The stock market has been reserved for elite and knowledgeable investors for much of its history. Throughout its life, the common consumer wasn’t heavily involved with the market, and a majority of investors consisted of large hedge fund managers and financial advisors.
It wasn’t until recently that investing has become more accessible for the masses.
A lot of the reason that it has, is because of consumer-based investment platforms. There are a few of these platforms, but the most notable, especially in recent times, is Robinhood.
Today’s article is going to talk about the origin story of this exciting (and somewhat questionable) investment platform.
Meet The Founders.
The story of Robinhood begins back in the summer of 2005. Two friends, Vladimir Tenev and Baiju Bhatt met as undergraduates studying mathematics at Stanford University in California.
Tenev was the son of two World Bank staffers, but he decided to pursue a degree in math because he found it interesting that 100% of your mental energy could theoretically be 100% productive when doing math. Bhatt, on the other hand, decided to go down the finance route from the start and began playing around in the industry from a fairly young age.
In 2011, he had begun pursuing a career working on creating high-frequency trading software for professionals on wall street, while Tenev transferred to UCLA to pursue a Ph.D. in mathematics. This didn’t last long, however, and Tenev decided to drop out and join Bhatt with his trading software endeavor.
The Initial Partnership.
The duo rented a small house in San Francisco and worked together to create trading systems. These systems were not consumer-oriented like Robinhood or eTrade is today, but instead, they were aimed at helping banks write and determine trading strategies.
They went on to test their products in New York City on Wall Street and quickly realized that much of the software and many of the practices that were being used were extremely outdated and inefficient and that there was a lot of room for improvement in this huge industry.
Their products were used to connect trading markets all around the world and to use the information from each of these markets to determine the best strategies for banks. It was definitely a step in the right direction but it was most definitely not the full extent of what these two would do.
Occupy Wall Street.
Later that year, in 2011, the financial markets would be exposed on a scale unlike anything else that had ever happened and it would lead to the inspiration for Robinhood as we know it.
Around this time there was a popular movement spreading across the United States known as the Occupy Wall Street movement. This was a group of coordinated protests designed to bring light to the corporate corruption, wealth inequality, and manipulation that was taking place across America.
Everyone lost faith in the financial markets and showed it with gatherings of thousands of people. Things were looking bad for the United States financial system but Vlad and his co-founder had an idea.
With the newfound distrust in the financial system, these two friends had inspiration for an idea to democratize trading. They realized that people lost trust due to the fact that hedge fund managers and huge investors had access to tools that were not available to the public and used their power to make insane returns on their investments.
It was time for them to create a new set of tools, not for the powerful, but for the people. It was time to make investing easy and accessible by anyone.
The Birth of Robinhood.
They began work on the Robinhood app and within a year they had a product that was complete enough to announce to the public and get approval by the SEC.
They started creating hype by restricting access to the product and building up a waitlist of over 50,000 people.
Then, with a genius marketing move, they increased the hype by allowing people who invited their friends to move up to a higher position in the list. It created a great word-of-mouth marketing campaign and by the time the app made it to the Apple app store in 2014, they had a waitlist of over 1,000,000 people.
Over ⅔ of Robinhood’s list were people who were referred by their friends, which is an insane number for a tech startup in an industry that people didn’t really understand.
Creating a useful product isn’t enough when it comes to actual success as a company. Especially in mobile apps, where user attention is extremely low and people are often distracted by millions of other potential apps, design is very important.
This is where Robinhood shined.
They were the first financial app to win an Apple design award and everything about their app screamed “good consumer experience”. It was extremely stimulating and rewarding to use and this good design helped it to grow even faster.
How Robinhood Makes Money.
When you purchase a stock on Robinhood, the company isn’t the one who gives you the shares that you purchase. They send your stock order to a different party for execution since they don’t have the right to give you a share of a stock that isn’t theirs.
So, people known as market makers hold these shares of stocks and give them to you, through Robinhood or other brokerages, in exchange for the amount you purchased the stock for.
Robinhood makes a majority of its money by using a process known as payment for order flow. Instead of charging you a fee upfront, they get a commission for each sale that they direct to these market makers. So, for Robinhood bringing these market makers their business, Robinhood gets a small kickback and that is how they make their money.
They also make money from the Robinhood gold subscription, where users get access to higher-level market data and reports, as well as through loans of cash balances and stock margin.
Each of these monetization methods has caused Robinhood to have a worth of over 11.7 billion dollars and to become one of the fastest-growing investment platforms on the internet. Their success story is amazing, and, even with some of their questionable decisions in recent months, they are on track to become even bigger and eventually go public on the stock market.