For a brief moment, last year’s GameStop craze made buying and selling stocks cool, even exciting, for a new generation of young investors. Now, that frenzy has turned to fear.
Robinhood CEO Vlad Tenev pointed to “a challenging macro environment” marked by rising prices and interest rates and a slumping market in a call with analysts explaining his company’s lackluster results. The downturn, he said, was something “most of our customers have never experienced in their lifetimes.”
Retail stock trading is still an attractive business, as shown by the news that crypto exchange FTX is dipping its toes in the market by letting some U.S. customers trade stocks. But the market’s steady decline has forced companies like Robinhood, Webull, Public and Charles Schwab to grapple with their own jittery investors.
Andrew D’Anna, managing director of Retail Client Experience at Charles Schwab, said 2021 saw a “massive influx of new investors,” most of whom “skewed young and a little less experienced.” That group was also “more bullish about the market,” he added.
Now, as they experience volatility, the question is “are we going to see a significant share of those investors pull out and be scared out of the market?” he told Protocol.
In Robinhood’s case, the answer is clearly yes. Tenev told analysts that the company was “seeing more pronounced declines from those that have lower balances.”
With the market uncertainty, he added, “Our customers became more cautious with their portfolios, trading less frequently and in smaller amounts across all asset classes.”
“We’re seeing exactly the same,” though the decline has not been as pronounced, Webull CEO Anthony Denier told Protocol.
Trading apps had one of their best revenue quarters in early 2021 when the GameStop frenzy hit. “Everyone became an investor whether to make money or to send a message,” Denier said.
The first few months of 2022 turned into “one of the ugliest quarters that retail investors have seen for the last eight years,” he said. Denier said many of the investors “we’re seeing walk away” got into the market during the GameStop frenzy. Some are closing accounts, others are just letting them sit.
The downturn is forcing a reexamination of the business models that helped some trading apps profit from the boom.
Robinhood helped blaze the trail for commission-free, app-based stock trading, a model that has also been embraced by key rivals like Webull, Charles Schwab and Public.
Robinhood, Webull and Charles Schwab make money from rebates they receive for sending trade orders to market makers. That system, known as payment for order flow, has become controversial. Critics have argued that it encourages customers to make as many trades as possible, even when it's not in their best interest. SEC Chair Gary Gensler has said the regulator could ban the practice.
Denier of Webull called that view “an extremist position” on a system that can sometimes help consumers to get better pricing on trades. D’Anna of Schwab agreed, arguing that payment for order flow helps users “execute trades more efficiently.”
The GameStop frenzy brought fresh scrutiny of payment for order flow. Robinhood pulled the plug on trades in GME and other volatile stocks in part because of the complex web of arrangements it used with companies like Citadel Securities for payment for order flow.
Around that time, Public announced it was dropping payment for order flow. Fidelity also doesn’t take payment for order flow for stock trades.
FTX, the new entrant, said it will offer commission-free trading that will “route customer orders directly to Nasdaq’s order router” instead of using payment for order flow, FTX.US President Brett Harrison said in a tweet.
That prompted a tweet response from Public COO Stephen Sikes, who congratulated FTX for “joining us in rejecting PFOF.”
Public’s business model is based on voluntary tips, which Sikes said offers the company a revenue scale that “is very similar to what we would expect to earn in a payment for order flow model.”
The tip system isn’t without its downsides. As customers losing money on trades feel increasingly strapped, they might feel less inclined to tip.
That’s probably why Public is looking for new, possibly steadier revenue streams. Sikes said Public plans to launch a paid subscription service offering investing research, analysis and data to users.
The downturn has also led online trading apps to focus on longer-term investors, a more sustainable source of growth.
Robinhood has said it plans to roll out new retirement account products. “There's more that we have to do for retirement and long-term investing,” Tenev told analysts on the company earnings call.
Schwab said it saw that shift in customer surveys over the last two years.
In 2020, 56% said they were investing for the long term, while 44% were short-term traders. Last year, 72% said they were buy-and-hold investors, while only 28% were looking for short-term gains. A new survey in February found only 18% were interested only in short-term gains.
“For us the mindset is very much around the long term,” D’Anna of Schwab said.
In a market slump when daily trades no longer make sense, he said, the smart approach is to help clients “ignore the noise through periods like this.”