Treacherous Trading: Robinhood cancels its UK launch

July 29, 2020

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2 min read

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What's going on here?

Robinhood, an American stock-trading app with a mission to “democratise finance” for new traders, has indefinitely postponed its UK launch.

What does this mean?

Robinhood is one of the many new investment apps that have emerged to disrupt traditional brokerage. They offer a zero-fee service platform which marks a stark contrast to established online trading platforms requiring commission fees or a minimum deposit. Flashy colours coupled with a slick interface has attracted 13 million users, half of which are millennials eager to dabble in stock trading. This has allowed the app to build up a waiting list of over 250,000 people in anticipation for its UK launch. The company secured $600m in funding this year, giving it a valuation of $8.6bn. Nonetheless, the company has decided to refocus its efforts in strengthening its domestic foothold.

That the platform has backed out of the UK is in part because of the intense scrutiny it has faced following the suicide of one of its customers, Alex Kearns. Kearns mistakenly believed he had lost $730,000 when he was actually $16,000 in credit. Its reputation was further hit by system failures in March 2020, which meant that users missed out on surging stocks (prompting a class-action lawsuit). This may be another reason for Robinhood to refocus its “efforts on strengthening [its] core business in the US”.

What's the big picture effect?

Robinhood’s UK failure speaks to the challenges of international expansion. It ought to be a warning to European fintechs like Monzo and Revolut who are attempting to move into US markets. Those apps maintain an analogous slick interface with marketing aimed at millennial users. There are difficulties with expanding into the UK, given the market saturation and profit concerns. Higher usage doesn’t generate profit for Robinhood as it’s zero commission feature means money only comes from monetising idle cash in clients’ accounts and selling investment services. With its £8.6bn valuation, Robinhood has to show it can make money.

The sudden popularity of Robinhood also points to the rise of retail investing (ie. non-professional investors), which has led to criticism of the “gamification” of investing, exposing millennials to its dangers without adequate risk-protection. Robinhood encourages users to “level up with options trading” and generates confetti cannons across the screen when users make their first trades. Andrew Lo, a finance professor at the Massachusetts Institute of Technology, notes that “the parallels between video games and day trading is becoming closer…younger [traders] who … don’t fully understand the impact of significant losses and gains on their psychophysiology” could face consequences like worsening mental health and binge drinking. 

US politicians are demanding Robinhood protect its young user base. While it offers simplified accounts of major market events, investment advice and education on these complex financial products is lacking. With its optimistic mission of “democratising” investment, we can only hope that the company strengthens its efforts to educate fledgling investors and strengthen its core systems. Once it has addressed its shortfalls, perhaps the company can re-consider international expansion.

Report written by Robyn Ma

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