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Photo: Robinhood GuestAfter the epidemic of stock holdings in households tripled

How did Robinhood capture young people in the United States?

I conclude that Robinhood’s three magic weapons are democratic ideas, commission-free, and cutting investments.

The concept of democracy is reflected in two aspects. One is to actively dilute the concept of securities trading. In Robinhood, you can’t find any traces of brokers. Robinhood does not help you find the best price deal after opening an account or placing an order with a particular broker ( The subtleties are here).

The second is Robinhood’s consistent method of publicity-“Democratize America’s Financial System” (democratizing America’s financial system), which means giving everyone the power to invest because the US stock market has always been All are an institutional-led market (institutional transactions in the United States account for nearly 60%, and institutional transactions in China account for 30%). But is the essence of Robinhood’s democratized finance, and it is the retail investment under the mobile Internet.

Commission-free is arguably the most important reason Robinhood is widely known in the world-no commissions are required to trade stocks, ETFs and options in Robhinhood. In addition, the concept of democracy and commission-free are complementary. Commission-free is more in line with young people’s understanding of the concept of free Internet, and the concept of democracy is more recognized.

Cut investment was first introduced by SoFi, another trading software led by young people, that is, investors can buy stocks with a unit of less than 1-if you can’t afford 300,000 shares of Berkshire shares, Robinhood , Square and other trading software can provide lowFor an investment of US$1 (that is, buying only one-third of a million shares), the original industry giants Fidelity and Charles Schwab also provided similar functions. Cutting investment satisfies the needs of young people who can invest in stocks with high prices and with little capital.

Three sets of combination punches–the democratic concept of “everyone can trade”, commission-free trading, and cutting investmentRapidly attracted a large number of young people who are about to work or who have not yet touched traditional investment and financial management institutions. Cooperating with the large amount of relief funds issued by the government during the epidemic (many times higher than the original wages of these people), it triggered a rare retail market in the history of US stocks.

The mystery of commission-free-order flow back point PFOF

Everyone will have doubts about the Robinhood model: Since there is no commission, how does it make money?

Robinhood has three main sources of income: order rebates (accounting for nearly half), membership income, and loan interest income.

Payment for Order Flow (PFOF) is a widely accepted operation on Wall Street. In short, retail brokers like Robinhood divert orders from customers’ stock options to market makers ( For example, Citadel) or the exchange to deal, so the market maker will give the broker a certain percentage of points back.

In fact, there is a conflict of interest in the middle, and the broker may hand the order to the market maker with the highest rebate point instead of the market maker with the best transaction price (in line with the interests of the customer), but because all Wall Street companies have In practice, NYSE, which held objections for a long time, also adopted this operation in 2009.

Why is the market maker giving back points? Because retail customers (retail investors in the United States) orders are easier to execute than large institutional orders, andThe information advantage of large institutions is more obvious, and market makers get the orders of these retail customers to match the orders of the large institutions, and the risk of loss is smaller.

How many orders will Robinhood adopt this “rebate” model? The answer is 100%. Now you place orders for stocks in almost any trading software in the United States. The orders are default and can only be “non-direct orders” (Non-Direct-Orders: NDO), that is, handed to the broker to choose the place and object of the transaction. .

According to the Rule 606 report disclosed by all brokers on a quarterly basis, I have compiled the order distribution ratio of several major trading software:

The first place is undoubtedly Citadel, the largest market maker in the United States. Bloomberg said that it handles nearly one-third of retail transactions in the United States, and the data basically confirms this assertion that at least 30% of orders It was all handed over to Citadel. The second place is Virtu, the only listed company that can verify the specific expenditure of PFOF.

Robinhood is a special case. Other brokers are more balanced. Only it handed over 70% of orders to Citadel. I guess there are two reasons:

First, the fewer start-up companies have access to the company, the lower the cost, Citadel’s system is already advanced enough to deal with Robinhood’s transaction volume; Second is the rebate given by Citadel The highest, the same is true, not only Robinhood prefers Citadel, Citadel also favors robinhood:

In 2018, WSJ reported that if a customer buys stock worth $20,000, Robinhood will direct the order to Citadel, Robinhood mayIn order to get a rebate of $5.2. But Schwab can only get 9 cents, TD Ameritrade can only get 16 cents rebate, the gap is as high as 58 times.

However, the pattern changed in November 2019. In the previous month, almost all trading software joined the ranks of commission-free. Order flow rebate point PFOF has become the only source that can make up for the commission loss, and the rebate ratio gradually changes (see Robinhood’s life is also not easy).

Back to PFOF, it was actually invented by Bernard Madoff, who later created the Ponzi scheme. Madoff Investment Securities, the company he founded at the time, was one of the largest market makers on Wall Street. Both Fidelity and Charles Schwab belonged to it. client. At the beginning, Madoff provided a rebate of 0.02 USD/share (Nasdaq). In 2000, it became a rebate based on a certain percentage of the price difference, which was about 0.075 USD/share (Nasdaq).

So how many rebates can Robinhood get now? According to the data of the first quarter of 2020, Robinhood, Webull and other new trading software have the highest rebate ratio. For every 100 shares of SP500 trading stocks, you can receive a rebate of about 0.17 US dollars. But traditional brokers Schwab and TD Ameritrade can only receive a rebate of 0.09-0.1 USD, which is a full difference of .

How many rebates can Robinhood get? According to Alphacution’s calculations, the revenue of Robinhood’s order rebate points in 2018 was US$69 million (up 227%), and in 2019 it is forecast to be US$134 million (up 94%).

Member, loan interest income: enough to cover commission-free losses?

In addition to the revenue from order rebates, Robinhood also has two important sources of income: membership (income from premium accounts) and interest income from loans.

Member service was launched in September 2016. The basic member is US$6/month (now US$5/month), which provides a more advanced market display (similar to Level II of a flush flush) and faster deposits and withdrawals. , Lending function (margin / leverage trading function).

The margin account requires a minimum asset amount of $2,000, and every $1,000 borrowed pays an interest of $6 per month, and supports up to 50% of the asset balance (equivalent to 1.5 times leverage). An additional 5% annual interest will be levied on the portion of the loan over US$50,000. The interest on borrowing is actually very high. First, you need to pay a membership fee of $6, and then a monthly interest of $6 per $1,000, which is equivalent to 7.2% per annum. (In a society like the United States, where traditional deposit interest is close to 0%, it is very high. ).

There is also an underdeveloped sector: deposits. The second tab on the Robinhood homepage is deposits with an annual interest rate of 2.05%. Why did Robinhood pay such a high annual interest rate? It is still through rebates-when customers deposit money, Robinhood finds a bank with the highest rebate to deposit.

From here, you can also see that Robinhood’s consistent product ideas, or business models-on the one hand rely on new concepts to attract users, and then rely on the rapid growth of users to force traditional financial institutions to give higher Rebate (to make up for the lack of business growth); on the other hand, rely on traditional financial institutions to reduce their own marketing costs (high deposit interest rates and commission-free are a marketing cost), and then likePublicize their product innovations.

Why do I say that membership fees and interest income are enough to cover commissions? According to Alphacution’s calculations, as long as TD Ameritrade users subscribe for a membership fee of less than 10 knives per month, they can offset the losses caused by commission-free transactions. The average transaction volume per account is smaller and Schwab is even lower for 4 knives.

Although the proportion of Robinhood retail accounts is larger, and the average transaction volume per account is also larger (because Schwab users are more passive investment, the average transaction is only 15 times per year), the loss caused by commission-free is definitely greater and needs more More members can pay to make up, but if you add the PFOF rebate, you may be able to even out the loss caused by the commission-free.

This reminds me of Another Chinese company in the same industry that supports 70 billion market value with “membership payment”-Tonghuashun, the 2019 annual report value-added telecommunications service revenue accounted for 51% (890 million), is Isn’t the level of payment sufficient to support the commission-free model? Of course, considering all factors, a straight flush can’t be done, and there is no need to do commission-free.

(Flush Flush Paid Page)

Robinhood is not easy to live

As mentioned above, starting from October 2019, almost all industries have joined the fierce competition without commission, which has three profound implications for the development of the entire industry:

1. The way to acquire users has changed

2. The fundamental change in income model

3. The proportion of PFOF return point shrinks greatly

First of all, commission-free is no longer Robinhood’s strength, service quality and legal compliance operation will be an important factor affecting user choice.

Since March this year, Robinhood has experienced at least three serious downtimes. The first time it happened to be the strongest recovery in the US stock market from the four meltdowns, but users could not buy any stock, and Robinhood users must be Loyal users of other mobile Internet products = Downtime will certainly form a massive crusade on Twitter.

Robinhood has had two serious compliance incidents: leverage incidents and deposit incidents. The leverage event originated from Robinhood’s margin function. A user posted on Reddit that he found that Robinhood’s trading settings resulted in the option fees received by the Covered Call sold by leverage directly turning into the account balance, so he kept arbitrage Rolled 2,000 US dollars to 50000+ US dollars without risk. This incident later triggered a huge storm that led to a hearing in Congress.

In the deposit incident, Robinhood bypassed the American Deposit Protection Association (FDIC) in 2018 and launched a product with an annual interest rate of up to 3%. Moreover, due to the fuzzy structure of the product (which is neither a deposit nor an investment transaction), it is not compliant Was taken off the shelf directly. It was not until November last year that the deposit product called the cash management project was re-launched.

But I have to admit that Robinhood’s leading position will be commission-free or that the new trading software and Robinhood have equal signs (category=brand), and the rapid growth of potential energy will still exist for some time.

But looking back at the industry as a whole, The number of account openings has skyrocketed since March, when U.S. stocks plummeted, and TD Ameritrade and E*Trade have both experienced 150%+ month-on-month account opening growth (on the other hand, because Due to the impact of the epidemic, investment channels have been turned online), and competition is extremely fierce.