Online brokerage company Robinhood said in its first earnings report as a public company that it expects retail traders to become less active in the third quarter after wild trading in cryptocurrencies helped more than double its revenue.
“For the three months ended September 30, 2021, we expect seasonal headwinds and lower trading activity across the industry to result in lower revenues and considerably fewer new funded accounts than in the prior quarter,” the company said about the third quarter. Shares of Robinhood dropped more than 8% in after-hours trading.
The lifting of some COVID-19 restrictions by the U.S. in recent weeks has brought about a decline in retail trading, which has been one of the notable events during the pandemic. According to one analyst, the commencement of sports and other activities likely took some of the retail interest.
Robinhood’s revenue for the second quarter of 2021 beat consensus estimates, rising 131.5 percent from the same period last year. Robinhood’s shares began trading on Nasdaq for $38 per share on July 29, 2021, after the company completed its initial public offering (IPO). The shares are up 31.1 percent from that initial opening price. By comparison, the S&P 500 was flat over the same period. Some analysts expressed concern about whether retail investors will continue to trade at a meteoric pace as the economy continues to reopen, or if the Federal Reserve will begin to restrict the easy money policies that helped the S&P 500 double from its March 2020 lows.
Robinhood’s net cumulative funded accounts rose 129.6 percent to 22.5 million in the second quarter fiscal year 2021. The company said that more than 60 percent of net cumulative funded accounts were trading in cryptocurrencies during the second quarter.
Robinhood’s transaction-based revenues stood at $451.2 million, accounting for as much as 79.8 percent of total revenue in the second quarter. Crypto transactions skyrocketed to $233 million during Q2 compared to $5 million a year ago. Transaction-based revenues are those generated by selling users’ stock, options, and cryptocurrency trades to market makers who execute the orders. This practice is known as payment for order flow (PFOF).
The U.S. Securities and Exchange Commission is investigating payment-for-order-flow (PFOF) over concerns that it might incentivize brokers to send customer orders to the places that maximize their profit, rather than to the places that would get their customers the best execution, and other potential conflicts of interest. Robinhood said it does not expect payment-for-order-flow (PFOF) to be banned, but if it is, it can find other ways to generate revenue, possibly by executing client orders internally.
Robinhood pioneers commission-free trades of stocks and exchange-traded funds via a mobile app introduced in March 2015. Its simple interface made it popular with investors trading from home during the COVID-19 pandemic. Its monthly active users increased by 109 percent to 21.3 million in the second quarter of 2021, compared to 10.2 million in the second quarter of 2020, while assets under custody increased by 205 percent year-over-year to $102 billion.