Illustrations: Shira Inbar

How Robinhood Convinced Millennials to Trade Their Way Through a Pandemic

The $8.3 billion stock trading startup fumbled into the financial crisis — and is now winning it

If there was a day everything changed for stock traders, it was Monday, March 2. The prior week, a Centers for Disease Control official warned that as the coronavirus pandemic sweeping Asia and Europe spread in the U.S., “disruption to everyday life may be severe.” China reported 202 new Covid-19 cases, bringing the total there to more than 80,000 despite massive lockdowns. Hundreds of new cases were confirmed in Italy; deaths were reported from Australia to South Korea; and cases in the U.S. tipped past 100. The S&P 500 had fallen for five straight days, plunging nearly 10% on spiking volume. For anyone working the markets, this would be the day to be ready for action.

Yet somehow it was a disastrous day for Robinhood. The markets rallied, but Robinhood — the no-fee trading app known for its young user base and unicorn-level valuation — did not. The service suffered an outage that lasted not an hour, not a couple of hours, but the entire trading day. “I definitely won’t be using Robinhood anymore,” one among many outraged users vowed to CNBC. “When they reopen I’m moving all of my funds.” Others even sued. For a company that just weeks earlier seemed a hot IPO candidate, it looked like a turning point. “Until this week,” the New York Times wrote, in obituary-like tones, the company “had been regarded as one of the most successful financial technology startups.”

The pessimism was understandable. There was always a whiff of the bull market phenomenon around Robinhood: The Stanford-pedigreed founders who talked of “democratizing” Wall Street, and the $7.8 billion valuation clearly yoked to growth over proof of profit. How much demand would there really be for a stock-trading app in an economic storm wiping out years of soaring stock prices? Especially if that app conked out when the markets were volatile — a seemingly mission-critical failure.

The service suffered an outage that lasted not an hour, not a couple of hours, but the entire trading day.

But surprisingly, that pessimism was misguided. Even as Robinhood experienced another hours-long outage the next day, and a third the following week, it claims that user growth was ultimately unaffected. “We’ve seen record trading volumes and record depositing activity,” Robinhood co-founder and co-CEO Vlad Tenev maintained in a late-April appearance on Jim Cramer’s CNBC show. Tenev, whose mussy shag cut and trim goatee made him disconcertingly resemble the folkloric outlaw his company is named after, underscored that Robinhood “has continued to have over 50% of the market share of new brokerage accounts,” more than “all of the incumbent legacy providers put together.”

By then, the IPO market seemed frozen, but Robinhood was reportedly raising new funding despite the turbulent economic conditions. “Raising money during a pandemic is certainly a challenging thing to do,” Robinhood’s other co-founder and co-CEO, Baiju Bhatt, says now. “There’s so much uncertainty, from so many different perspectives.” And while he declines to get specific, that included reassuring investors after the outages, positioning them as a side effect of a tenfold increase in traffic. If nothing else, Bhatt told them, it demonstrated its dedicated user base and Robinhood’s “resilience” in fixing the problems.

It worked. This month the company completed a new $280 million fundraising round that pushed its valuation even higher, to $8.3 billion. Sequoia Capital led the round, with other backers including Kleiner Perkins, CapitalG, NEA, Thrive Capital, Index Ventures, New Enterprise Associates, and Andreessen Horowitz. “Obviously the outages were tough. The company handled them about as well as I could imagine,” says Sequoia Capital partner Andrew Reed. But ultimately those outages were a distraction from a bigger story, he argues: “As consumer interest in the marketplace peaks, Robinhood has become the default place for them to go to open accounts, and to access the markets.”

The company is “a poster child of fintech success,” as James J. Angel, an associate professor at Georgetown University’s McDonough School of Business puts it. “They’ve pioneered using technology to roll out financial services to a previously under-served segment of the population. “

So, let’s review. A global pandemic has thrown the world’s economy into a terrifying tailspin. The stock market’s gyrations, which often seem wholly disconnected from the actual economy, are more unpredictable than ever — and no less an investment wizard than Warren Buffet says his fund remains on the sidelines because “we don’t see anything that attractive” to buy. Yet somehow an app designed to encourage inexperienced young Main Streeters to play the market, and that has been dogged by reliability issues, is a smash hit, bolstered by the smartest Silicon Valley investors.

After CNBC’s Cramer took in Tenev’s pitch, he spread his arms wide and yelped: “It seems like it’s your time!” And clearly he wasn’t wrong. So how did that happen?

The core premise of Robinhood as a product is straightforward: You can trade stocks with no commission charge at all. But as the name of the company suggests, Robinhood’s founders have always promoted their product as having a loftier mission: leveling the financial playing field.

Co-founders Tenev, now 33, and Bhatt, 35, became friends while studying math and physics at Stanford. They went on to found a New York-based startup that designed algorithmic trading software for financial institutions, but found this unsatisfying. During this stretch, in late 2011, they began to follow what they have claimed as their inspiration: the Occupy Wall Street movement.

“That was the one sort of cultural moment for defining what would become Robinhood,” Bhatt says now. “That stems from how it intersected with our individual lives. We were working in finance, and building technology for other financial institutions. And we realized our entire generation of consumers was feeling pretty left out from the way the financial system worked.” Watching the protests unfold, Tenev later told Fast Company, they realized: “We were making the top 1% of people wealthier.”

The underserved market segment Bhatt and Tenev had in mind wasn’t the financially disadvantaged underclass, or even the financially stressed working class. It was young people.

Like the protesters, Bhatt says, many of their classmates, colleagues, and peers seemed to think the financial system was hopelessly corrupt and unfair, and needed to be torn down. “We could understand the motivation behind that sentiment, but at the same time we had a fundamentally different view — one that I think was more optimistic,” he continues. “Rather than tearing the whole system down, what we could do is something really concrete — which is give more people access to it.”

That is not exactly storming the Bastille, or devising a scheme for universal basic income or a campaign to tax (let alone rob from) the rich. But that’s because really, the underserved market segment Bhatt and Tenev had in mind wasn’t the financially disadvantaged underclass, or even the financially stressed working class. It was young people. “The leap of faith,” Bhatt says, “was that we’d be able to activate a generation of consumers that previously had sat out from the market.”

They returned to Palo Alto in 2012 to develop their idea: A mobile-first stock-trading service that was easy to use, and charged no commission. “What intuitively felt to us like one of the biggest barriers to entry for ordinary people was that every single time you transacted with the stock market, it was costly,” Bhatt says.

This idea was not really a revolution, but an evolution. The tradition of making the stock market increasingly accessible to more customers dates back to the 1970s. The first wave of brokerage disruptors were discount brokers like Charles Schwab, which thrived after deregulation replaced a uniform fixed-rate commission structure with one that let brokers compete to execute trades for lower fees. The arrival of the internet as a mainstream phenomenon in the 1990s disrupted that disruption with even cheaper transaction costs, from the likes of E-Trade. Schwab’s $55-a-trade minimum, Georgetown’s Angel says, suddenly looked pricey compared to $10 or so to buy or sell through an online broker.

Robinhood took the trend to its logical conclusion — trades that cost $0 — and converted it into an opportunity to connect around money with members of a 90-million-strong generation. It was shrewd: Not only is it easier to reel in newcomers than to peel users away from other services, there’s an opportunity to make them lifetime customers, gradually adding new (fee-based) services. That’s why lots of businesses, including brokerage and financial firms, are interested in young HENRY — “high earners, not rich yet” — clients. “It’s about volume, getting more customers, and cross-selling other products,” research analyst Pauline Bell told Business Insider last year.

Tenev took the lead on engineering, and Bhatt on product design. Tenev has said the pair met with around 75 venture capital firms trying to land seed funding, ultimately raising $3 million from Index, Google Ventures, and Andreessen Horowitz. With a nascent team of engineers and designers, they’d work all week on prototypes. Then a small team would walk to a café on the nearby Stanford campus and quiz newcomers to the financial system — investor-curious students. “They would literally sit down with us and play around with the product,” Bhatt recalls. “We thought if we could make Robinhood useful for them, that that would be the ignition point.”

While they tinkered, the founders started a waiting list for early access, with a clever twist: You could see your rank in the line to try the product — and you could move ahead if you got others to get in line, too. The idea was to control the rollout, and make Robinhood accessible to the most excited potential customers first. Manufacturing pent-up anticipation worked: The waiting list reached 1 million before the app was finally released in 2015.

Even Bhatt concedes that the early Robinhood had “pretty limited functionality” — a seemingly risky move to compete with established online brokers. You could make trades, but where were the dense layers of news and research? This sleeker approach was a direct result of all those coffeehouse beta tests. “It did less,” he says, but performed its functions in a “really, really streamlined way.” And to newbie customers, that’s exactly what made it useful. Even now, the app features a clean, simple, phone-centric interface, and a swift, efficient onboarding process. Lookup a stock and your home screen has only a few elements — most notably a hard-to-miss “buy” button. You can scroll down for more stats and news if you really want to, but it’s all quite minimal, a stark contrast to the intimidating clutter and garish overload of most financial information design.

Robinhood’s interface is so inviting, in fact, that it’s been compared to a social media app, or a mobile game. (“Charles Schwab, meet Candy Crush,” as an NBC News report put it.) Partly prodded by push notifications, devoted users check it 10 times a day or more, Bhatt has said. The app won an Apple design award in 2015. All of this reinforced the intended signaling that investing in stocks isn’t some opaque and exclusionary process. Just tap here; anybody can do it!

With the combination of ease-of-use, no fees, and hardly any barrier to entry beyond a bank account, Robinhood sought, as Bhatt once put it, to give “people that don’t have a lot of money the ability to get started” as investors. And it has added more trading tools over time. You can use Robinhood to trade options, meaning you can bet against a stock instead of hoping it will rise. You can trade cryptocurrencies. Most recently, it added the ability to make “fractional” trades, in effect buying a slice of a stock with a high per-share price, like Netflix or Amazon.

In 2016 Bhatt and Tenev introduced Robinhood Gold, a subscription-based service that lets users trade after hours, and on margin (that is, with borrowed money), starting at $5 a month for access to a $1,000 loan. (The company also makes money through interest on idle funds in users’ accounts, and through arrangements with institutional “market maker” firms to execute trades; a Bloomberg report in 2018 estimated that the latter, a common but sometimes controversial practice referred to as payment for order flow, accounted for 40% of Robinhood’s revenue; the company wouldn’t comment.)

By 2017 Robinhood had 2 million registered users, with a median age of 28. The following year it surpassed E-Trade’s 3.7 million users. Rival brokers like Schwab, E-Trade, TD Ameritrade, and Interactive Brokers began to drop trading fees, in more or less direct response to the Robinhood effect. (More recently, Schwab bought TD Ameritrade, and E-Trade was sold to Morgan Stanley.) Free trading, which used to be Robinhood’s calling card, is now basically the norm.

“Free apps and this bull market are bringing the ability to make foolish decisions to an ever-broader swath of people.”

This did not slow the firm’s momentum. Robinhood won’t comment on whether it’s profitable, but entering 2020, it claimed 10 million users. An Apptopia analysis in January found that the company had more mobile monthly active users than all of its “legacy” rivals combined. These days the median age of Robinhood customers is 31. Bhatt and Tenev’s vision had essentially come true.

Then came a pandemic sparking global calamity across economies and markets — which, for Robinhood at least, turned out not to be such bad news.

By late March, it was clear that any Robinhood IPO prospects were on hold — because basically everyone’s IPO prospects were on hold. The pandemic-rattled market was simply too volatile for a public offering. And one might reasonably assume that the same volatility would scare away small investors, particularly the inexperienced newcomers central to Robinhood’s base. It’s one thing to play with stocks when the market is surging. But as Ben Edwards, a business and securities law professor at the University of Nevada, Las Vegas, suggested to the Wall Street Journal back in January, “Free apps and this bull market are bringing the ability to make foolish decisions to an ever-broader swath of people.”

It certainly seems intuitive that the taming of the bull would send individual investors rushing for the exits. “I think the conventional wisdom of many market participants and talking heads was at any downturn, retail investors are going to flee,” Sequoia’s Reed says. But that’s not what happened. Schwab, TD Ameritrade, and E-Trade collectively racked up 1.7 million new funded accounts — and Robinhood claimed over 3 million. In March, its deposits were 17 times higher than its monthly average. App downloads surged, too.

Among people earning $35,000 a year or more who received a government stimulus check, many used at least some of that money to buy stock.

“These are unusual times,” says Terrance Odean, a finance professor at the University of California, Berkeley. For some, Odean continues, moving in and out of stocks has always been more a form of speculative entertainment than wise investing for some. But lately, many people have been stuck at home, bored. As one equities researcher observed to Barron’s, plenty of sports bettors are looking for an adrenaline rush in a world absent of prominent games. Those who’ve lost jobs are watching their bank accounts drain. Whatever their drivers, new investors are surging into the market. In May, an analysis from software and data aggregation firm Envestnet Yodlee found that among people earning $35,000 a year or more who received a government stimulus check, many used at least some of that money to buy stock. Overall trading volume hit $14.6 trillion in March — double the volume a year earlier. April volume was up 50% over 2019.

This fits historic patterns. When the 2008 financial crisis kicked in, trading volume was high, only gradually drying up as the recession dragged on. “When things are moving, people want to make changes,” Georgetown’s Angel points out. “Either they get greedy and they want to join the party, or they get fearful and they want to take money off the table.”

All of this is, in some sense, to Robinhood’s benefit. Asked about his reaction to increased volume on the service, Bhatt says, “‘Surprised’ is not the word I would use.” For some time, he explains, the company has tried to figure out how its customers might respond to a severe downturn. For more than a year prior to the current crisis, the company was focusing on people who had registered for the service, but hadn’t used it to buy any stock, essentially asking: What’s preventing you from getting in the market?

“One of the most common answers we got is that people thought it wasn’t a good time to buy. They thought the market was too expensive,” Bhatt says. And in the last couple of months, that’s changed. “There was this large audience of consumers,” he continues, “that had been looking for an opportunity to jump in at a moment when the market was, according to them, at a better price.” And that’s how economic calamity translates into user activity.

Asked about Robinhood’s IPO prospects now, Sequoia’s Reed won’t get specific, but is as upbeat as you’d expect an investor to be. “Robinhood has clearly defined themselves as the company that has already upended the brokerage industry,” he says, “and should do it in many other [financial] sectors.”

How all of this squares with Robinhood’s lofty founding motives is a little murkier. Sure, the lowering of trading fees that started in the ’70s was a good idea, Odean says. “A couple of other good ideas were low-cost mutual funds, and index funds,” he points out. And those more passive, less intoxicating vehicles are a lot more sensible for most people trying to save for retirement than active trading of individual equities, especially in a volatile market — even if the trading costs nothing. Endless research shows that most individual traders don’t beat the market and would be better off in index funds. “Making it easier to trade isn’t necessarily doing that group of people a favor,” he says. In the last wave of tech-enabled “democratization” of access to the market back in the 1990s, cheaper fees helped turn stock-trading into a pop culture phenomenon, leading to the dubious “day trading” craze and the dot-com boom — all of which fizzled out when the markets unraveled in the early 2000s.

Plenty of Robinhood users will disagree with any suggestion that they are less than savvy traders. Chat boards, Facebook groups, and Reddit threads are rife with unconfirmable tales of trading prowess — including daring bets on options, exquisitely timed short term maneuvers, and so on. Presumably, some of these people are telling the truth. But by the company’s own account, roughly half its users are first-time investors. It would be extraordinary, to say the least, if a significant number of them proved to be market-beaters. Bhatt points out that Robinhood’s site has published extensive personal finance education material. But ultimately it’s a broker-dealer, not an investment adviser. The whole premise is that you know what you’re doing; it’s hardly Robinhood’s fault if you don’t.

It is about giving more people a feeling of access to the means that might someday rocket them into the top 1%, too.

Surely some chunk of Robinhood’s millions of users are investing for the long haul, believing that over time some equities being punished today might be bargains. Various airlines, Carnival Cruises, and Disney are all popular with Robinhood users, as are traditional standbys like Apple and Microsoft. But as Tenev told Cramer, users are lately trading at record volume, suggesting that buy-and-hold isn’t the only strategy in motion right now. Nor are blue chips the only stocks in play. “We generate a ludicrous amount of trades in $1 to $5 stocks,” Bhatt has said. “Because we’re free, we’re the only place where you can day trade stuff like that.”

Ultimately, Robinhood’s own future doesn’t really depend on its users making great, or even prudent, investment decisions. What it depends on is some chunk of those users feeling comfortable enough with the app to buy into other services over time. The Robinhood Gold product is the most prominent example so far: Basically you’re paying for access to a pool of borrowed capital to do with as you will. Usually, such arrangements are structured around interest payments; Robinhood’s idea to convert basically the same fee into a monthly subscription model made it easier to grasp (but just as potentially profitable).

Of course, the ability to play the market with borrowed money seems a long way from Occupy Wall Street. But the founders are quite familiar with the critique that many of its active users would be better off in dollar-cost-averaging into an index fund. “We look at how our customers are behaving,” Bhatt says. “One of the concerns that we’ve had — and we’ve learned a lot through customer research — is that while the information on how to do investing the quote-unquote correct way is out there, we see so many people that are looking at that and saying, ‘Hey this is really complicated. Maybe I’ll put this off, maybe I’ll do this at some later date.’”

From the company’s perspective, there’s no bad time to take the initiative, seize the tools of capitalist wealth creation, and take control of your financial life. Whatever its revolutionary self-styling, Robinhood is not about making the 1% loosen its grip on disconcerting riches for the good of society. It is about giving more people a feeling of access to the means that might someday rocket them into the top 1%, too. That is a more compelling, more traditionally internet-y, and certainly a more classically American, idea.

Bringing more people into “the system” is fundamentally empowering, Bhatt says, categorically better than leaving them on the sidelines. “We as a company believe that participation is power,” he concludes. That’s a noble sentiment, and a catchy slogan. And for Robinhood, it seems to be working out as a pretty promising business model, too.

Author The Art of Noticing. Related newsletter at https://robwalker.substack.com

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