Robinhood: The Line Between Institutional and Retail Blurs

In case you missed it over the last week or so, Robinhood went public – an exciting IPO that was down, then way up, and now is still up. If you’re not familiar with the name, Robinhood is a retail focused brokerage that has been at the forefront of bringing free trading to the masses. They have (for better or worse) lowered the costs of trading in many asset classes (options, equities, etc.) to zero. Yes, as I have written about, they sell order flow, and yes, it is very profitable, but revenue has to be made somewhere – others make it on requiring cash balances, or a minimum number of trades, or some other policy. Regardless of what got them here, they are likely the largest and most influential retail brokerage today.

Then, they bought Say.

If you’ve never heard of Say, they focus on connecting retail investors with corporates by essentially aggregating their retail constituents combined influence. The idea of Say is to to be able to ‘represent’ retail investors at scale, such as by allowing them to aggregate (and then ask) the most requested question on an earnings call. Say wants its users to be able to ask questions alongside leading sell side analysts.

Robinhood is well on its way to further blurring the line between institutional and retail investors with their acquisition of Say technologies. I know Say, and know the team there through a shared investor (Point 72), and they have always had an interesting mission – and with the Robinhood acquisition, it will continue to change the dynamics for almost everyone involved: retail investors, IR departments, the buy side, and the sell side.

For retail investors, they have the chance to actually be ‘represented’ on earnings calls: this can be through having the most ‘upvoted’ question answered by management, or another such means.

It will also help retail investors continue to connect and share ideas, thoughts, and views. You can imagine a question board where a retail investor could see, engage with, and upvote questions that resonated with them (the top of which would eventually get answered/addressed by management).

For IR/corporations, it means an opportunity to drive a centralized/aggregated communication channel with their retail investors.

While retail investors are extremely fragmented, they represent a real block of ownership if they can be aggregated effectively. You can imagine how delicately management would approach a question if Robinhood could point out that 20,000 of its users requested such a question, all of which are verified shareholders.

For the sell side, an aggregated retail client base may become an interesting market. Retail investors individually aren’t really worth marketing services and research to, given the compliance and legal overhead, but if a firm like Robinhood can effectively aggregate those clients, then there is a big opportunity.

While many institutional brokerages already have ‘redistribution’ partnerships with some major retail brokerages (such as TD Ameritrade, etc.) Robinhood may take that to a whole new level. When many of the products have ‘zero marginal cost’ (such as Research), finding a new market segment to sell to can be very lucrative.

For the buy side, more active investors may mean competition for dollars. As retail investors feel they can access institutional level information, and even be ‘represented’ on calls, there is less differentiation between institutional and retail access.

All in all, this acquisition continues to blur the line between institutional and retail investors. I would keep an eye on Robinhood to see how this continues…and to see how their peers respond. They may end up becoming one of the biggest ‘clients’ in the world

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