Robinhood App Will Offer Zero-Commission Stock Trades Thanks To $3M Seed From Index And A16Z

Robinhood App Will Offer Zero-Commission Stock Trades Thanks To $3M Seed From Index And A16Z

Posted Dec 18, 2013 by Josh Constine (@joshconstine)

Why pay E*Trade or Scottrade $7 to trade a stock when you could do it for free? That premise helped mobile investment app startup Robinhood raise the $3 million seed round led by Index Ventures it announced today. With the zero-commission trading it will launch next month, Robinhood is out to prove that young people do care about trading stocks — it’s just been too expensive for them to invest small sums.Robinhood’s tech-fueled, automated approach could change that.

Wait. Is zero-commission trading even possible? Yes. It doesn’t actually cost a brokerage much money to place a trade. In fact, Robinhood’s found ways to earn money doing it. But decades-old financial companies have been charging their users $7 to $10 a trade to pay for their brick-and-mortar retail locations, army of employees, and big profit margins. Robinhood plans to replace all that with a mobile app and a lean engineering team. While it might not get rich quick, it wants to be the Amazon of stock trading by building a huge audience and making just a little off each user.

Robinhood first launched in April as an iOS app for tracking stocks and sharing predictions of whether they’d rise or fall. It also let users the track record of other people’s predictions and follow those who reliably make the right calls. The crowdsourced stock advice gives users more confidence in their own trading decisions.

At the time, the Robinhood app was designed to fill a major hole on mobile, where there was no decent native equivalent of Yahoo Finance or Google Finance’s popular websites. Yahoo has since updated its mobile apps, boxing out Robinhood. The startup ended up pulling its app from the store to redesign it around something big.

In October after eight months of waiting, Robinhood was approved by finance regulatory agency FINRA to become a broker-dealer. That meant it could add the most important feature missing in its app: the ability to actually buy and sell stocks. It could soon become the first unlimited zero-commission stock brokerage in the world.

Robinhood will launch free stock trading early next year but you can sign up now to be in the first wave of users granted access. In a Mailbox-esque scheme, tweeting about Robinhood will bump up your place in line. There’s clearly big demand for free trading, as Robinhood’s sign up page leaked to Reddit and hitnumber 1 on HackerNews this weekend, bringing in over 10,000 signups in 24 hours.

Zero-commission trading could bring a new generation of young investors into the stock market. If you’re an old, rich person investing tens of thousands of dollars or more, a $7 fee is pocket change. But if you’re young, on a budget, and only buying $500 of stock, a $7 fee is a steep price to pay. “You’re losing the amount the stock market appreciates in a year in just commissions” Robinhood co-founder Vlad Tenev tells me. By eliminating the fee, it becomes financially viable for less wealthy people to get into trading.

 

To scale up the zero-commission trading feature, Robinhood needs to hire engineers and designers, so it’s added to its initial funding from Google Ventures. Today it revealed it’sraised $3 million led by Index Ventures, and joined by Andreessen Horowitz, Rothenberg Ventures, and angels like Tim Draper, Howard Lindzon, and more from the finance sector. Robinhood co-founder Baiju Bhatt tells me the startup went with Index because “they were super pasionate about what we were doing. It’s important to share the same enthusiasm for the vision and product.”

These big name investors weren’t just funding the idea, but the Robinhood team. Tenev and Bhatt were all-stars in their math undergrad programs at Stanford. Disclosure: I know that because I went to college as was friends with them. Tenev even dropped out of the world-renowned UCLA math PhD program to start building finance companies with Bhatt.

Since 2009, they founded Celeris, an algorithmic trading trading technology startup, and Chronos Research, which sold financial software to top investment banks. Along the way Tenev and Bhatt learned how to navigate financial regulation, discovered the massive opportunity in mobile stock trading, and learned how to build it. Robinhood’s trades are executed fast with reliable pricing because these guys had already run an entire business dedicated to low-latency trading. And its compliance team ensures users pay the real market price for stocks with no shady markup.

How will Robinhood make good on its investment if users trade for free? It has a few ideas. First is charging for API access. Once the startup has its trading system humming, it could let other apps build on top of it for a price. Next is charging users to trade on margin — spending money on credit because their own is still locked up in the three-day waiting period that follows a stock sell. Robinhood will also earn money from what’s called “payment for order flow”. Essentially, stock exchanges want lots of stock trading volume so people can always find a buyer or seller, so they’re willing to pay a little to get trades executed on their exchange versus another. And eventually, Robinhood could earn interest by holding custody of users’ assets.

Robinhood will have to battle the big marketing budgets E*Trade, Scottrade, and other big-name consumer brokerages. It will also compete with finance news apps like MarketWatch, Yahoo Finance, Bloomberg, and Morningstar, but these don’t actually let you buy and sell stocks. Robinhood will also have to stay lean and efficient as it grows so as not to befall the fate of Zecco, a service that offered free trading in 2006 but eventually started charging.

Code rules the world now, yet the finance sector has been somewhat protected by layers of regulation that discourage startups. Robinhood has jumped through the hoops, and they’re just the beginning of the shift. In ten years, people might think it’s crazy we used to pay to trade stocks when all it takes is a few taps.

 

Robinhood gets $3M to take from Wall St. and give to Main St. with its mobile-first, zero-commission brokerage

MICHAEL CARNEY 
ON DECEMBER 18, 2013

Today, being a digital native no longer means being an acne-faced teenager, living at home with your parents. People who grew up turning to the Internet first for access to information and services – often called Generation Y or Millennials – now live on their own, have professional careers, and thus need access to financial services. But the financial industry has been slow to adapt to this sea change or to introduce products that make investing accessible and approachable to this new generation.

Robinhood is a mobile-first financial services company that aims to change this with the launch of the world’s first zero-commission stock brokerage. Today the company announced a $3 million seed round which formally closed in October. The round was led by Index Ventures with participation from Andreessen Horowitz* (a16z), Rothenberg Ventures, Howard Lindzon’s Social Leverage, and Tim Draper’s Draper Associates. The company previously raised an undisclosed sum from Google Ventures.

In addition to today’s funding news, the company announced that its newly formed, wholly-owned subsidiary, Robinhood Financial LLC, has received Financial Industry Regulatory Authority (FINRA) approval to operate as a securities broker-dealer. This is a non-trivial step that has prevented many Silicon Valley financial technology companies from properly attacking the brokerage incumbents, and which will allow Robinhood to offer its clients stock, corporate bond and option trading. (The company will initially limit trading to US-listed stocks and exchange traded funds, aka ETFs.) Robinhood financial will be run by a separate team of experienced and licensed securities professionals, many of which joined the company from E*Trade.

Robinhood is the first retail brokerage to offer unlimited commission-free trading. At traditional brokerages like E*Trade and Charles Schwab, retail consumers typically pay fees of around $10 per trade. But behind the scenes, these institutions trade amongst themselves at a cost of pennies per trade, making the retail markup almost entirely profit margin.

“The brokerage industry has operated essentially the same way since it began, and it took until now for someone to develop a mobile-first, zero commission trading model,” says Index Ventures partner Jan Hammer. “Robinhood is the right idea, at the right time, to enable and empower a new generation of investors to build their financial future at a younger age, and we’re excited to be on the ground floor of this sea change.”

Vlad Tenev and Baiju Bhatt, the former Stanford roommate founders of Robinhood, are on their third financial technology startup. Along that journey they’ve seen firsthand the inefficiency in the incumbent brokerage system and decided to cut out this trading fee markup search for other ways to earn money.

Initially, this monetization mechanism will be to offer margin trading, aka lending money to traders who wish to borrow capital to invest beyond the value of their portfolio – an incredibly high-risk proposition for both the lender and the borrower. Robinhood plans to offer other premium products and services in the future, according to Tenev, as well as expand to support other securities like corporate bonds, currencies, and international equities. The company also plans to offer an API, opening up access to its platform to integration with third parties software systems.

Robinhood is in the final stages of testing today and the company plans to begin granting access to the trading platform in January 2014. Access to its iPhone app will be granted slowly, on a first-come first-served basis, beginning with those already on its waiting list. The company plans to offer iPad and Android apps, as well as a Web product, within the first half of the year, according to Tenev. Today, Robinhood is a US-only platform, but, longer term, the company has hopes of expanding to address the global asset management market.

It’s not just the zero-commission structure that makes Robinhood unique. The company has also developed a ‘live’ mobile trading app that eliminates much of the friction associated with traditional brokerages. Never again will customers need to make a phone call or, heaven forbid, send a fax to initiate or authorize a trade.

“In an age when people are attached to their phones, it is a natural fit to take trading and investing to a mobile-first format,” says Social Leverage general partner Howard Lindzon, who is also the co-founder and CEO of social, stock micro-blogging service StockTwits.

Index Ventures is also no novice to the financial services sector, having led an investment into the Wealthfront asset management platform. Rather than view these two portfolio companies as competitive, the firm sees them as complementary. In a blog post today, Hammer points out that that Wealthfront is targeting “a market which was largely ignored by incumbents – those without the resources to delegate to high-end asset manager.” Conversely, the firm sees Robinhood as “addressing the other half of the market – the DIY-ers…a lively community of engaged users who are curious about performance of individual stocks, who are keen to test their own investment instinct and who want to instantly act on their decisions.”

The zero-commission trading platform will allow these curious traders to dip a toe in the water in ways that were never possible before. Previously, a $100 speculative trade was never feasible given the burden of the $10 flat commission structure of most brokerages. But with Robinhood’s no-fee brokerage, traders can test investment theses or participate in the market with far less investable assets than was otherwise practical.

The financial services sector is notoriously resistant to change, but this is not a long-term sustainable strategy. Until recently, the demographics of the active investing community hasn’t demanded much in the way of innovation. But that is starting to change. It’s slow going at first, as most millennials still don’t have the wealth to incentivize Wall Street to get with the times. But people age, and many of today’s rookie investors will be tomorrow’s whales.

Upstarts like Robinhood, Wealthfront, SigFig, Motif, and others have all entered the the market in recent years and each is offering a new and novel value proposition with the hopes of grabbing market share among Wall Street’s disenchanted. Robinhood may be the newest kid on the block, but it’s hard to argue with free – no matter what generation you’re a part of.