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.
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.
Crypto trading has helped — Robinhood’s highest-margin business, but also its most volatile. Ultimately, Robinhood’s 25 million US-based accounts just aren’t nearly as active as they were during the pandemic-driven peak in the first half of 2021, according to Bloomberg Intelligence. They might never be again.
Tenev told me his primary focus is becoming the number-one broker for active individual investors in the US, a position currently held by Charles Schwab Corp. But his secondary goal is to become a leading financial institution for Millennials and Gen Z. Clients can already manage individual retirement accounts on Robinhood’s platform, and it also offers credit cards. More services will follow.
International expansion is another diversification tactic, one that other online US brokers haven’t tried. Bloomberg Intelligence analyst Neil Sipes says it’s very early days as to how it will develop, and the big question for its economics is what profile of customers Robinhood will attract. Will they be active traders or longer term investors? Active traders, especially those that use leverage, are more obviously profitable, but less active very large accounts can still provide strong revenue if they carry big cash balances and use margin loans.
Britain might provide more opportunity on the active side; what the country lacks in investing culture, it makes up for in online gambling. The source of Robinhood’s popularity in the US — and of much criticism, too — is the way in which it made trading in stocks, options and crypto look and feel more like gaming, which helped draw in a younger, perhaps less risk-sensitive crowd. Robinhood could take share from William Hill Ltd. and Flutter Entertainment Co.’s Paddy Power rather than Hargreaves Lansdowne Plc.
But this cuts both ways. In the US, a recent study suggested investors might be pulling cash from brokerage accounts to plough into sports betting now that deregulation is widening access there. The growth of American online gambling could pose another threat to Robinhood’s core business. Tenev says he hasn’t seen evidence that his company is losing activity to sports betting in the US, adding that the recent study might not have been validated. (Aaron Brown questioned some of its assumptions for Bloomberg Opinion.)
But if there’s a real trend, there’s potentially a three-way battle for stock investors between traditional brokers, gaming and gamified online brokers. Robinhood’s UK moves won’t counter all of the threats it faces, but they’re a start. The target may be interest income — but Tenev won’t get that without finding a base of active traders. There’s no guarantee that American investing culture will find root in Britain.
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