{"id":6677,"date":"2021-10-27T11:35:07","date_gmt":"2021-10-27T11:35:07","guid":{"rendered":"https:\/\/newmoneyreview.com\/?p=6677"},"modified":"2021-11-11T10:21:18","modified_gmt":"2021-11-11T10:21:18","slug":"robinhoods-crypto-party-ends","status":"publish","type":"post","link":"https:\/\/newmoneyreview.com\/index.php\/2021\/10\/27\/robinhoods-crypto-party-ends\/","title":{"rendered":"Robinhood\u2019s crypto party ends"},"content":{"rendered":"

Robinhood\u2019s infatuation with crypto was short and sweet, if last night\u2019s corporate earnings report<\/a> is anything to go by.<\/p>\n

Robinhood shares fall below July IPO price <\/strong><\/p>\n

The trading app\u2019s revenue from cryptocurrency plummeted by nearly 80 percent during the third quarter, from $233m to only $51m, Robinhood said last night.<\/p>\n

Its stock price dropped over 10 percent in after-hours trading as investors digested the disappointing news.<\/p>\n

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.<\/p>\n

End of Elon Musk’s dogecoin frenzy<\/strong><\/p>\n

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.<\/p>\n

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.<\/p>\n

By comparison with its disappointing Q3 crypto performance, Robinhood\u2019s revenues from equity and option trading dipped only slightly over during the quarter, from $217m to $214m.<\/p>\n

Robinhood\u2019s 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.<\/p>\n

Paying for client order information<\/strong><\/p>\n

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 \u2018payment for order flow\u2019<\/a>.<\/p>\n

Under such an arrangement, professional trading firms pay Robinhood for access to information about its clients\u2019 orders.<\/p>\n

In particular, trading firms want to find out more about retail clients\u2019 stop-loss orders and other so-called non-marketable limit orders, which they can use to programme their own trading algorithms.<\/p>\n

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

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

“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<\/em>.<\/p>\n

However, the practice of paying retail brokers for information about their clients’ orders is proving increasingly controversial.<\/p>\n

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.<\/p>\n

In August the SEC said it was considering whether to ban payment for order flow<\/a> outright.<\/p>\n

A darkened outlook<\/strong><\/p>\n

In response to Robinhood\u2019s 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.<\/p>\n

\u201cOur 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,\u201d Goldman said.<\/p>\n

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.<\/p>\n

\u201cInvestors aren\u2019t protected the way they are, whether they go into the stock or bonds markets that we\u2019ve overseen so long,\u201d Gensler said at a Yahoo Finance event on Monday<\/a>.<\/p>\n

\u201cWithout that, I think it really is, as I\u2019ve said to others, a bit of the Wild West.\u201d<\/p>\n

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.<\/p>\n

A $42 share price in a year\u2019s time would value the brokerage at 14 times its annual revenues in 2023.<\/p>\n

Sign up here<\/a> for the New Money Review newsletter<\/em><\/p>\n

Click here<\/a> for a full list of episodes of the New Money Review podcast: the future of money in 30 minutes<\/em><\/p>\n

Related content from\u00a0New Money Review<\/em><\/span><\/p>\n

Jack Bogle was right<\/a><\/p>\n

Share-trading small fry rush to join the menu<\/a><\/p>\n

 <\/p>\n","protected":false},"excerpt":{"rendered":"

Robinhood\u2019s infatuation with crypto was short and sweet, if last night\u2019s corporate earnings report is anything to go by. 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