What is Robinhood?
July 12, 2021·5 comments·In Brief
Robinhood markets itself as a platform that democratizes investing, positioning every user as a long-term wealth builder. Yet the company's own financial disclosures reveal a different story. The largest source of revenue comes not from equity ownership but from options trading, where the incentives and mechanics mirror gambling far more than investing.
- The revenue model tells the real story. Options contributed 47% of transaction revenues in 2021 despite representing only 2% of customer funds. Each options trade generates $2.9 in revenue compared to $0.40 for equities, creating an obvious pull toward a particular kind of trading activity.
- Customer behavior has shifted dramatically. Users averaged 54 trades annually two years prior, then 84 last year, reaching 122 per year by early 2021. That's roughly double the rate at Charles Schwab and approaching the turnover patterns of pure speculation platforms, not traditional investing platforms.
- The business mechanics resemble high-risk gambling structures. Options have fixed expiration dates and embedded leverage, making them function like stakes in an uncertain outcome rather than ownership of productive assets. CFD platforms using similar mechanics report that 67% of retail customers lose money.
- Customer acquisition costs suggest a churn problem lurking beneath. Robinhood spends $15 to acquire each customer and expects to extract $714 of lifetime value. That's far lower than competitors and implies customers are transient, replacing those who lost money or lost interest.
- The sustainability rests entirely on market gains that won't persist. Customers currently hold $25 billion in unrealized gains, creating "house money" that fuels continued trading. But when markets turn and those gains evaporate, as they did in 2000, the entire model for engaging customers may disappear with them.
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This commentary is being provided to you as general information only and should not be taken as investment advice. The opinions expressed in these materials represent the personal views of the author(s). It is not investment research or a research recommendation, as it does not constitute substantive research or analysis. Any action that you take as a result of information contained in this document is ultimately your responsibility. Epsilon Theory will not accept liability for any loss or damage, including without limitation to any loss of profit, which may arise directly or indirectly from use of or reliance on such information. Consult your investment advisor before making any investment decisions. It must be noted, that no one can accurately predict the future of the market with certainty or guarantee future investment performance. Past performance is not a guarantee of future results.
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Comments
Hi Marc,
Terrific contribution, probably my favourite to date. The synthesis you drew forth between the rotation from investing, to speculation, to plain gambling and Srinivasan’s observation that in a financialised economy, the end game is that everyone is an investor is getting very close to explaining much of the inexplicable we see around us today. It could be a rich seam to mine further.
James
Great write up Marc!
I liked the previous one on DeFi as well!
Thanks & keep them coming
Another great article Marc! I was introduced to your writing through the previous guest article on Epsilon Theory. I’ve now signed up for Net Interest so I can read everything you publish each Friday. Thanks for all the good info!
Hi Marc, excellent article. I would add that when Schwab, TD and the other large brokerage houses went to zero commissions, this lit the real fire under trading, and then their marketing departments went all-in on options. Both of which led to more speculation. Not to mention the number of books, articles, blogs and social media devoted to bringing options trading to the masses. In the narrative game, Robinhood has successfully positioned itself as “not big corporate brokerage” even though PFOF from Citadel and Virtu make the biggest gains from all this “investment.”. It will take a long, grinding, pitiless bear market to turn the zeitgeist.
With the statement that 67% of retail customers lose money on CFD’s, I assume that this means that institutional/professional clients are the ones that are winning because there is a winner and a loser on every trade. I guess that I can understand that because I have a poor track record with options.
And as another commenter stated, the commission free trade took away any impediment to trading. If there still was an $8.95 commission per trade the number of trades would be cut dramatically.
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