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Robinhood's disruption in online stock trading


One in four U.S. adults with access to the Internet are trading online, and this penetration is accelerating, especially for millennials [1]. While online brokerage firms such as Scottrade, Interactive Brokers and OptionsHouse  enable online trading, they come with strings attached: high commission, account minimums, clumsy user interface and surprise fees. Robinhood stands out from the competition by disrupting stock market trading with no minimum account balance, and zero-dollar commission. Robinhood provides a secure and intuitive mobile-first interface for anyone to grow their wealth in the stock market.


The past two years have seen an influx of apps that cater to solo investors. Apps like Acorns and Digit allow individuals to passively manage their finances by connecting to personal bank accounts and recommending a portfolio. However, a fair share of millennials prefer trading stocks on their own. Robinhood is currently filling that niche. With the potential to expand to professional traders, Robinhood also poses a clear threat to brokerage firms. All of these traits combine to form an app with a sleek user interface, state-of-the-art technology, and a transparent fee structure with one purpose - facilitating hassle-free investing for anyone with a smartphone and a bank account.



User Interface


Robinhood’s gorgeous user interface is one of the main reasons I love using the app. The onboarding process is straightforward and follows with a content-centric design that makes the learning curve nonexistent. When you open the app, you can instantly see the results of the rigorous collaboration that went in designing it -- a clean and meticulous design with consistent branding and typography. The minimal and flat design couples well with a color scheme that is easy on the eyes and follows iOS design conventions. It comes to no surprise that Robinhood won the Apple Design Award as well as Product Hunt’s Sexiest App of the year in 2015.


The home screen shows the total value of a user’s portfolio with a chart of performance over the time, as well as a list of stocks in the portfolio. It recently added a cards feature that displays financial news related to the portfolio and updates regarding a user’s account. Making a trade is intuitive. Search for the company name, click the buy/sell button followed by an order type (market orders, limit orders, stop limit orders, and stop loss orders), and provide the quantity. 


One of my favorite features is the notification center widget that allows users to quickly glance at their portfolio without needing to open the app. A convenient feature for users that don’t trade frequently.



Technology Platform & Security


Andreessen Horowitz partner Benedict Evans claims that, “the mobile ecosystem, now, is heading towards perhaps 10x the scale of the PC industry” [2]. With that in mind, Robinhood requires users to trade on an iPhone or Android device, offering no web/desktop app as of yet. This mobile-first approach matches perfectly with Robinhood’s targeted demographic and the mentioned smartphone penetration. Most brokerage firms now offer a mobile app, but Robinhood has a very tangible advantage with its mobile-first approach. The creators claim to use a low latency trading system, allowing trades to execute quickly and remain resilient to volatility.


Robinhood also wisely provides access to its API to select partners. With the intent to continue its community reach, Robinhood announced last year plans to integrate with Openfolio, Quantopia and StockTwits, allowing users to view their portfolio information and even execute trades using some of the integrations. This is a great strategy that support its broader business strategy and objectives, as it allows Robinhood to become a platform with an ecosystem for developers, inevitably drawing in more attention and revenue.


With the negative stigma associated with mobile security, Robinhood guarantees to hedge any concern with a robust application planned for security from the ground up. Robinhood uses “bank level” SSL and 256-bit AES encryption to secure data transport and to provide end-to-end encryption of any personal and financial information stored remotely. Also being a member of the FINRA and SIPC, Robinhood’s customers are protected up to $500,000 against the loss of cash and securities in the rare case of Robinhood facing financial troubles. This protection gives the majority of users guaranteed protection against insolvency.



Fee Structure:

 

Most brokerage firms charge a per trade commission of $5-$10. On Robinhood, traders don’t pay any commission, and the app doesn’t have a minimum balance requirement. Zero dollar commision allows casual investors like me to make low volume trades as well as experiment with day trading.

While some online brokerage firms charge users to get real time stock quotes, Robinhood offers real time quotes at no charge.  In order to make it easy for users to understand the fee structure, they provide a single page listing out all the fees. Having used Interactive Brokers and Trade Monster in the past, Robinhood’s fee structure is more transparent, and caters towards individual investors.


Robinhood was built with efficiency in mind and eliminates overhead costs such as brick-and-mortar stores and advertising. Currently, they make money by keeping the interest earned from customer’s cash balances as well as by charging an interest on margin accounts.  In the future, Robinhood plans to support joint, custodial and IRA account types, entering the competitive landscape with brokerage firms. Robinhood’s partner API also offers an interesting and vast expansion of the business model.



Room for improvement:


Targeting individual investments with little to no investing experience follows with disappointment in the absence of built-in research tools. Having a simple pop-up that shows a fundamental analysis would benefit casual traders. Below is a sketch of a potential analysis feature that can function as opt-in for traders wanting competitive information.




According to a report by Oliver Wyman, “the online brokerage market in the US is highly fragmented” [3]. Fragmentation offers room for both innovation and experimentation to create a highly adaptive business. By lowering the inherent barrier to investing and providing a concise and minimal interface, Robinhood has positioned itself to be an innovative leader and a staple in the space of personal finance. More young investors are signing up for the app, and if Robinhood continues to add advanced trading features, even experienced investors could migrate over. Given its current trajectory, Robinhood is poised to become a dominant player in the online brokerage space within the next 10 years.


Sources:

[1] http://aitegroup.com/online-trading-penetration-united-states-and-retail-traders-trading-device-preferences-are-rapidly

[2] http://a16z.com/2015/12/18/16-mobile-theses/

[3] http://info.scivantage.com/rs/scivantage/images/State%20of%20Online%20Brokerage%20Platforms-Scivantage.pdf


 


Hello World

I used to have a blog on wordpress a while ago, but then I decided to move away from it. Since then I had been meaning to setup a blog but never got around to it. Last month I finally decided to just make one using Django to have more control over the setup. So here is my new blog. It is built using Django and Pure CSS Framework and hosted on Digital Ocean. I am using Nginx to serve static files, Gunicorn as the WSGI http server and postgres as the database. Not sure what I will be blogging about yet so stay tuned! Till then, enjoy one of the pictures that I took in San Diego few years ago.