Reverse Robinhood

Robinhood, as we know him, was a philanthropist who robbed the rich to give to the poor. Today, it’s a software company that aims to “democratise” America’s financial system by enabling investors to “build their wealth free of charge.”

This new startup, launched by two former Stanford roommates and backed by venture capitalist Tim Draper, has revolutionised investing for millions of people. The platform’s value has catapulted by nearly 50% since the beginning of the pandemic with their user base reaching nearly 13m this quarter. This was despite a crushing setback triggering a series of outages during some of the most testing periods in February and March.

For those unfamiliar with the firm, Robinhood was the first true zero fee brokerage on the market. It also made buying larger companies more accessible by offering fractional shares. As the firm started gaining traction, many of the other leading players (think Charles Schwab, TD Ameritrade) followed suit and dropped their fees to zero. 

On the surface Robinhood has delivered on its goal of furthering market access for smaller investors, but at what cost has it come? 

Many have criticised the platform for making it too easy to take risk, “Robinhood has gamified investing. Trading is now so simple that it can be easy to make impulsive decisions,” one millennial investor in Harvard’s PhD economics program told the FT. 

In addition to this, Robinhood has generated tens over millions of dollars by selling their users order flow to high frequency trading funds, such as Citadel. The hedge fund run by Ken Griffin makes money by automatically taking the other side of the order, then returning to the market to flip the trade, pocketing the difference between the price to buy and sell, also known as the spread.

– Order Flow: Reem of buy and sell orders, i.e. lists of trades submitted to a broker/exchange.

“There is a little bit of an oxymoron by calling it Robinhood … the company is worth $11.2bn – it’s not a charity, that’s for sure.” Said one Wall Street Executive to the FT. Zero commissions can certainly be construed as generosity, but profiting from allowing multi-billion dollar hedge funds to take the other side of the trade, is certainly not. 

Polestar is working with some of the leading professional services firms including a firm which helps investors off-set their market risks. If you are working in the space and wish to raise funds or for an exit, we would be keen to hear about your ambitions.

“Robinhood has gamified investing. Trading is now so simple that it can be easy to make impulsive decisions,”

By Shaan Bharwani on 26/11/2020