Business Breakdowns
· Arthur Olson
[00:00:00] S1: That is the power, really. The industry has voted with their feet, and now everybody's payment for order flow, with the exception of Interactive Brokers and partners. That is because they've got a different customer base—small hedge funds, prop traders. But no, it's very interesting. So yes, the whole market has moved to payment for order flow. And in that way, commission-free trading is no longer a competitive advantage on a relative basis for Robinhood. If you go back in history, so Robinhood was founded in 2013, hit the market in 2015. Within five years, had flipped the entire industry. So in 2019, Schwab made the decision they were going commission-free, and then literally within weeks, every other player in the space made the same decision. This ultimately crippled, for instance, TD Ameritrade, E*Trade. Both of those ultimately got subsumed by Schwab in the one case and Morgan Stanley in the other. But it was a point in time where many people said, "Okay, Robinhood is dead. That is their whole differentiation, is commission-free trading. The bar is now leveled." And what we saw is that they went on over the next year and a half to like 5x their customer base. So the whole industry has moved to this model. But those that thought that it would kill Robinhood misunderstood what is the real competitive advantage here. Innovating on economics was one, but the other is the mobile experience and also the brand. The product velocity that Robinhood has been demonstrating over the last, really, three years since 2022 is incredibly impressive. It's just a stroke of genius. I don't know if our listeners have watched some of their product summits. I highly suggest the most recent one, the Active Trader Summit. And it's just a masterclass in sales and brand building—going to your customers, showing them all the new product that you've built for them, and then saying, "What else do you guys want us to build for you?" That's not something Schwab, Fidelity, any of those guys are showing that kind of attention to the customer. This is in Vlad's DNA. This is what the VC investor said: "We've never seen a CEO that's more in touch with his customer than Vlad." The initial flywheel or the initial wedge, a decent chunk of that was payment for order flow, but now that is standard across the board.
· Matt Reustle
[00:00:00] S0: On the customer base, you mentioned the average size of an account, and that's gone up meaningfully. Is there any way to capture the quality of the account versus Interactive Brokers has many institutional or institutional-like investors sitting on its platform? Then you start to move into the high net worth. What does the quality of the Robinhood customer base look like?
· Arthur Olson
[00:00:00] S1: This was probably the biggest unlock, and when I knew we had a real differentiated view, because I think it's fair to say the perception of Robinhood, frankly as a company, but also their customer base, is not that great to the average person. Both of those are misleading. So I would say people expect Robinhood to be day traders, to be unsophisticated bad investors, effectively. So there's 250 roughly trading days in the year. I think most people that I talked to at the time assumed Robinhood customers were trading at least once a day, maybe twice a day. So their number of trades per year would be 200, 300, 400. The real number is 40. They're placing 40 trades a year, or about one a week. It's not the picture of this hyperactive day trader that you would think. Schwab's average customer, the self-directed customer, trades 40 times a year. It's very, very similar. And then, okay, if you look a level deeper, you say, okay, what's the mix of those trades? Maybe it's all just crazy options and crypto. Again, I think that's the perception. When you look at it, no, two-thirds are vanilla equity, about one-fourth are options, and then about a tenth are crypto. If you look at equity, it's overwhelmingly skews to large cap, high quality companies. Lastly, if you think about outcomes, we know roughly 85% of day traders ultimately fail. So if that was Robinhood's base, you would expect to see one, a lot of churn, and then average account balances flat or probably down. And the reality is we see the opposite. Churn for the last two years, almost three years at this point, has been about 5%. We're talking about 95% retention, and that's before any net new adds. So we're talking about enterprise SaaS levels of retention. By the way, those numbers are 2 to 3 points higher than Schwab's. Average account size is 5x from the lows three years ago. And even from that crypto meme stock era, it's still double that level. The takeaway ultimately that we had is that functionally, Robinhood users are really no different than a Schwab user or Fidelity user in terms of the risk appetite. There's a generational thing we see in terms of younger people are obviously starting to invest earlier and they also are a little bit more active. So we would expect them to be a little bit more active over time, but that's not a bad thing.
· Arthur Olson
The core difference is just that these people are much younger. The average customer is 35 years old, as opposed to 55 or 60 years old, which is the average for Schwab. And it sets up this really, really interesting dynamic where you realize we believe that Robinhood is going to hold onto these customers over the course of their entire life. So it's this unbelievable opportunity where you've got all these demographic tailwinds, where we really expect—so the average account balance is about $10,000 today. We expect that to 10 to 20x over the next decade or two. Very few companies, I mean, almost none that I've ever come across, have line of sight on that duration of growth. The punchline is the customers are very similar to Schwab, to Fidelity, to E*TRADE, just much younger. That's been a secular trend really over the last decade. For boomers and even Gen X to a certain degree, investing was kind of a midlife process. You start investing in your mid-30s, your 40s. And for millennials and Gen Z, we see it starting in their teens and early twenties. And Robinhood has effectively already captured that base and it's just waiting to monetize that over the next 20-plus years.
· Matt Reustle
[00:00:00] S0: It's definitely interesting to hear the demographics relative to a Schwab and some of those numbers, particularly on the churn or lack thereof. When you go back into that time period of the sell-off, there's this natural question that pops up. Well, the last three years we've had this extensive bull market and that might continue on. No need for us to make a call on that part. But how sensitive was that? Less so from a stock perspective, because I know the narrative is going to capture more here, but from a business perspective, was it more sensitive in that era?
· Arthur Olson
[00:00:00] S1: It's a good question and it gets to a point Vlad has talked about. He considers 2022 the refounding of Robinhood. The background is January 2021. You had the crescendo of the meme stock hysteria. Robinhood was forced by the central clearinghouse to effectively pull the buy button on those stocks because of an egregious capital call that was given in the middle of the night, demanding $3.5 billion. That was 10x any capital call Robinhood had received up until that point. They'd only raised $700 million since inception, and that's a whole story that's just fascinating. But they get through that moment in time, they raise some capital in case that happens again. They get through, but they're just dragged through the mud in the media. It's the only issue that could unify AOC and Ted Cruz—just excoriating Robinhood and these abuses and collusion. Long story short, all of that was proven not to be true. It was just complying with the regulators, the reason they had to pull the buy button. You then fast forward to 2022 and you're coming right off of that controversy into inflation ripping, interest rates going up, growth stocks melting down, investors pulling money out of those stocks, putting them into yield assets. Robinhood's volumes declined by 40, almost 50%. And it was another existential moment. Would the business have gone bankrupt? Are we topping out? Can we continue to grow through this? And Vlad's insight was that the business that he founded catered to the first-time investor. And that was a very powerful unlock, democratizing finance. But the next unlock, and what would make their business much more resilient through cycle, was focusing on the active trader. And these are more sophisticated traders, people that are using option strategies, multi-leg option strategies that can benefit in a bull market. They can also make money in a bear market. They can also make money in a sideways market, and also their transaction density is higher. That was his insight and he realized, okay, we built the product for effectively newbies and we by accident acquired some active traders just because our fee structure is so much better and the product is a little bit better. But we were really not doing a good job serving these customers. So this is what kicked off two years of intense product development.