Robinhood’s Trading Limits Send Users Into Small Brokers’ Arms

(Bloomberg) -- Robinhood Markets’ stock-trading clampdown sent outraged retail investors scurrying to find other trading platforms. Small-scale brokerage firms were waiting with open arms.

In the three days following Jan. 28, when Robinhood limited trading of heavily shorted stocks, Acorns Advisers LLC gained 100,000 new customers, according to a company spokesperson, a pace that signals sharp increase over the 258,000 verified accounts it added in all of January 2020. New brokerage accounts at M1 Finance LLC at one point topped 20,000 a day -- nearly triple its average sign-up rate, according to a spokesperson. And a company representative said that the number of Public Holdings Inc.’s trading app clients grew 20-fold.

Questions over what motivated Robinhood to halt certain trades on firms like GameStop Corp. are scheduled to be addressed in a congressional hearing set for Thursday. But the fallout has thus far done little to cut into the platform’s staying power. According to SimilarWeb data, Robinhood remains among the top 100 apps downloaded in the U.S.

While new users may be jumping on Robinhood to join the retail investing movement, some veteran customers who were frustrated by the app’s restrictions went looking for a new platform. Many turned to offerings by smaller firms -- those not among the 25 largest broker dealers in the U.S. either by customers or assets under management.

Chris Beaty, a staffing solutions managing director in Los Angeles, said he decided to cut ties with Robinhood in part because the platform’s statement on its trading restrictions was “really, really corporate” and not in the working-for-everyone spirit that the app was rooted in. “It was a morality issue,” Beaty said, noting that he’d been using the service since last February to trade stocks like Fulgent Genetics Inc., Coty Inc. and the digital cryptocurrency Dogecoin.

The 51-year-old Navy veteran, who’d attempted to buy stock in AMC Entertainment Holdings Inc. in late January as Robinhood restricted trading, is now transferring his portfolio to Public’s social investing app. He liked the fact that it’s vowed to move away from the payment-for-order-flow system used by many zero-commission brokers. “Next to Robinhood, they seemed to have the next best app and platform,” said Beaty, who believes Public is targeting Robinhood’s “small-time retail and younger demographic.”

But not all apps are created equal. Some don’t offer all the features on Robinhood, like fractional investing or options trading.

In fact, many of the small-form trading apps take a very different approach. Public leans into financial literacy, with a social media forum that encourages users to learn from other investors. And the M1 app, which doesn’t allow day trading, focuses on long-term financial goals and wealth creation through automated investing in addition to other features like an integrated debit card.

In January, the platform saw about $150 million in assets transferred from other brokerages, according to Brian Barnes, M1 Finance’s chief executive officer, due in part, he said, to “people fleeing Robinhood.” “But we’re still small relative to the other places,” he added.

M1, which like Public and Acorns is closely held, now has more than 500,000 accounts, according to a spokesperson. Public announced this week that it has surpassed 1 million members. They’re both still dwarfed by Robinhood’s 20 million customers and Fidelity Investments’ 35 million individual investors as of December.

‘Get Rich Slow’

The growing interest in retail trading is likely to mean more users of all types of trading apps. But the smaller firms argue that investors are better off trading without Robinhood-style firework animations.

“I’m excited when the conversation around investing grows the way it did, I just want it to be focused on the right aspects of it,” said Acorn’s Chief Executive Officer Noah Kerner. “I understand the allure of ‘get rich quick’ because we’ve all experienced it, but I like ‘get rich slow’ as a better and more realistic philosophy.”

Thirty-year-old Gabriel Maldonado, an electric cooperative warehouse worker in Ulysses, Kansas, also reached a breaking point with Robinhood after the trading restrictions were announced.

“I wanted to transfer it to another broker,” Maldonado said, knowing that “most of them offer to pay the transfer fee.” But he’s yet to find a new investment platform to replace Robinhood, which he said “has a great app when they’re not purposely crashing it” or stocks aren’t being restricted.

Still, he’s determined to leave because, he said, it’s “user friendly but they’re not friendly with the users.”

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