Forget $10 Trades, Meet Robinhood: New Brokerage Targets Millennials With Little Cash
Halah Touryalai Forbes Staff
The stock market is hitting all sorts of records lately, but where do you go to pick up a few shares of your favorite company?
If you're young and every dollar is precious, then paying the usual $5 or $10 fee most online brokerages charge isn't appealing. Plus, account minimums of $500 to $2000 don't help either. There goes another market rally.
Vladimir Tenev, 26, and Baiju Bhatt, 28, are planning to change that with a mobile app they've created that charges you nothing to place a trade. (Yes, yet another mobile app story on Forbes--I actually never thought I'd write one but this got my attention because of its focus on young, often ignored investors.)
Next month, Stanford grads will launch the app in beta for a portion of users who signed up for its $0 commission stock trading. The online stock brokerage firm, aptly named Robinhood, has already signed on 150,000 accounts before its official launch this spring.
I met Tenev and Bhatt last week when they were in New York, and them asked why they decided to use their math genius to build a boring stock trading platform. Why weren't they using their advanced math and physics degrees to create exotic products and platforms for billion dollar Wall Street firms?
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Well, they'd already done that. The two spent some time building software for hedge funds and other firms that enabled high frequency trading. That's when they were struck by the economics of trading.
"We realized institutions were paying fractions of a penny for trading and transactions," says Tenev.
The technology efficiencies institutions are privy to weren't available to everyday retail investors who are subject to $10 fees when placing a single trade. Some deeply-discounted firms like OptionsHouse charge $5, but account minimums run anywhere from $500 to $5,000. That's a high threshold for investors who are just getting started.
Tenev and Bhatt estimate there are 1.5 million active traders who trade more than 10x per month, and who end up paying thousands each year to existing online brokerage firms like ETrade, Scottrade, TDAmeritrade and others.
Bhatt notes that online brokerage firms have a stronghold on investors in their 40s and 50s but fail to capture younger, less profitable investors who have less money to invest. But that's exactly who Robinhood is targetting. Of the 150,000 accounts that have signed up before Robinhood's official launch, 75% were born in 1980 and later. The duo, and their team of 11 full-time employees including engineers and designers out of MIT, Caltech and Stanford, are essentially bringing the efficiencies of an institutional trading firm to retail investors who trade on their own.
How? Well, for one thing, Robinhood doesn't have the same operational costs as a Charles Schwab or ETrade. They only recently upgraded their headquarters from a garage into new Redwood City, Calif. offices where the walls are painted with chalkboard paint. Bhatt mentions comic book posters and mathematical formulas adorn the chalkboard walls. And unlike their competitors, they don't have any major administrative expenses; there are not plans to open any brick and mortar offices or launch any massive marketing campaigns.
At the same time, existing brokerage firms argue that their clients have access to services beyond just making trades; services including research, market commentary, customer support lines and investment education comes at a cost.
ETrade notes that is offers much more than trading execution. "We offer the tools, guidance, and advice online and in-person to assist investors before, during, and after placing a trade," a company spokesperson says.
But Robinhood's founders don't think its younger investors with a few hundred bucks place much value on those services.
So, the big questions is, how will Robinhood make money? Eventually it will charge for premium services offered to more active investors. Robinhood will also offer margin trading which allows investors to borrow money from the brokerage firm to make investments. Trading on margin comes at a cost of around 5%.
(For those wondering, Robinhood is registered with the SEC and is a member of FINRA and the Securities Investor Protection Corporation (SIPC).)
Tenev says there are also plans to partner with other finance and stockmarket developers that want to connect to Robinhood trading platform. Think personal finance services like StockTwits and Mint.
The chairman and cofounder of Stocktwits, Howard Lindzon, is also an early investor in Robinhood. StockTwits is basically Twitter for investors; it's an online financial community of investors that allows members to share their market insights and ideas in real-time. Of its roughly 500,000 users today about 40% are between age 18 and 30.
"If you're a young investor you have no loyalty to brokerage firms like Fidelity and Schwab. Robinhood has a strong mobile focus and they get the way the social world works," Lindzon says.
Robinhood has raised $3 million a number of venture capital firms including Google Ventures, Andreessen Horowitz, Elefund, Index Ventures and Social Leverage.
The founders expect all users will have full access to the platform a few weeks after its beta launch in mid March. They're planning for about 10,000 new account openings everyday once the app premieres.
"Our goal is to make the public markets more available to more people," Bhatt notes.
Halah Touryalai
I'm a deputy editor covering all things Wall Street and Investing. I joined Forbes in 2010. I am fascinated by the financial industry's power and influence around the gl...