Robinhood’s crypto party ends

Robinhood’s infatuation with crypto was short and sweet, if last night’s corporate earnings report is anything to go by.

Robinhood shares fall below July IPO price

The trading app’s revenue from cryptocurrency plummeted by nearly 80 percent during the third quarter, from $233m to only $51m, Robinhood said last night.

Its stock price dropped over 10 percent in after-hours trading as investors digested the disappointing news.

Robinhood shares went public on the Nasdaq exchange at the end of July. Priced at $38, they rose to over $70 by early August. However, last night’s earnings miss brought the Robinhood share price to below the initial offering price.

End of Elon Musk’s dogecoin frenzy

A decline in activity in the dog-themed crypto coin ‘dogecoin’, which made up 62 percent of crypto revenue in Q2, was a major reason for the drop in income.

Tesla CEO Elon Musk issued repeated comments about dogecoin on social media in April and May, helping drive short-term price rises in the crypto asset. Dogecoin hit a peak of 75 cents per coin on May 7 but has since lost more than two-thirds of its price.

By comparison with its disappointing Q3 crypto performance, Robinhood’s revenues from equity and option trading dipped only slightly over during the quarter, from $217m to $214m.

Robinhood’s quarterly loss before tax widened sharply to $1.37bn, up from $464m the quarter before. By comparison, its loss before tax in Q3 2020 was only $11m.

Paying for client order information

Robinhood offers its clients commission-free trading across a range of assets. Instead of earning commissions from clients, its revenues derive primarily from a practice called ‘payment for order flow’.

Under such an arrangement, professional trading firms pay Robinhood for access to information about its clients’ orders.

In particular, trading firms want to find out more about retail clients’ stop-loss orders and other so-called non-marketable limit orders, which they can use to programme their own trading algorithms.

For 2020 as a whole, RobinHood alone made over $600m from market makers as a reward for providing such order information from its clients.

Just one high-frequency trading firm, Jump Trading, paid Robinhood $164m for information on its crypto orders in the second quarter.

“Crypto order flow is particularly profitable because the bid-offer spreads are so much wider than regular share trading,” Peter Sleep, senior investment manager at 7IM, told New Money Review.

However, the practice of paying retail brokers for information about their clients’ orders is proving increasingly controversial.

In December 2020, Robinhood paid a $65m fine to the US Securities and Exchange Commission (SEC), after the regulator said it had misled its customers about how it was remunerated by third parties.

In August the SEC said it was considering whether to ban payment for order flow outright.

A darkened outlook

In response to Robinhood’s quarterly earnings report, Goldman Sachs said it was downgrading its expectations for the trading app, predicting lower future revenues and citing rising regulatory risk in cryptocurrency as a key concern.

“Our updated revenue and target price reflect a lower level of monetization across the board, as well as a slower ramp in new products and crypto revenues on the back of regulatory scrutiny around these products,” Goldman said.

Earlier this week SEC Chair Gary Gensler said he is particularly worried about investor protection in the $2.5trn crypto markets, by comparison with the established financial markets the regulator already supervises.

“Investors aren’t protected the way they are, whether they go into the stock or bonds markets that we’ve overseen so long,” Gensler said at a Yahoo Finance event on Monday.

“Without that, I think it really is, as I’ve said to others, a bit of the Wild West.”

Goldman said it was lowering its 12-month share price target for Robinhood from $56 to $42, compared to a pre-market price of $36.27 on October 27.

A $42 share price in a year’s time would value the brokerage at 14 times its annual revenues in 2023.

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