Breaking: Robinhood’s Surprising UK Invasion Has the Regulatory Sheriffs on High Alert!

When US stock trading app Robinhood made its first attempt at a UK launch in 2020, it garnered considerable excitement – ​​and a waiting list of 250,000 potential users. But a two-day failure of the company’s US platform in March of that year and the ensuing coronavirus pandemic forced the company to abandon plans.

The broker, best known for introducing commission-free trading to the United States and for its role in the stock mania meme of 2021, has nonetheless embarked on yet another attempt. He announced that it would be launched in the house of the original Robin Hood by the end of the year.

Industry figures, however, expect a tough battle for this particular group of happy men and women. The UK market is more mature than before Robin Hood first tried to launch and banned its main source of income. It will also find itself competing with rivals such as Freetrade, which has offered a stock trading app in the UK since 2018, and US start-up Public, which launched UK operations in July this year. year.

Yet little seems to deter Robinhood chief executive Vlad Tenev. He told investors on a conference call that the company’s existing licenses and strong brand recognition would allow it to launch in the UK.

“We are even more excited about driving innovation in the UK market, as we have done in [US],” he said.

The company, which declined to comment, has already started recruiting a small UK-based team. It appointed a managing director for its UK operations earlier this year.

Dan Dolev, senior fintech analyst at Mizuho Securities in New York, said he expected the UK expansion to be a “good thing” for the company.

“From Western Europe, [the UK is] the market that most closely resembles the United States,” Dolev said, pointing out that the company has also drawn global attention for its use by investors betting big on so-called “meme stocks” in 2021. .

Robinhood was the main platform used by traders who drove the value of some old-fashioned stocks – including retailer GameStop – to their highest values ​​in years.

“People have known this since the days of meme stocks and it’s free marketing for them,” Dolev said.

Dann Bibas, head of international expansion at Robinhood rival Public, agrees with Dolev’s perception. He said his firm sees the UK as an entry point for Europe, with higher digital adoption than other parts of Western Europe, but with private equity trading activity well. lower than in the United States.

According to the OECD Rich Country Club, only 11 per cent of UK households invest directly in stocks and other securities. That compares to nearly 40 percent in the United States, where the widespread holding of 401K retirement plans has helped entrench a culture of retail investing.

Still, the main challenge for Robinhood could be thriving in a market that blocks the trading mechanism that fueled its rise in its home market. Instead of charging fees for trades, Robinhood profits in the US by accepting discounts for sending client orders to large market makers such as Citadel Securities.

Critics view “payment for order flow” or PFOF as a conflict of interest. UK regulators banned PFOF in 2012 and the EU is phasing in a similar ban.

Martin Sandler, a partner at law firm Eversheds Sutherland, said large US commission-free brokers expanding into Europe should “rethink their business model” and how they get paid.

Robinhood CFO Jason Warnick, however, said in a recent call with analysts that the broker has a number of revenue streams it could tap into in the UK. This involved profiting from the difference between the interest earned on customer cash and the interest paid. It also planned to offer a subscription service that offered benefits such as search and a higher interest rate.

“There is potential for this to be a good deal on a unit economic level. [basis] without PFOF,” he said.

Public’s operations in the UK offer exchanges US stocks, on which it claims to offer lower currency conversion fees than its competitors. The company does this in part because of licensing restrictions, which require it to route transactions through its US broker. Robinhood holds a similar UK license.

Estonia-based Lightyear launched in the UK and several other European countries in 2021 with a similar core proposition to Public. More recently, it has expanded its offering to include exchange-traded funds (ETFs) that replicate equity indices to appeal to long-term investors.

“We launched our first product and it was just US stocks, and then you realize it’s a weak product because you don’t have an ETF,” said Martin Sokk, head of Lightyear.

The market, however, proved difficult for brokers on both sides of the Atlantic. Transaction volumes declined as customers returned to work in their offices after being at home during the coronavirus pandemic. Activity was also depressed by poor share price performance. The blue-chip S&P 500 index lost nearly a fifth of its value in 2022, its worst performance since the 2008 financial crisis.

Bella Caridade-Ferreira, founder and chief executive of consultancy Fundscape, said things were “really difficult”.

“Those who will survive are those who have grandparents,” she said.

Many rigs were showing signs of strain and she expects several of them to either go down or be acquired next year, Caridade-Ferreira added.

Freetrade, the UK’s biggest competitor app, which has more than a million customers, is downsizing its offices this year in a bid to cut costs.

“The mindset of the company right now is to control its own destiny – to not need additional fundraising to stay alive,” said Adam Dodds, the company’s chief executive.

Robinhood has faced similar challenges before in its home market. The company’s stock price peaked at $70.39 shortly after its IPO two years ago. It has since shrunk by more than four-fifths, with the number of monthly active users nearly halving.

Nevertheless, the shares gained more than 39 percent between January 1 and September 1 of this year. The stock outpaced the market as a whole as Tenev and his team introduced features including a retirement savings offer. The company reported positive net profit for the first time in the three months to June.

“We feel a bit better about the near to medium term outlook,” JMP Securities analyst Devin Ryan said after Robinhood’s August earnings release.

He highlighted the growth of new initiatives, including equity loans and pensions, as well as international expansion plans.

Caridade-Ferreira was more skeptical.

“I give [Robinhood] two or three years and they disappear again,” she said of the UK market. “The assumption is that people are hungry for investment. Many people are afraid to invest.

Dodds, from Freetrade, is nevertheless confident that the UK market can embrace stock trading apps, despite the challenging environment – ​​at least through his company.

“There are a lot of people who are still not exposed to investing as a regular habit that we hope to have on board,” Dodds said. “It’s still early for the industry to become a cultural expectation, almost like it is in the United States. »