Why Robinhood Is Seeking Merry Traders Overseas

Britain’s stock-investing culture has been withering for years, with the only real growth coming from consultants, policymakers and commentators generating ideas on how to revive it. So why is Robinhood Markets Inc. so keen to expand in the UK? The draw may be more the country’s enthusiasm for online betting than allocating savings to equities.

The trading app that shot to infamy during the meme-stock craze of 2021 offers US stock trading to UK customers and is about to add margin lending against those stocks, followed by US options and, potentially one day, UK equities too. But if Britain isn’t a nation of active stock punters, nor is it a place that allows brokers like Robinhood to take payments from market makers for its clients’ trades.

UK clients still get to trade for free just like US customers, despite the Europe-wide ban on payment for order flow, Vlad Tenev, co-founder and chief executive officer, told me last week. The main way Tenev expects to make money from stocks and options in Britain (and eventually in Europe) is by holding customer cash, making margin loans and lending out its clients’ securities to dealers, all of which generate interest income. Longer term, there’s also the possibility that international traders will boost out-of-hours US market activity and make 24-hour trading a better product for US customers.

For Robinhood, interest income in the US has been a major source of revenue over the past couple of years, averaging about 50% of the top line in the past eight quarters. Federal Reserve interest-rate cuts will squeeze that income, while payment for order flow in the US is also under threat from rule changes proposed by the Securities and Exchange Commission. These twin dangers are part of the motivation for Robinhood to diversify its cashflow.

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The SEC changes will hurt Robinhood, but not nearly as much as they would have done in the past. Equity flow payments contributed more than one-quarter of total revenue in 2020 and 16% in 2021, but just 6% in the first half of this year. That’s partly down to both the growth in interest income and the boom in options trading, where order flow payments aren’t being challenged by the SEC. Options trading generated more than four times the income of stocks in the first six months of the year for the platform.