Robinhood, a highly valued US fintech, has launched in the UK to offer investors commission-free trading in Wall Street and global stocks.
The Silicon Valley-based platform’s cut-rate offer helped trigger a price war in the US and so its arrival on these shores could set another fintech cat among the big domestic investment platforms pigeons.
Robinhood, which was valued at more than US$7bn earlier this year, opened for UK registrations on Wednesday, promising British investors the ability to buy and sell over 3,500 overseas stocks without execution fees.
Investing will start from early in the new year, the company said, in what will be its first overseas market.
As well as US stocks such as Alphabet, Amazon, Apple, Netflix, Nike, Snapchat and Tesla, the platform also offers access to another 1,000 global equities that are trade in the US via global depository receipts, such as AstraZeneca, Burberry, Barclays and Shell.
Robinhood UK, which has been authorised and is regulated by the Financial Conduct Authority and offers up to US$500,000 of protection under the SIPC scheme, allows new customers to open an account with just £1 and says it won’t charge British customers any foreign-exchange fees.
“We see the opportunity here to bring real value to the market," CEO Wanders Rutger told reporters in London, adding that the aim was to bring a "much more competitive product to existing investors".
Possibility of a price war in the UK?
Launching in the UK with a low-cost offer puts it up against established investment platforms such as FTSE 100 giant Hargreaves Lansdown PLC (LON:HL.) and FTSE 250-listed AJ Bell PLC (LON:AJB), as well as the likes of Interactive Investor, Share plc’s (LON:SHRE) Share Centre and leveraged trading platforms like IG Group PLC (LON:IGG) and CMC Markets Plc (LON:CMCX).
A couple of years ago the launch of another US low-cost platform, Vanguard, led to predictions of a price war in fund trading.
Since Robinhood’s launch in the States six years ago, other larger firms such as Charles Schwab slashed their fees for trading equities and other securities, pulling in the likes of Fidelity and TD Ameritrade into offering no-fee trades.
So could the arrival of the US challenger in the UK, where London-based Freetrade app has been available since earlier this year, lead to a price war in equity trading?
Financial sector analyst Paul McGinnis at Shore Capital was sanguine about the effect on incumbent UK rivals.
“I’m sure there is a market for Robinhood, but not one that’s going to be large enough to trouble the big guys [in the UK].
“I haven’t seen any impact from other low-cost launches, which Hargreaves faced a few years ago from Vanguard, as you’ve not really seen any sort of impact from that since.”
He felt most existing investors were unlikely to move because of the attractions of their current providers.
“People underestimate that power of convenience that the big platforms offer, with it all in one place. The SIPP and ISA tax wrappers are quite a powerful thing in terms of keeping you relatively loyal to those platforms.
“If you sprinkle in a little bit of inertia in terms of it being a bit of a ball-ache to transfer your account to somewhere else, then I think those ingredients together means they won’t be too worried.”
How Robinhood makes money
Cheaper operators tend to make money from stock lending and from earnings interest on the money that clients hold as cash, says McGinnis, which Hargreaves and Bell also do, in terms of sweeping up excess cash balances a making a margin on those.
“Maybe they get kickbacks from market makers as well,” he suggests.
Robinhood will generate revenue through a US affiliate, Robinhood Securities, which is a clearing firm, as well as interest on customer deposits.
In the US, the platform offers leveraged trading under its Robinhood Gold and from selling clients’ stock orders to the market makers who handle the trades, a process called payment for order flow (PFOF) that is used by the likes of Schwab and Etrade in order to offer low prices.
PFOF involves a financial services firm, Robinhood in this case, receiving a commission for any trades from market maker that carries out the trade.
The process has raised concerns about conflicts of interest, and by regulators and investors who see it creating extra costs that are passed on to the end client in the form of wider bid-offer spreads.
Earlier this year, the FCA put out a report on PFOF that said firms “could do more to improve the systems and controls they use to manage conflicts of interest for specific areas of their business” and that it was “difficult for firms to be certain if their activity was legitimately providing non-exclusive liquidity to a range of counterparties, which may allow them to manage the conflicts of charging both sides of a trade”.