Robinhood: Revolutionizing Retail Investing

Founded by Vladimir Tenev and Baiju Bhatt in 2013, Robinhood has grown into one of the most popular investing platforms in the U.S. in under a decade. Driven by the belief that everyone should have equal access to financial markets, Robinhood has transformed the industry with its innovative approach. Let's take a closer look.

• Important friendship: Robinhood's co-founders, Vladimir Tenev and Baiju Bhatt, met while studying mathematics at Stanford University.

• Business model: Discover how Robinhood differentiated from its competitors as the app launched in 2015.

• Expansion beyond the U.S.: As of 2024, Robinhood has expanded its services to the UK and EU.

The story of Robinhood began with a friendship between two mathematics students at Standford University: Vladimir Tenev and Baiju Bhatt. The two completed their master's degrees in 2008 before going separate ways – Tenev pursued a PhD at UCLA, while Bhatt joined a trading firm.

Inspired by his early experiences and the tumultuous global crisis that was unfolding, Bhatt convinced Tenev to drop out of school and join him to start their own trading firm. This first joint venture, Celeris, focused on high-frequency trading. After roughly a year or so the pair went on to their next fintech company: Chronos Research, where they created software tools for banks and hedge funds to build automated trading strategies.

Following the Great Financial Crisis of 2008 there was a growing distrust of the financial sector. In 2011, the tensions resulted in the Occupy Wall Street movement. The protests and the overall loss of faith in the financial system became an inspiration for Tenev and Bhatt to pursue a new business opportunity.

In 2013, Tenev and Bhatt founded the trading platform Robinhood. The vision of the company was to make investing easy, cheap, and convenient with a sleek mobile-first design. The name came from its mission to "provide everyone with access to the financial markets, not just the wealthy".

Tenev and Bhatt early on decided to share the responsibility of CEO between the two of them. The duo brought over a young and dedicated team of engineers who had worked with them at Celeris and Chronos. Together they began to develop the platform, while also initiating the exhaustive process of receiving regulatory approval. Finally, after roughly a year Robinhood was approved by the SEC and became a member of FINRA (Financial Industry Regulatory Authority).

With the approval secured the company launched its website, which simply had a waiting list signup with the short message: "Commission-free trading, stop paying up to $10 per trade." Closing in on the platform's launch, about a year and a half later, the waiting list had grown to close to a million people.

In March 2015, Robinhood launched on the App Store as the first mobile-first brokerage in the U.S. The design of the user-friendly app was more similar to a social media app, attempting to increase user engagement past long-term investments. Another important element of Robinhood's offering was that there was no minimum deposit upon registration.

The most important element, however, was the promise of commission-free trading. This was revolutionary, set the company apart from its competitors, and is the core part of its business model to this day. The idea for the innovative offering was described by Tenev in an interview with Business Insider:

How this works technically is that Robinhood sells its customers' trade orders to market makers. These market makers, in turn, integrate Robinhood's order flow into their algorithms, profiting by capturing small margins on bid-ask spreads. This practice, known as payment for order flow (PFOF), allows Robinhood to offer commission-free trading to users while generating revenue from the fees it receives from market makers for directing orders their way. Robinhood relies heavily on PFOF as a primary revenue source.

It took a few years, but eventually, Robinhood's competitors followed the innovative move to eliminate commissions. In 2019, during the span of just a few days, Charles Schwab, TD Ameritrade (later acquired by Charles Schwab), Interactive Brokers Group, and E-Trade (later acquired by Morgan Stanley), all announced that they would cut commissions to zero.

Additionally, Robinhood generates revenue similarly to traditional banks through securities lending. This involves lending out customers' assets to institutional investors, such as hedge funds or other financial firms. Other revenue sources include Robinhood Gold Subscription and transaction-based fees from options and cryptocurrency trading.

Since its initial launch with stock and ETF trading in 2015, Robinhood has significantly broadened its range of features. In 2017, it added options trading, followed by cryptocurrency trading in 2018. In 2019, Robinhood introduced fractional share trading, allowing users to buy fractions of a share. Buying even just one share in certain companies can mean an upfront investment of hundreds of dollars, and allowing fractional buying was another way to make the stock market more inclusive.

In early 2021, the GameStop short squeeze and subsequent chaos attracted worldwide interest for a couple of weeks. Robinhood was among several brokerages that restricted trading on GameStop and other heavily shorted stocks, citing liquidity concerns and regulatory requirements.

The decision ignited strong reactions from users and ultimately led to congressional hearings for CEO Vladimir Tenev, followed by fines for Robinhood. While much of the initial controversy has since subsided, the turmoil prompted Robinhood to enhance its risk management practices and implement additional safeguards.

In July 2021, Robinhood completed a highly anticipated IPO at a valuation of $32 billion. Driven by intense trading activity during the GameStop hysteria, the company had just presented an annual revenue increase for the first quarter of over 300%. In little over a year, its user base had expanded from 9.8 million to over 22 million.

Just months before the IPO, Bhatt had stepped down as co-CEO to become chief creative officer – meaning that Tenev was now the sole CEO of the now-public Robinhood.

From its IPO Robinhood has continued to position itself as an industry pioneer. While improving its U.S. market share the company has also expanded internationally to the United Kingdom in early 2024. Although the UK offering remains limited due to regulatory challenges, plans to expand features are underway.

Robinhood has also expanded its platform to offer crypto trading within the EU. Regarding further international growth, CEO Tenev noted in the conference call following its second quarter of 2024 that the company is actively exploring expansion into additional jurisdictions.

In less than a decade, Robinhood has become one of the most popular investing platforms in the United States. With its relentless and fearless drive for innovation, it has pushed the entire retail investment industry to evolve to remain competitive. After successfully democratizing and in large part enabling the surge in popularity of retail investing in the U.S., the company is looking to expand its global presence. The goal is to do this with the same strategy that made it popular in the first place: no commissions, easy-to-navigate interface, and accessibility for all investors.