A Different Look at the GameStop Saga
The GameStop saga has illuminated a controversy behind Robinhood’s relative success. As retail traders hop onto the bandwagon, this article seeks to explain and evaluate Robinhood’s business operations as a brokerage firm within the equity market craze.
Robinhood’s Business Model
Admit it- you would first think of ‘commission’ when it comes to brokerage firms’ profits. Unlike old school models, however, Robinhood’s success does not predicate on collecting trading fees from its consumers when a stock is bought/ sold. Instead, its ‘payment for order flow’ model sees Robinhood bridging retail investors and larger brokerage firms. In effect, the zero-commission platform acts as a middleman in selling client orders to bigger market makers for a profit. To further lubricate the process, Robinhood offers its traders cash flow by way of ‘margin accounts’, allowing investors to buy stocks using borrowed funds provided by itself. Therefore, its easy access and trading flexibility swiftly crowns the E-trading platform as the most downloaded App amidst the short squeeze frenzy.
Financial and legal thinking points
Whilst Robinhood’s business model does sound surreal, its commitments are amplified in the form of financial and legal risks. Traders’ high investment volumes and concentrations on specific stocks would require heavy financing to insulate its trading partners from potential losses. As a venture-backed company, Robinhood is already expecting future governance issues as emergency funding were infused in the form of convertible debt. A discounted valuation will be tied to its share princes when the company floats, prompting further share dilution in the future. Separately, regulators’ scrutiny on Robinhood in the past had informed us of its legal issues. Its incentives from market-makers had not always aligned with its customers’ interests, as seen in its failure to fully disclose its client order selling to market makers. Especially as a company that profits from client information, its track record of information-handling related litigations further questions the business model’s controversy in the present tech-centric landscape.
By Quintus Wong