. Traders using the financial services app Robinhood have been cashing in during this unpredictable market climate. Since the COVID-19 pandemic has significantly impacted our economies, young, bored traders have turned to Robinhood to speculate on the stock market. This phone-friendly platform was founded by Vladimir Tenev and Baiju Bhatt in 2013, and today, these two men, aged 33 and 35, are billionaires themselves.

Tenev and Bhatt have adopted a business model that mirrors the successful strategies used by tech giants such as Facebook. Robinhood is designed to be free, simple to use, and highly addictive—all of which appeal to millennials. Their motto, "democratize finance for all," has resonated with a generation eager for accessible trading. Moreover, the economic stimulus checks during the pandemic have provided an unexpected windfall for Robinhood, leading to a 30% increase in new accounts since January. Revenue is projected to hit $700 million this year, a remarkable 250% increase from 2019. Robinhood has not only popularized commission-free trading but also forced larger firms like Fidelity, Merrill Lynch, and Schwab to follow suit. It’s no wonder that Robinhood's active users are gravitating towards specific stocks, with favorites including Tesla, marijuana brand Cronos, casino operator Penn National Gaming, and Hertz.

Vladimir Tenev and Baiju Bhatt first crossed paths in the summer of 2005 while they were both undergraduates at Stanford University. They discovered they shared numerous commonalities, including growing up in Virginia, being only children, and studying physics. Both of their families immigrated to the U.S. to earn their Ph.D.s—Tenev's family is from Bulgaria, while Bhatt's roots are in India. Tenev began his Ph.D. program in mathematics at UCLA but decided to drop out in 2011 to develop trading software for high-frequency traders alongside Bhatt. Their inspiration came from the 2010 "Flash Crash," a sudden and drastic drop in the stock market that revealed the new realities of high-speed trading.

Table of Contents

• Launch of Robinhood
• Impact on Trading Practices
• The Future of Finance

Launch of Robinhood

Robinhood officially launched in 2013, leveraging the allure of exclusivity to attract users. Within a short span, they amassed a waiting list of 50,000 eager customers. The innovative strategy involved incentivizing those on the waiting list to refer friends, which significantly boosted their user base. By the time Robinhood made its debut on Apple's App Store in 2014, they had already garnered a waiting list of 1 million users—all accomplished without spending a dime on marketing!

The app's appeal to millennial customers was immediate and overwhelming. By late 2019, Robinhood had raised nearly $1 billion in funding, boasting a staggering $7.6 billion valuation along with six million users and a workforce of 500 employees. Both Tenev and Bhatt held around 10% stakes in the company, marking their transition into official billionaire status. In September 2019, competitors like E-Trade, Schwab, and TD Ameritrade followed suit by cutting their commission fees to zero, showcasing how Robinhood had changed the landscape of trading.

Impact on Trading Practices

Millions of users continue to flock to the Robinhood app, particularly during the COVID-19 pandemic. During this time, the platform raised $800 million, driving its valuation to an impressive $11.2 billion, further solidifying Tenev and Bhatt's billionaire status. However, this raises an important question: how does Robinhood generate revenue without charging commissions?

The answer lies in a practice similar to that of larger brokerage firms: Robinhood sells the data concerning their users’ trades to prominent firms like Two Sigma Securities and Citadel Securities. This behind-the-scenes operation has allowed Robinhood to thrive while maintaining its commitment to commission-free trading, effectively disrupting the traditional brokerage model.

The Future of Finance

As Robinhood continues to grow in popularity, it raises significant questions about the future landscape of trading and finance. The rise of commission-free trading has not only democratized access to stock markets but has also encouraged a new wave of young investors to engage in trading activities. This shift could have lasting implications on how traditional financial institutions operate.

With millions of individuals empowered to take control of their finances, Robinhood’s innovative model may very well inspire other companies to adopt similar strategies. The ultimate goal remains to create a level playing field in finance, challenging the status quo and ensuring that everyone, regardless of background, has the opportunity to participate in wealth-building activities.