Daily Average Fugazi’s: Robinhood Postures for IPO

“Name of the game? Move the money from your client’s pocket into your pocket. Number one rule of Wall Street: Nobody knows if the stock is going up, down, sideways or in … circles. It’s all a fugazi… – Mr. Hanna, Wolf of Wall Street

On Monday, August 10 at exactly 11am EDT (you know, after the opening bell was safely in the rearview mirror), Robinhood Markets, Inc. – the anti-incumbency insurgent trading app platform and self-proclaimed democratizer of all things financial – set out to dominate the week’s financial news cycle by enticing media powerhouse, Bloomberg, to drop a news bomb into an ecosystem already negligently over-stimulated on the topic: “Robinhood Blows Past Rivals in Record Retail Trading Year.

One piece of data was exclusively revealed to Bloomberg at the center of this story: 4.31 million daily average revenue trades – commonly known as DARTs (and generally defined as customer orders executed divided by trading days) – were recorded in June with the additional explanation that “the firm is revealing the data for the first time, in the wake of a surge in online dealing among people stuck at home during the coronavirus pandemic.” This, of course, coming on the highly-orchestrated heels of Bloomberg’s Friday, August 7, 11:09pm EDT story (you know, after the prior week’s financial news is safely in the rearview mirror and the weekend is primed like a plump cherry for scuttlebutt), “RobinTrack, Chronicler of Day Trader Stock Demand, to Shut.” 

And, of course, this little walk down recent memory lane would not be complete if we failed to mention the announcement on Tuesday, August 4 – this time via the official Robinhood blog – that former Amazon-PayPal-Facebook communications alum, Christina Smedley, “joins Robinhood as Chief Marketing Officer.”

BTW, there’s also an August 5 blog post about visual identity, including a new illustration style (described as “delightful and future-focused”) and two new type faces (Capsule Sans, a “warm, highly legible sans serif embodying simplicity and precision;” and Nib, “a unique, welcoming, and whimsical serif full of personality.”) And then, the August 11 blog post showcasing “expansion with hundreds of new customer service employees.” (No mention of the DARTs here…)

Don’t be surprised if your next post-split TSLA order comes with hints of chia and delicately-smoked Maduro…

Folks, these clues are what’s known in the vernacular as corporate body language – a brilliant descriptor, that I must credit to our friends at Wall Street Horizon; a term used to describe the catalytic data that illuminates what may be going on behind the scenes. And, what we believe is going on behind the scenes here is being governed by a timeline that is being influenced by powerful venture capitalists (who just completed Robinhood’s Series F) and the unusually unpredictable nature of the current environment.

If you haven’t noticed by now, Robinhood is not the brainchild of original experience honed in a New York or Chicago prop firm (even though they now benefit from that expertise among those who eagerly purchase their order flow). No, it’s the brainchild of an increasingly Silly Valley. The founders – Lev and Igor – are supposed to have quant trading street cred from a prior venture, but those details don’t show up in the manicured narrative. Instead, what we have here are the region’s most common exports: Attention manipulation devices and venture capitalists, just like the original Robinhood tale envisioned it…

Once upon a time, Robinhood co-founders, Vlad Tenev and Baiju Bhatt, may have had their hearts in the right place, but the VCs are clearly in charge now. To float this June DART number, without a press release, without any surrounding data to further contextualize the accomplishment, and given the timing of other clues and developments, it smacks of aggressive manufactured positioning. The thinking, which is not rocket science, goes like this:

Wouldn’t it be awesome if we could go public in this insanely frothy market, and before the unknowns of the presidential election are realized?

With this opening as our setup, let’s put Robinhood’s June DART figure in context, starting with a ranking of retail-oriented DARTs for June 2020 across the common cast of players:

On the surface, it appears that Robinhood has eclipsed it’s rivals in the June DART category, thereby attempting to soften the ground for the case that it has surpassed the entity that Schwab recently acquired for $26 billion and the entity that Morgan Stanley recently acquired for $13 billion.

Not so fast…

It turns out that, among other metrics like clients asset levels that also don’t measure up, Robinhood’s average stock order size is much smaller than its rivals. Alphacution estimates average (stock) order size based on implied shares traded from 606 reporting, as well as actual shares traded for June from Interactive Brokers. (To simplify the analysis, we have set aside the impacts of options and futures trading in this example.)

Once we have an estimate for total monthly shares traded, average daily shares and average stock order size (using DARTs) follow easily. Here’s that progression:

Footnote: There truly is a retail trading phenomenon going on. In June, Alphacution’s estimates suggest that the five brokers showcased herein represented 37.5% of total market average daily volume (ADV). With some additional modeling, we will eventually show how this trend has grown throughout 2020.

The question that all stakeholders in this saga need to answer for themselves now: How sustainable is this phenomenon?

Until next time…

By | 2020-08-13T00:19:35-04:00 August 13th, 2020|Alphacution Feed|

About the Author:

Paul Rowady is the Director of Research for Alphacution Research Conservatory, a research and strategic advisory platform uniquely focused on modeling and benchmarking the impacts of technology on global financial markets and the businesses of trading, asset management and banking. He is a 30-year veteran of the proprietary, quantitative and derivatives trading arenas. Contact: feedback@alphacution.com; Follow: @alphacution.