Robinhood's Gamification of Investing

Founded in April 2013 by co-founders Vladimir Tenev and Baiju Bhatt, Robinhood Markets, Inc. is a financial technology company that operates an online brokerage for retail investors, offering commission-free trading through its web- and mobile-based platform. Robinhood allows users to buy and sell stocks, exchange-traded funds (ETFs), options, American depositary receipts (ADRs), and certain cryptocurrencies. As of 2022, Robinhood has over 15 million monthly active users and over 22 million funded accounts.

https://blog.robinhood.com/news/2017/10/31/robinhood-now-on-web

History

According to its founders, Robinhood was created to democratize investing and provide everyone access to the financial world. The name Robinhood comes from the company's mission to "provide everyone access to financial markets, not just the wealthy." Robinhood officially launched its app in March 2015 and has helped "millennials," those between 18 and 29, access opportunities to invest in ways that were previously inaccessible due to fees and minimum account balances. The company has succeeded within this "mobile-first, share-everything generation that [they] capture by design."

Fundraising

Robinhood has been very popular among venture capital firms worldwide, raising a total of $6.2B across 28 funding rounds.. In April 2017, Robinhood raised $110M at a $1.3B valuation. In May 2018, after introducing cryptocurrency trading and other investing options, Robinhood raised a $363M at a $5.6B valuation. At the time, it had just passed $150B in transaction volume. Robinhood continued to show strong growth, and later raised $200M at a new, higher $11.2B valuation in August 2020. This funding round was later extended when Robinhood raised $460M more, boosting its valuation to over $11.7B.

Going Public

Due to its past success, Robinhood finally confidentially filed for an IPO on March 23, 2021. On July 28, 2021, Robinhood sold shares in its IPO at $38 per share before its debut on the Nasdaq on July 29, raising close to $2B. The company was to be traded under the ticker symbol HOOD. Robinhood sold 52.4M shares, valuing it slightly below forecasts at $32B. Robinhood garnered a lot of attention from retail investors, its primary client demographic, because it offered ~25% of its IPO shares to its own clients. This move aligned with its mission to make investing more accessible to the public.

Robinhood Customer Dies by Suicide

In June 2020, a 20-year-old Robinhood user named Alexander Kearns took his own life after receiving a notice that his account had a negative balance of over $730k. The user, with no personal income, was able to get assigned almost one million dollars worth of leverage through the company's options trading services. Like many other young users, using Robinhood was Kearn's first experience with investing. In a final note, he wrote that he had "no clue" what he was doing. Kearns also insisted that he never authorized margin trading and voiced how shocked he was that his small could amass such an apparent loss. It was later determined that the negative cash balance was not his indebtedness, but a temporary balance until the stocks underlying Kearns' assigned options had settled into his account. Even though many brokerages, including Robinhood, E-Trade, and Charles Schwab, now offer commission-free trading and zero minimum balances to attract younger consumers, Kearns' story may serve as a cautionary story for the industry as to how little some users may understand of the securities and markets they are entering. Robinhood's founders have since responded to Kearns' death by pledging major changes to their platform to help educate users, particularly when options trading.

2020 Robinhood Outages

In early March 2020, Robinhood saw a lot of growth in platform traffic, partly due to the Covid-19 pandemic. With many people at home, they looked for other ways to occupy their time. As a result, many retail traders saw Robinhood as a means of doing so. This unexpected spike in users came with trouble for the platform; Robinhood suffered multiple days of outages, leaving clients unable to trade any of their assets. Robinhood's infrastructure was not able to support the large number of users that were trying to execute trades. As a result, the platform remained offline as the Dow saw its single-biggest point gain in history after the Federal Reserve's rate cut to help encourage spending. Robinhood later publicly apologized for the outages in an email to users and made improvements to its infrastructure to avoid another incident happening again in the future.

FINRA Penalty

In March 2020, Robinhood suffered multiple days of outages where clients could not trade any of their assets. The platform was offline during some of the highest-volume trading days of the year as investors aggressively sold off stocks due to the Covid-19 pandemic. Robinhood users could not participate while the platform was down, potentially missing out on millions of dollars worth of trades. Also, Robinhood faced backlash for its lack of due diligence when approving customers for options trades and providing misleading information to customers about aspects like trading on margin. Because of this, the Financial Regulatory Industry (FINRA) ordered Robinhood to pay $70M in penalties for systemwide outages and misleading communication and trading practices. The FINRA fine of $57M is the largest ever imposed by the organization, while the other $13M will be paid as restitution to thousands of clients.

GameStop Short Squeeze

In 2020 and early 2021, many institutional investors were very confident that the shares of electronics retail company GameStop were going to crash. Because of this, they took out a short position, which involves borrowing shares and selling them with the intent of buying them back at lower prices. Problems may arise in these situations because stock prices can technically rise indefinitely, making short losses very large. A short squeeze is when other investors are confident in the opposite direction and try to get the stock price to rise, "squeezing out" those who short the market. For GameStop, this squeeze was driven by retail traders and the Reddit investing community, who encouraged each other to keep buying shares of GameStop, causing the stock price to rise rapidly and hurt the institutional traders with short positions. In August 2020, GameStop stock was trading for around $4. By January 2021, GameStop shares hit a high of $483. Because of this increase, many institutional investors suffered large losses on the trade.

Since the retail trading community led the GameStop short squeeze against institutional investors, many used Robinhood as their platform to purchase the volatile stock. Since Robinhood acts as a middle-man to execute trades in partnership with high-frequency trading firms, for every trade it executes, it needs sufficient cash reserves to be posted as collateral until the trades settle. This became a problem when Robinhood did not have enough cash to support the large volume of trades that its users were trying to execute. Robinhood had only $700M for collateral, $3B short of the $3.7B it needed to settle its customers' trades with its partner trading firms. In an effort to stay solvent, Robinhood had to fundraise $3B from existing investors and ask for leniency. During this, they decided to stop customers trading on volatile stocks, including GameStop, for the day to limit their own immediate risk. As a result, Robinhood faced a wave of backlash from its customers, and later a congressional hearing and investigation. During the hearing, Robinhood CEO Vladimir Tenev denied any wrongdoing for his choices during the GameStop meme stock frenzy but apologized to Congress and Robinhood's users for having to take such drastic measures.

Revenue Model

Payment for Order Flow

Payment for order flow is a system where instead of using a stock exchange to execute customers' trades, a broker will route trades to a market maker in exchange for a fee. In this case, Robinhood will sell trades to a firm like Citadel, which will purchase the shares that the investor is selling and give Robinhood a fee for doing so, and Citadel will make a profit from re-selling the shares on the open market for a higher price. Robinhood earns less than one cent per share for routing these trades. Still, since users have executed over $150 billion in transactions, payment for order flow revenue adds up and now makes almost half of Robinhood's revenue.

Robinhood's use of payment for order flow was at the center of regulatory scrutiny during the 2020 meme stock phenomenon, where GameStop and AMC, who seemed to have no intrinsic value, were trading for multiple times above their value weeks before, propelled by retail investors collaborating to dramatically raise the stock price.

Subscriber Fees from Robinhood Gold

Robinhood offers a premium service named Robinhood Gold for $5 a month, which gives users access to more investing tools, including research reports, market data, larger instant deposits, and margin trading.

Income from Margin Trading

When Robinhood users engage in margin trading, they borrow from Robinhood Securities, which earns income from lending margin to counterparties. Users pay a 2.5% interest rate when they borrow over $1000 for margin trading. The Company's addition of margin trading to its service faced controversy after the SEC said it was one of the ways they "provided misleading information to customers about the true cost of choosing to trade with the firm."

Cash Management Fees

Robinhood receives fees on cash that is put into its Cash Management network from partner banks that extend FDIC insurance on deposits. Also, Robinhood receives interchange fees from customers using the Robinhood debit card

Income from Cash

If customers have uninvested cash that isn't put into Robinhood's Cash Management network, The Company earns income by depositing it into interest-bearing bank accounts.

Fees on Transfers and Other Services

Robinhood charges additional fees to customers for services such as transferring money to another broker, delivering checks overnight, and receiving paper statements.

Gamification

The Role of Gamification in User Experience

Gamification is the technique of inserting game mechanics into non-game products to make products more entertaining. Through gamification, designers aim to help increase user engagement and retention using specific mechanics. Gamification is intended to drive emotions and make products more memorable.

Types of Game Mechanics

Badges and Stickers

Badges and stickers are common in mobile app experiences, usually rewarding users for gathering a certain number of points or reaching a specific achievement. They're designed to invoke a feeling of satisfaction in users when the task is completed, with the intention of drawing them back to do so repeatedly.

Leaderboard

Leaderboards in mobile app experiences add another dimension of excitement for users, incentivizing them to keep trying to complete the task or challenge so they can be rewarded with recognition. Leaderboards are designed to encourage competition among users and motivate them to improve their skills.

Challenge

Applied in mobile app experiences, challenges are designed to help motivate users to try new experiences and learn more about the product. Also, they help prevent user turnover by creating new exciting tasks to complete, which helps disrupt their usual experience.

Points

Another way mobile app experiences stimulate users is by incorporating point systems to demonstrate progress. This lets players see how much of a task they've completed and what is left to complete. The points system may also measure the user's success, and is designed to keep users engaged when using a platform.

Journey

Incorporating a journey into game mechanics means onboarding users step by step, which turns their experience with a platform into a personal journey. As users progress through the journey, they are introduced to new features as they gradually become more experienced. This helps the platform feel more like a game and makes their interactions more enjoyable.

Constraints

A popular form of constraint is countdowns, which motivate users to complete a task within a limited time. Constraints create tension for the users and motivate them to take action on the platform faster. Countdowns, for example, help users feel inspired and more productive when completing tasks. By doing this, designers strategically get users to want to use their platform to avoid or surpass constraints.

Robinhood's Gamification of Investing

Gamification Case in Massachusetts

On December 16, 2020, Massachusetts securities regulators filed a complaint against Robinhood, alleging they "aggressively marketed to novice investors" and exposed them to "unnecessary trading risks" by "falling far short of the fiduciary standard that requires broker-dealers to act in their client's best interests." The filing by securities regulators focused on the tactics that Robinhood employs to keep customers engaged, alleging that it encourages them to use the platform through "gamification" features.

User Interface

Robinhood's service was designed to give users a simple and easy-to-understand interface based on their mission to democratize investing by lowering the barrier to entry. In the mobile app, users swipe up to confirm a stock transaction and perform similar microtransactions to obtain more information. Controversy has arisen because critics believe some features "promote strategies that benefit brokerages rather than consumers" . For example, Robinhood users used to be rewarded with confetti showers (this feature was later removed after backlash ) when they bought their first stock to celebrate their first investment. Also, users receive one free stock in return for a referral to a new user. They see the awarded stock by scratching off an on-screen lottery card. Another feature Robinhood has implemented is an on-screen emphasis on trending stocks, highlighting rising share prices as an incentive to buy and falling share prices as an incentive to sell. Additionally, computer scientists have noted that Robinhood's interface mimics dark patterns or designed choices that steer users toward desired outcomes. In contrast to Robinhood's easy one-swipe purchase process, canceling a trade requires more friction and can steer users towards a desired outcome.

https://www.cnbc.com/2021/03/31/robinhood-gets-rid-of-confetti-feature-amid-scrutiny-over-gamification.html

Payment for Order Flow

Some critics say that the introduction of friction in trade cancellation and incentives to trade through certain gamification in Robinhood's interface may be linked to the fact that Robinhood's main revenue source comes from payment for order flow, where Robinhood receives more money when more trades are made.