Arena: Market Conditions Before Robinhood
People with small sums to invest for the first time · 2013 · United States
Barriers to participationRegulatory constraints
A young person with a few hundred dollars to invest faced a fee on every trade. Online brokers charged $7 to $10 a stock trade, a large share of a $100 first purchase, and many asked for about $2,000 before an account could be opened at all R1. Their websites and trading screens were built for experienced traders and felt complicated and intimidating to a beginner R3 R1. Banks and hedge funds, meanwhile, were trading almost free, because electronic execution had pushed institutional costs down R2. Many people in their twenties had come to distrust financial firms after the 2008 crisis R2. Brokerage was a licensed, regulated business, and no new US retail broker of note had started since the online brokers of the late 1990s R1.
How each step happened
Step 1 of 5 · 2013–15
Commission-free trading in a simple phone app, no minimum
Robinhood's innovation was a brokerage with no commission and no account minimum, inside a phone app simple enough for a first investment. E*Trade charged $7 to $10 a stock trade RHX-1, and co-founder Vlad Tenev says that for someone starting with a hundred dollars that fee was "a significant percentage of the total amount you would be investing" R1. Removing the fee and the minimum made a small first purchase worth making.
The idea came from the founders' previous business. Tenev and his co-founder Baiju Bhatt had sold algorithmic trading software to banks and hedge funds through Chronos Research R2. "Banks and hedge funds were effectively trading for free. But retail investors were still paying $10 per trade," Tenev says R2. In 2013 they chose to serve millennials on mobile phones; their seed investor Jan Hammer of Index recalls, "Millennials were the wedge" R2.
The app was built for people who had never used a trading screen. Investor Micky Malka says it replaced complex dashboards with "a very simple swipe, and gestures" R1. It opened to the public on the iPhone in March 2015, handled more than $2 billion in transactions that year and became the first finance company to win an Apple Design Award R1 R4.
Rivals E*Trade charged $7 to $10 a stock trade in 2018 RHX-1; its average commission per trade was $6.66 in the fourth quarter of 2018, and it planned $6.60 to $7 for 2019 RHX-6. Many brokers also required about $2,000 to open an account R1.
Penetration PricingFounder Domain ExpertiseEase of UseFocus Strategy
Step 2 of 5 · 2015–19
Market makers pay for the trade, not the customer
A free trade needed someone else to pay for it. Brokers routed customer orders to market makers such as Citadel, Two Sigma and Virtu, which paid a rebate for the order flow; in 2018 Robinhood earned about $0.00026 per dollar traded, 2.6 cents on a $100 purchase R5. E*Trade, Schwab and TD Ameritrade took the same rebates and also charged a commission on each trade R5. Tenev says commissions were only 10% to 30% of a broker's revenue, so a broker with no branches and a small staff could give them up R1. Malka says free trading had been tried before and had failed R1.
The rebates carried the business: by 2020 they supplied over 70% of Robinhood's revenue RHX-11. The model had a cost for customers. The SEC found that from 2015 to late 2018 Robinhood's orders were filled at worse prices than other brokers', costing customers $34.1 million even after the commission savings; Robinhood paid a $65 million penalty without admitting or denying the findings R7. Because the customer paid nothing per trade, the offer could be explained in one sentence, and that sentence is what customers passed on in step 3.
Rivals E*Trade collected market-maker rebates and a commission on every trade; its commission revenue was $123 million in the fourth quarter of 2018 alone RHX-6 R5.
Cross-Subsidy
Step 3 of 5 · 2013–21
Customers recruit customers: waitlist, then referral program
This step starts in 2013 because the waitlist opened more than a year before trading did. Anyone who signed up could move up the queue by inviting friends R1. The list spread on Reddit and Hacker News, took 50,000 signups within a month and grew to nearly a million people R2. Bhatt says the waitlist grew without paid campaigns RHX-7. Hundreds of thousands on the list became users at the March 2015 launch, more than Malka had expected R1, and the company credited customers' recommendations for its first year R4.
The loop kept running after launch through the Robinhood Referral Program. Over 80% of the new funded accounts in 2020 and the first quarter of 2021 joined organically or through a referral RHX-5. The 2020 retail-trading surge, fed by commission-free apps and government stimulus payments, widened the audience for every broker R15; Robinhood entered it with an audience its customers had already built.
Rivals E*Trade bought its growth: it spent $200 million on marketing in 2018 for a record 204,000 net new brokerage accounts, and bought nearly a million more accounts from Capital One RHX-6.
Growth LoopCustomer Referrals
Step 4 of 5 · 2015–20
New demand: first-time, young investors
These customers were mostly new to investing, not traders taken from E*Trade. Over half of Robinhood's funded customers said it was their first brokerage account RHX-5; the median customer was 31, and about 70% were millennials or Generation Z RHX-10 RHX-11. Their average balance was under $5,000, against $255,000 at Schwab RHX-11. Celent analyst Will Trout said in 2018 that Robinhood was expanding the market by serving people large banks never reached RHX-9.
Robinhood passed 4 million users in 2018, more than E*Trade, and six million by October 2018 R2 RHX-1 R5. It had 15 million accounts by December 2020 RHX-11 and 18.0 million funded accounts by March 2021 RHX-5.
Rivals E*Trade served existing self-directed traders: its record year of 2018 added 204,000 net new accounts RHX-6, and it had 5.2 million client accounts when it agreed to be sold in February 2020 RHX-4.
Blue Ocean Strategy
Step 5 of 5 · 2015–20
Matching the price cost E*Trade its commission income
The price advantage lasted four years because the leading online brokers could not match it cheaply. E*Trade's revenue came partly from commissions, and in January 2019 it planned to keep its advertised rates for the year RHX-6. Robinhood, whose revenue came from the market-maker rebates of step 2, lost nothing by charging $0. Schwab cut its online stock commission from $4.95 to zero from October 7, 2019 R6, and E*Trade followed the same day, at an estimated cost of about $75 million a quarter, roughly 17% of its revenue RHX-2 RHX-3. Tenev says all the large brokers dropped commissions within weeks of each other, and that "the incumbent companies actually didn't need these commissions in the first place" R1.
By then Robinhood had the customers from steps 3 and 4. In February 2020 E*Trade agreed to sell itself to Morgan Stanley RHX-4. With every broker at $0, Robinhood still took over half of new US investing-app downloads in 2020, in a group that included E*Trade, Schwab and Fidelity RHX-5.
After the price was matched
With the price edge gone, the business built on those customers was tested. Robinhood restricted purchases of some volatile stocks in January 2021 when clearing collateral requirements rose R8, and lost $1.03 billion in 2022 R9. Tenev found that its most active customers were the least satisfied, and the company concentrated on them R1 R2, launching the desktop Legend platform in October 2024 R12. Retirement accounts (January 2023) and a $5-a-month Gold subscription with a 3% IRA match, kept only if the funds stay five years, gave customers reasons to hold more money there, a limited, contractual switching cost R10 R11. By December 2025 Robinhood had 4.2 million Gold subscribers and $26.5 billion in retirement assets R13. Trading still supplied 59% of 2025 revenue, and subscriptions 4% R14.
Rivals E*Trade went to $0 on October 7, 2019, giving up an estimated $75 million a quarter RHX-2 RHX-3, and on February 20, 2020 agreed to sell to Morgan Stanley for about $13 billion RHX-4. Schwab matched the price first and kept its much wealthier customers R6 RHX-11.
Counter-positioningCustomer DiscoveryMulti-ProductSwitching costs