When US share-trading app Robinhood made its first attempt at launching in the UK in 2020, it generated considerable excitement — and a waiting list of 250,000 would-be users. But a two-day failure of the company’s US platform in March that year and the subsequent coronavirus pandemic forced the company to abandon plans.
The broker, most famous for introducing commission-free trading in the US and for its role in the 2021 meme stock mania, has nevertheless embarked on a new attempt. It has said it will launch in the home of the original Robin Hood by the end of the year.
Industry figures expect a daunting battle for this particular band of merry men and women, however. The UK market is more mature than when Robinhood first tried to launch and bans its main source of income. It will also find itself in competition with rivals such as Freetrade, which has been offering a share-trading app in the UK since 2018, and US start-up Public, which launched its UK operation in July this year.
Yet little seems to dissuade Robinhood’s chief executive Vlad Tenev. He told investors on a conference call that the company’s existing licences and strong brand recognition would carry it through to launch in the UK.
“We’re getting even more excited to drive innovation in the UK market like we’ve done in the [US],” he said.
The company, which declined to comment, has already begun recruiting for a small, UK-based team. It appointed a chief executive for its UK operation earlier this year.
Dan Dolev, senior fintech analyst at Mizuho Securities in New York, said he expected UK expansion to be a “great thing” for the company.
“Of western Europe, [the UK is] the market that is the most similar to the US,” Dolev said, pointing out that the company had also attracted worldwide attention for its use by investors betting big on so-called “meme stocks” in 2021.
Robinhood was the main platform used by traders who pushed up the value of some unfashionable shares — including retailer GameStop — to their highest values in years.
“People know it from the meme stock era and that’s free marketing for them,” Dolev said.
Dann Bibas, head of international expansion at Robinhood rival Public, shares Dolev’s perception. He said his company viewed the UK as an entry point for Europe, with digital adoption being higher than in other parts of western Europe but with far less private share-trading activity than the US.
According to the OECD club of rich countries, only 11 per cent of British households invest directly in shares and other securities. That compares with nearly 40 per cent in the US, where widespread holdings of 401K retirement plans have helped to embed a retail investing culture.
Yet the central challenge for Robinhood may be to thrive in a market that bars the trading mechanism that powered its rise in its home market. Instead of charging fees for trades, Robinhood profits in the US from accepting rebates for sending client orders to big market makers such as Citadel Securities.
Critics consider so-called “payment for order flow”, or PFOF, a conflict of interest. UK regulators barred PFOF in 2012 and the EU is phasing in a similar ban.
Martin Sandler, a partner at law firm Eversheds Sutherland, said large commission-free brokers in the US expanding into Europe would have to “rethink their business model” and how they were being paid.
Robinhood chief financial officer Jason Warnick nevertheless said in a recent call with analysts that the broker had a number of revenue streams it could exploit in the UK. This included benefiting from the spread between the interest it earned on customers’ cash holdings and the interest it paid. It also planned to offer a subscription service offering perks such as research and a higher interest rate.
“There is a potential for this to be a good business on a unit economic [basis] without PFOF,” he said.
Public’s UK operation offers trading in US equities, on which it says it offers lower currency-conversion charges than rivals. The company does so in part because of licensing restrictions, which require it to route trades through its US brokerage. Robinhood holds a similar UK licence.
Estonia-based Lightyear launched in the UK and several other European countries in 2021 with a similar basic proposition to Public’s. More recently it has widened its offer to include exchange traded funds (ETFs) tracking stock indices to appeal to longer-term investors.
“We launched our first product and that was just US stocks, and then you realise that it’s a weak product because you don’t have ETFs,” Martin Sokk, Lightyear chief, said.
The market has been challenging for brokers on both sides of the Atlantic, however. Trading volumes have declined as customers returned to working in their offices after being at home during the coronavirus pandemic. Activity has also been depressed by poor share-price performance. The blue-chip S&P 500 lost almost a fifth of its value in 2022, its worst performance since the 2008 financial crisis.
Bella Caridade-Ferreira, founder and chief executive of consultancy Fundscape, said the going was “really tough”.
“The ones that are going to survive are the ones with big parents,” she said.
Many platforms were showing signs of strain and she expected several either to fold or be acquired next year, Caridade-Ferreira added.
The UK’s largest challenger app, Freetrade, which has more than 1mn customers, is cutting its office space this year in a drive to reduce costs.
“The mood of the company right now is to control your own destiny — don’t require additional funding rounds to stay alive,” Adam Dodds, the company’s chief executive, said.
Robinhood has already faced similar challenges in its home market. The company’s share price peaked at $70.39 soon after its float two years ago. It has since fallen by more than four-fifths as the number of monthly active users has almost halved.
Nevertheless, the shares gained more than 39 per cent between January 1 and September 1 this year. The stock has outpaced the broader market as Tenev and his team have introduced features including a retirement savings offering. The company reported positive net income for the first time in the three months to June.
“We feel a bit better about both the near and intermediate-term outlooks,” JMP Securities analyst Devin Ryan said after Robinhood released earnings in August.
He pointed to growth in new initiatives including stock lending and retirement as well as its international expansion plans.
Caridade-Ferreira was more sceptical.
“I give [Robinhood] two or three years and they’re gone again,” she said of the UK market. “The assumption is people are hungry for investment. A lot of people are scared of investment.”
Freetrade’s Dodds, nevertheless, is confident that the UK market can embrace share trading apps, despite the tough environment — via his company at least.
“There’s a lot of people that are still not exposed to investing as a regular habit that we hope to have on board,” Dodds said. “It is still early days for the industry becoming a cultural expectation, almost like it is in the US.”
