The Unraveling of Robinhood’s Fairy Tale

Few companies embodied the market mania of the past two years quite like Robinhood
HOOD 4.35% Markets Inc.

The flashy online brokerage ushered in an investing revolution at the start of the Covid-19
pandemic that, for the first time in decades, made trading cool. Robinhood’s easy-to-use
interface hooked millions of Americans on buying and selling stocks, options and
cryptocurrencies. A raging bull market helped turn many newbie investors’ trades into wins.

Good times for customers meant good times for Robinhood. The more customers traded,
the more revenue Robinhood raked in. By last summer, it boasted more than 22 million
funded customer accounts, had opened offices around the country and was preparing for an
initial public offering of its stock.

Then the party ended.

Employees of Robinhood gathered in New York for IPO day last July. Photo: BRENDAN
MCDERMID/REUTERS
In the span of less than a year, Robinhood has seen many of its successes fade. Its
monthly active user count dropped 25% in the first quarter from last year’s quarterly peak,
while revenue fell even faster, down 47%. Its stock this week fell to a record low and is
trading 81% below its July IPO price. The company has shifted its focus from rapid growth
to cost-cutting, laying off 9% of its staff earlier this year.

Robinhood has also found itself on a collision course with regulators after Securities and
Exchange Commission Chairman Gary Gensler last week outlined a revamp of trading rules
that could threaten part of its business model.

“You had a perfect storm that fueled the rise and attention around Robinhood,” said Paul
Rowady, director of research for Alphacution Research Conservatory, a market research
and advisory firm. Now, he said, “You’ve had the opposite occur over the past year.”

Amateur investors took the stock market by storm a year ago, buying up shares of meme
stocks like GameStop and AMC Entertainment. Many remember it as a revolution against
Wall Street, but in the end, they largely just lined the pockets of major financial firms. WSJ’s
Dion Rabouin explains. Illustration: Sebastian Vega
Few on Wall Street expected the boom times at brokerages to last forever. But Robinhood
has been hit harder than most. Current and former employees, customers and analysts said
the forces that built Robinhood—most notably, a flourishing bull market and investors’
delight in speculative trading—are the ones that now threaten its core business as stocks
and cryptocurrencies decline. Where, some said, does Robinhood go from here?

Robinhood Chief Brokerage Officer Steve Quirk said in an interview that the company’s
explosive growth in 2020 and 2021 had consumed many resources that otherwise would
have been invested in longer-term projects, but it had a “healthy” pipeline of new product
launches in the works. The company this year has extended pre- and post-market trading
hours and launched products including a new debit card, while executives have said
Robinhood is working on adding new retirement accounts. Those kinds of features, Mr.
Quirk said, will allow Robinhood to grow with existing customers and generate revenues.

“How can we build for our customers and in doing so, make us a more evenly distributed
revenue firm?” he said.

Robinhood helped hook millions of Americans on buying and selling stocks, options and
cryptocurrencies. Photo: Amir Hamja for The Wall Street Journal
‘Insane growth’

Millions of Americans flocked to Robinhood to try their hands at navigating the market
volatility at the onset of the Covid-19 pandemic. They relished in trading securities both big
and small, on fundamentals and just for fun. Later, users chased meme stocks like
GameStop Corp. and AMC Entertainment Holdings Inc. higher and binged on bullish
options bets. Robinhood users’ embrace of dogecoin, a cryptocurrency started as a joke,
was so fervent that it briefly crashed the brokerage’s app last year.

Robinhood makes the bulk of its revenue by sending its customers’ orders for stocks,
options and crypto to high-speed trading firms that pay for the right to execute them. The
practice, known as payment for order flow, makes it possible for brokers to let their
customers buy and sell stocks without paying commissions, a feature Robinhood pioneered
before it was imitated by others. Robinhood came to rely more heavily on that revenue than
other brokers.

Capturing those small payments from high-speed trading firms on millions of customer
orders started to add up. By the second quarter of last year—Robinhood’s best, according
to public filings—it reported $565 million in revenue—80% of which came from routing
customers’ stock, options and crypto orders. The company booked nearly $145 million in
revenue tied to dogecoin trading in last year’s second quarter, roughly 25% of its total
revenue that period and more than what it made from stock trading.

Robinhood also ramped up hiring to keep up with demand. “It just felt like everyone’s job
was to keep the ship running,” said Josh Cockrell, a former software engineer at Robinhood
who said he left the company earlier this year. “It was just insane growth with customers
and demands on the servers.”

Robinhood’s weekly all-hands meetings, led by co-founders Vlad Tenev and Baiju Bhatt and
broadcast company wide, were often filled with charts showcasing the company’s growth.
Teams would share progress on various projects using a “red,” “yellow,” and “green” color
system, according to some of the former employees, who said they relished surprise virtual
visits from celebrities including Jared Leto and Ashton Kutcher.

Many employees also received generous stock compensation packages that would have
produced a big payday had the stock soared after the IPO. Some gathered in New York
City’s financial district on July 29, 2021, the day Robinhood made its public debut. Messrs.
Tenev and Bhatt posed for pictures in front of a sign reading, “Welcome to the new Wall
Street.”

A sign that appeared in New York on Robinhood’s IPO day. Photo: Amir Hamja for The Wall
Street Journal
Robinhood’s shares closed down more than 8% from its IPO price that day. It would be the
first of many rough days for the stock.

Even before the recent selloff in markets, cracks in the company’s growth were starting to
show. The number of new funded accounts and active users on the platform had spiked
dramatically during meme stock and dogecoin rallies in the early part of 2021, but by the
second half of last year the number of monthly active users started to drop as the
speculative fervor in the markets slowed.

As Robinhood’s stock sagged, some of the former employees said they heard questions at
all-hands meetings about whether Robinhood would roll out new product lines and what the
plan was as growth slowed, according to people who attended these meetings. These
people said they also heard Robinhood questioned at these meetings about why the
company didn’t offer customers the ability to trade buzzier digital tokens such as Shiba Inu.
Robinhood added Shiba Inu this April.

Mr. Quirk, Robinhood’s chief brokerage officer, said the company is moving forward with
new ventures. This year, Robinhood has rolled out a feature that makes it easier for
customers to transfer their digital currencies, as well as a new debit card that allows users
to roundup transactions to the nearest dollar and use that additional money to invest. In
April, Robinhood also unveiled an agreement to acquire Ziglu Ltd., a U.K.-based
cryptoasset firm; the deal will allow Robinhood to expand internationally.

“By building out all these needs [for clients], there are revenues associated with those,” Mr.
Quirk said.

On the company’s most recent earnings call in April, Robinhood’s chief executive said the
company was “playing offense and charging ahead” while also paying more attention to
expenses. At an all-hands meeting on Thursday, Mr. Tenev didn’t rule out the possibility of
more layoffs, according to people briefed on the meeting.

A Robinhood logo attached to a lapel on Robinhood’s IPO day last July. Photo: Amir Hamja
for The Wall Street Journal
Takeover talk

Some investors are still willing to make bets on Robinhood’s future. In May, one of the
biggest names in cryptocurrencies unveiled a roughly $648 million investment in Robinhood
in exchange for 7.6% of the company’s Class A shares. That man, Sam Bankman -Fried, is
the billionaire founder of cryptocurrency exchange FTX.

He said in an interview that the investment was mostly driven by the stock’s depressed
valuation and his expectations that the company could rebound.

“There is a really plausible world in which it has a huge comeback,” he said, citing
Robinhood’s potential to expand its menu of services and international reach.

He also said his company was also open to partnerships with Robinhood; FTX has been
adding stock-trading capabilities to its popular app and Robinhood has been expanding its
crypto offerings.
For months, market watchers have speculated that Robinhood could be a takeover target
due to the change in the company’s fortunes and a more competitive industry. Rivals TD
Ameritrade and E*Trade have already found new parent companies in Charles Schwab
Corp. and Morgan Stanley, respectively.