Robinhood In Retreat As Retail Trading Frenzy Wanes, Market Cap Plunges By 67 Per Cent

Robinhood, the brokerage that brought free trading to retail traders has seen its stock price collapse as the retail trading frenzy subsides. The company, which had grown its user base to 12.5 million quite quickly by offering free trading and joining bonuses, has announced a downward review of its revenues.

The stock has lost 67 per cent of its value since the day the company listed on the stock exchanges. Investors have already begun filing class-action lawsuits against the company as they believe that the company might have misled them about the business prospects and the risks associated with the business. Retail trading volumes, which peaked in January 2021 at 27 per cent of total market volume, fell to 21 per cent by November 2021.

The rise in trading was believed to have been pushed, in part, by large stimulus checks provided to United States’ citizens. However, growth is expected to decrease as markets have trended lower, and the base for the previous year is quite high.

In addition, its new product launches have been marred by other asset classes such as crypto-currency trending lower. With choppy markets, investors usually postpone investing decisions for period of better clarity.

Robinhood gained notoriety with the Gamestop saga when retail investors on Reddit decided to buy the Gamestop stock heavily. Similarly, Robinhood’s investors bought into AMC’s stock as well. Hedge funds and investors who were shorting Gamestop faced huge losses, while Robinhood itself had to draw credit lines to clear the trades on its platform.

The funds were required to be deposited at the clearing house as Robinhood’s customer kept buying shares and options, and the quantum of funds required is decided on the basis of volatility. It faced investor ire when it limited the buying for some popular meme stocks by removing the buy button.

It is believed that the large investors who had shorted the stocks put pressure on Robinhood as well. Regulators too, began looking into Robinhood’s operation to prevent excessive volatility in meme stocks. The Securities and Exchange Commission has also been considering a ban on payment for order flow (PFOF) – the mechanism that Robinhood uses to earn revenues from market makers.

Other agencies looking into Robinhood include the US Attorney Office for California, US Justice Department, Financial Industry Regulation Authority, state attorneys general, and other state regulator. Its user interface, that attempts to “gamify” stock trading, and encourage users to trade more has been under scrutiny as well. After drawing hundreds of millions in credit from banks, Robinhood stabilised its finances.

Currently, Robinhood expects revenue to decline by 35 per cent as compared to January 2021, as numbers would not be propped up by meme stocks during the quarter. Profitability remains a significant concern as well – the company has revenues of $363 million, while losses stood $423 million for the last quarter of 2021. The corrections in stock markets and crypto markets should put to test the ability of retail traders to digest corrections.

The previous year had been great for Robinhood as investors were flush with cash and had little spending option as they were locked up inside their homes. But, whether it can continue to grow, while becoming profitable in order to justify valuations, is yet to be seen.