Robinhood took the trading world by storm when Redditors used the brokerage to make outlandish trades on imperiled stocks like GameStop and Bed, Bath, and Beyond. Now, the company is expanding a crucial product from its lineup to U.K. customers.
Robinhood has launched margin trading for U.K. customers six months after its app first launched in the country.
Margin trading, another word for leveraged trading, allows retail traders to increase the size of their position through a loan from a broker, increasing the potential rewards of a successful trade.
Robinhood was a niche brokerage for much of its first seven years in operation after forming in 2013. It won over customers with what it said was true commission-free trading, arguing competitors offered a commission-free model while charging hidden fees.
However, it became a household name in 2021 when Redditors gathered on the subreddit “WallStreetBets” to drive the “meme stock” craze.
The most famous example was GameStop. Institutional investors heavily bet against the brick-and-mortar gaming store, forecasting long-term decline as digital gaming proliferated.
Nostalgic Redditors, however, saw the stock differently and overwhelmed investors by buying up options in GameStop. The shift caused a “short squeeze” as institutional investors closed their short positions, driving the price up higher.
Robinhood was the brokerage of choice for many of these Redditors, who used margin trading to increase their bets on the business. It also alerted a new generation of young traders to the potential for a quick profit.
Robinhood now has 24 million customers in the U.S. The group reported record revenues of $682 million and net income of $188 million in the second quarter of 2024.
U.K. retail traders
Robinhood expanded to the U.K. in March with its commission-free stock trading offering. The company had briefly promised margin trading but took this down from its website afters it launched, thanks to regulatory hurdles.
Jordan Sinclar, Robinhood’s U.K. president, didn’t elaborate on the regulatory challenges that caused the delay in the rollout of leveraged trading.
“In the U.S., we've had this product for a long time, and I guess that probably demonstrates that it just has taken a little bit of time with regulators to get them comfortable with your product, the education, the rates, how it's delivered to customers,” Sinclair told Fortune.
The company has also brought 24/5 trading to its U.K. customers, allowing them to trade around the clock alongside retail traders in the U.S.
“Earnings volatility is probably something we see more and more. And traditionally, U.K. customers can't access the markets,” Sinclair told Fortune.
For now, U.K. traders will be able to trade U.S. stocks with leverage. U.K. stocks are not yet available to trade on the platform, though Sinclair didn’t explain the reasons why. Sinclair promised new products for U.K. customers were in the pipeline.
“Would we like to do it tomorrow? Yes, absolutely,” he said.
Competitors like IG and Plus500 also offer margin trading in the U.K. Robinhood is keen to expand its appeal beyond retail trading and offer itself as a long-term investment platform for U.K. customers.
Sinclair said the U.K. has traditionally been more “conservative” than the U.S. when it comes to investing, something he hopes to help change.
“We don't have a culture quite comparable in terms of talking about stocks from the age of 16, having a 401K that you're always kind of thinking about, even just engagement with news and the market and what the stocks are doing,” he said.
Trader’s remorse
Robinhood’s gradual expansion follows a turbulent number of years for the platform, where it has grown users and revenues by millions while courting its fair share of controversy.
In June 2021, Robinhood was ordered to pay $57 million to the U.S. Financial Industry Regulatory Authority (FINRA) and another $12.6 million plus interest in restitution to customers after providing misleading information to customers on margin trading. It was the largest punishment ever doled out by the regulator.
The platform suffered outages on its app during the pandemic and was forced to settle a lawsuit with customers who said they missed out on trading potentially lucrative volatility.
Robinhood has marketed itself as a platform that democratizes finance and opens trading access beyond the traditionally murky institutional finance sector, which is backed by market-moving levels of liquidity.
Sinclair says that historically, just under half of users carry out their first ever trade with Robinhood. However, that democratization has opened the door to young, inexperienced retails traders who might otherwise have avoided getting involved in the unforgiving day trading market.
Brokers often warn traders they should be prepared to lose all the money they have invested when buying a stock. Short-selling using leverage, however, means an investor could lose much more than 100% of their position if a stock increases, leaving them in significant levels of debt.
Successful retail traders, while a compelling example for novices, are rare. Disclosures from several brokerages have shown more than 70% of retail traders lose money.
The New York Times spoke to Robinhood traders in 2020, who said they were lured in by the gamified aspects of the app like emoji-laden, but many were left with excessive debt as their trades went sour.
Sinclair explained the company was offering two-to-one leverage in the U.K., but “only for the right customers.” Traders need a minimum of $2,000 to open an account, and can only loan 50% of their holdings to trade on leverage.
“What we really want to do is make sure customers always have the right information, and for us, is to make sure that customers aren’t making losses.”
He added that customers who first joined the platform thanks to the meme stock craze had largely stayed and “grown up” with the broker and now held retirement saving accounts with Robinhood.
Robinhood also plans to expand its presence as an educational platform to empower traders in the U.K.
The company has a separate news service that provides stock analysis. It is currently hiring for a data reporter based in London, according to a LinkedIn job advertisement.