BAIJU BHATT
The Founder of Robinhood Wants You to Trade Stocks for Free
By Matthew Philips, April 11, 2016
Q: HOW DO YOU TRADE?
A: I typically trade about $20 million in penny stocks a year. I use two main brokers that charge me on a per-share basis, so I end up paying a lot of money on commission. On a typical day I spend maybe $76 on trading commissions.
Q: WHAT STRUCK YOU ABOUT ROBINHOOD WHEN YOU FIRST HEARD ABOUT IT?
A: It was nice to see someone come in with a fresh idea to compete with the established players. What I was struck by at first was what a nice, clean design they had. Brokers typically put no thought into the design and user experience. I have a bunch of accounts I’ve opened through the years, and even today most of those retail brokerage websites look like they’re straight out of 1996. … The act of placing a trade is still way too complicated.
Q: WOULD YOU EVER USE ROBINHOOD?
A: I’m not sure it fits my purposes as a day trader. I talked about it recently with some other day traders, and none of them thought it was a good fit for them. I use some of my own algorithmic trading programs, and Robinhood doesn’t support those. Also, execution quality is super important for day traders. What’s more important to me isn’t the fees I’m paying but the ability to trade what I want, when I want.
Q: IS THERE ROOM FOR ANOTHER ONLINE BROKER?
A: The one thing I am sure of is that the established discount brokers need some fresh competition. Their trade commissions haven’t budged for 15 years. There’s been so much advancement in trading technology and volumes. The big institutional investors have benefited from that and are paying a lot less to trade. But the retail traders, the average folks, have seen no cost savings. And that’s because the large discount brokers got entrenched. I see this as a space worth disrupting.
Q: WILL THIS WORK?
A: That remains to be seen. There have been a couple attempts at doing zero-commission trades that didn’t work. I don’t know that free commissions alone will attract enough investors. What makes me optimistic now is that these guys are focused on mobile. It’s cheaper to build apps than websites. I feel like the model could work if the business is lean and efficient enough.
In 2011, Baiju Bhatt and Vladimir Tenev, both Stanford physics graduates, were living in New York, building trading systems for large institutional investors and hedge funds. After Occupy Wall Street, they decided to apply their expertise to improve access to the financial-services industry for young people. In 2013 they founded Robinhood, a commission-free trading app. Robinhood is now the fastest-growing brokerage, with more than $3 billion in trading volumes. Its almost 1 million customers have saved some $70 million in trading commissions.
Q: YOU’RE TRYING TO SIMPLIFY WHAT CAN BE A PRETTY COMPLICATED PROCESS.
A: Steve Jobs once said good design isn’t just how something looks and feels but how it works. We’ve tried to make that mentality part of our worldview. So, if you’ve ever tried to open an account or trade a stock on an online brokerage account, it’s like a Rube Goldberg machine. It’s far too complicated and often designed for people who make those brokerages the most money. What we’re after is something much more basic that can provide access to the public markets for everyone, not just for people with lots of money.
Q: HOW DO YOU MAKE MONEY?
A: Robinhood collects interest on uninvested cash in customer accounts and will roll out margin trading in the next few months. Margin trading will drive the lion’s share of our revenue, which is like a loan that lets people have more money to trade with.
Q: DO YOU THINK THE ONLINE BROKERAGES BECAME TOO BEHOLDEN TO THEIR WEALTHIEST CUSTOMERS?
A: Without question. And it’s a pattern I see more and more. I think it’s the difference between the mindset of the people that built the finance industry vs. the people that built the Internet. Finance is about being short-term greedy, rather than thinking about the markets as a critical part of our society that exist to empower the world, rather than to enrich a few.
Q: DO YOU SEE ANY PART OF YOUR MISSION AS TRYING TO GET MILLENNIALS TO INVEST MORE IN THE STOCK MARKET AS A WAY TO SAVE FOR THE FUTURE?
A: Partly. But it’s also just people in general, not just young people. The effects of the 2008 crash are still lingering for a lot of people, who are hesitant to get back into the market. Part of that is they simply don’t have enough money to afford access, which is absurd since they’re supposed to be public markets. A lot of times, you need a minimum balance of a few thousand dollars to be able to even open an account. That’s the kind of stuff we’re trying to cut through.
Q: WHAT DID YOU FOCUS ON WHEN CREATING YOUR INTERFACE?
A: Obviously, mobile came first. That had as much to do with the ease of building it as it did with the experience and audience we were after. We wanted it to be simple; we wanted it to be tactile—something that gives people the sense that when they open the app, they’re holding their money right in their hand. We took advantage of things like swiping up to push your order into the market. The engine is very complex, but we were able to put that under the hood.