Regulatory sheriffs await Robinhood’s latest UK foray

When US stock trading app Robinhood first attempted to launch in the UK in 2020, there was considerable excitement and a waiting list of 250,000 potential users. But a two-day outage on the company’s U.S. platform in March of that year and the ensuing coronavirus pandemic forced the company to scrap its plans.

The broker, best known for launching commission-free trading in the US and for its role in the 2021 meme stock boom, is now trying something new. The company says it will launch in the home of the original Robin Hood by the end of the year.

Industry insiders, however, expect this particular battle to be an uphill one for this happy group of men and women. The UK market is more mature than it was when Robinhood first attempted to launch and banned its main source of revenue. It will also find itself facing competition from rivals such as Freetrade, which has offered a stock trading app in the UK since 2018, and US start-up Public, which launched a UK operation in July this year.

However, nothing seems to be stopping Robinhood CEO Vlad Tenev. He told investors on a conference call that the company’s existing licenses and strong brand recognition would allow it to list in the UK.

“We’re even more excited about driving innovation in the UK market, as we’re doing in (the US),” he said.

The company declined to comment but has started recruiting a small team based in the UK. Earlier this year, the company appointed a chief executive for its UK operations.

Dan Dolev, senior fintech analyst at Mizuho Securities in New York, said he expected the UK expansion to be a “great thing” for the company.

“In Western Europe, (UK) is the market that is most similar to the U.S.,” Dolev said, noting that the company has also attracted worldwide attention for investors betting heavily on so-called “meme stocks.” 2021.

Robinhood, the main platform used by traders, has pushed the value of some unpopular stocks, including retailer GameStop, to their highest levels in years.

“People have known this from the days of meme stocks, and it’s free marketing for them,” Dolev said.

Dann Bibas, director of international expansion at Robinhood competitor Public, echoed Dolev’s sentiments. He said his firm sees the UK as an entry point into Europe, where digital adoption is higher than the rest of western Europe, but with far less private equity trading activity than the US.

According to the OECD’s rich countries club, only 11% of British households invest directly in shares and other securities. In contrast, nearly 40% of people in the US hold a 401K retirement plan, helping to ingrain the culture of retail investing.

Bar chart (%) of household assets invested in equities in 2022 shows that UK savers are still investing less than their European and US counterparts

Robinhood’s main challenge, however, may be thriving in a market that forbids the trading mechanics that have prospered in its home market. Robinhood does not charge transaction fees in the U.S., but instead earns by accepting kickbacks when sending customer orders to large market makers such as Citadel Securities.

Critics see the so-called “pay for order flow” (PFOF) as a conflict of interest. British regulators banned PFOFs in 2012, and the European Union is gradually implementing a similar ban.

Martin Sandler, a partner at law firm Eversheds Sutherland, said large U.S. commission-free brokers expanding into Europe would have to “rethink their business models” and how they get paid.

Still, Robinhood Chief Financial Officer Jason Warnick said in a recent conference call with analysts that the broker has a number of revenue streams in the U.K. that it can tap. This includes benefiting from the spread between the interest earned on cash held by customers and the interest they pay. It also plans to offer a subscription service with perks like research and higher interest rates.

“In the absence of PFOF, this has the potential to be a good business in terms of unit economics (basis), ” he said.

Public, whose U.K. business offers U.S. stock trading, said it offered lower currency conversion fees than rivals. The firm did so in part because of license restrictions requiring it to trade through its U.S. brokerage. Robinhood holds a similar UK license.

Estonia-based Lightyear, which will launch in the UK and several other European countries in 2021, has a similar underlying proposition to Public. More recently, it has expanded its offerings to include exchange-traded funds (ETFs) that track stock indexes to appeal to long-term investors.

“We launched our first product, which was just U.S. stocks, and then you realize it’s a weak product because you don’t have an ETF,” said Martin Sokk, Lightyear’s chief executive.

However, the market has been challenging for brokers on both sides of the Atlantic. Transaction volumes have declined as customers return to offices and work while staying at home during the coronavirus pandemic. The underperformance of stock prices has also dampened economic activity. The blue-chip S&P 500 has lost nearly a fifth of its value in 2022, its worst performance since the 2008 financial crisis.

Bella Caridade-Ferreira, founder and chief executive of Fundscape, a consultancy, said progress had been “very tough”.

“Those with big parents survived,” she said.

Caridade-Ferreira added that many platforms are showing signs of strain, and she expects several to either fold or be acquired in the next year.

Freetrade, the UK’s largest challenger app with more than one million customers, is cutting office space this year to cut costs.

“The attitude of companies now is to control their own destiny — they don’t need additional financing to stay afloat,” said Adam Dodds, the company’s chief executive.

Robinhood already faces similar challenges in its home market. The company’s shares peaked at $70.39 shortly after it went public two years ago. That number has since fallen by more than four-fifths as the number of monthly active users has nearly halved.

Robinhood's $38 line chart since 2021 IPO shows a problematic deal

Still, the stock rose more than 39% between Jan. 1 and Sept. 1 this year. The stock has outperformed the broader market as Tenev and his team rolled out features including retirement savings products. The company reported positive net profit for the first time in the three months to June.

“We feel a little better about the near-term and mid-term outlook,” JMP Securities analyst Devin Ryan said after Robinhood’s August earnings report.

He pointed to growth in new initiatives such as stock lending and retirement, as well as plans for international expansion.

Khalidade – Ferreira is more skeptical.

“I gave (Robin Hood) two or three years and they disappeared again,” she said of the UK market. “Assume that people are eager to invest. A lot of people are afraid to invest.”

Still, Freetrade’s Dodds is confident that despite the tough environment, the UK market is receptive to stock trading apps — at least through his firm.

“There are a lot of people out there who haven’t made investing a regular habit that we want to develop,” Dodds said. “It’s early days for the industry to become a cultural expectation, as it is in the United States.”

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