{"id":15822,"date":"2016-11-17T15:07:53","date_gmt":"2016-11-17T20:07:53","guid":{"rendered":"https:\/\/digital.hbs.edu\/platform-rctom\/submission\/online-brokers-and-robinhood\/"},"modified":"2016-11-17T15:21:29","modified_gmt":"2016-11-17T20:21:29","slug":"online-brokers-and-robinhood","status":"publish","type":"hck-submission","link":"https:\/\/d3.harvard.edu\/platform-rctom\/submission\/online-brokers-and-robinhood\/","title":{"rendered":"Online Brokers and Robinhood"},"content":{"rendered":"<p><strong>Background<\/strong><\/p>\n<p>A stock brokerage firm facilitates the buying and selling of tradable financial assets, including stocks, bonds, mutual funds, exchange-traded funds (\u201cETF\u201d), and other investment products.\u00a0 The present blog entry introduces the various forms of brokerages and explores the opportunities and threats posed by online brokerage firms\u2014especially Robinhood\u2014to the brokerage world.<\/p>\n<p><strong>Traditional Full-Service Stock Brokerage<\/strong><\/p>\n<p>A traditional full-service brokerage firm offers services and products (<em>e.g.<\/em>, financial and retirement planning, investment advice, tax advice, and portfolio updates) and, in general, generates revenue by charging fees proportional to assets under management.\u00a0 Because investors using traditional full-service brokers receive personalized services and recommendations in accordance with their risk appetite, the fees charged tend to be higher than those of other forms of brokerage firms.\u00a0 As a rule of thumb, traditional full-service brokers charge between 1 to 5% on the assets under management, with declining fees as the assets under management increases.\u00a0 Many of these brokers also require a minimum maintenance fee charged on a per annum basis.<\/p>\n<ul>\n<li><strong>Pros:<\/strong>\n<ul>\n<li>Personalized attention from experienced financial advisors<\/li>\n<li>No need to spend time researching and adjusting portfolio holdings<\/li>\n<\/ul>\n<\/li>\n<li><strong>Cons:<\/strong>\n<ul>\n<li>High fees<\/li>\n<li>Lack of control over portfolio holdings<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<p><strong>Online Stock Brokerage<\/strong><\/p>\n<p>The Internet revolutionized the way people traded financial instruments and dramatically increased trading volumes and liquidity, all the while slashing the amount of fees that could be imposed by \u201cthe middleman.\u201d\u00a0 Many investors today care not so much about the analysis and recommendations provided by traditional brokerage firms as they do about the ease of executing a trade.\u00a0 Accordingly, online brokerage firms\u2014including Charles Schwab, E*Trade, Fidelity, and Interactive Brokers\u2014have moved away from imposing annual fees based on assets under management and started imposing fees on a per transaction basis.<\/p>\n<p>Because the business model here is tied to the number of transactions made by investors, online brokerage firms tend to spend much on customer acquisition and provide perks for opening an account.\u00a0 Promotions range from free trades for a period of time to getting some amount of trading credit.\u00a0 For instance, E*Trade allows new registrants to trade for free for up to 60 days and gives $600 to those who deposit $250,000 or more.<\/p>\n<p>As online stock brokerage firms merely provide a platform for investors to trade, product differentiation\u2014and therefore barrier to entry\u2014is arguably quite low.\u00a0 Various websites, in addition to providing signup perks, therefore attempt to differentiate themselves by providing heavy discounts in a particular product.\u00a0 eOption, for example, charges only $3 per option trade and 15\u00a2 per option contract.<\/p>\n<ul>\n<li><strong>Pros:<\/strong>\n<ul>\n<li>Lower fees compared to traditional full-service stock brokerages<\/li>\n<li>Able to execute trades almost instantaneously, thereby having complete control over portfolio holdings<\/li>\n<\/ul>\n<\/li>\n<li><strong>Cons:<\/strong>\n<ul>\n<li>Lack of a professional feedback loop and requires time for research<\/li>\n<li>Software delays can lead to delays in price quotes and information on order status<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<p><strong>Robinhood<\/strong><\/p>\n<p>2013 came Robinhood, a stock brokerage application that, according to its founders, \u201cdemocratizes access to the financial markets.\u201d\u00a0 Providing only a simplistic, yet elegant, mobile platform to trade, Robinhood prides itself on enabling its customers to buy and sell stocks and ETFs with zero commission.\u00a0 With the launch of Robinhood Gold (a premium tier that charges monthly fees), Robinhood now positions itself as a freemium business.\u00a0 Robinhood Gold enables customers to trade on margin without paying interest and provides access to pre-market and post-market trading sessions, which have only been accessible to institutional investors.\u00a0 In addition to collecting membership fees, Robinhood also generates revenue by accruing interests from customers\u2019 uninvested cash balance.<\/p>\n<ul>\n<li><strong>Pros:<\/strong>\n<ul>\n<li>Free to use<\/li>\n<li>Access to pre- and post-market trading sessions<\/li>\n<li>Simple and intuitive user interface<\/li>\n<li>Provides investors with complete control over their portfolio holdings<\/li>\n<\/ul>\n<\/li>\n<li><strong>Cons:<\/strong>\n<ul>\n<li>Encourages day trading<\/li>\n<li>Lack of a professional feedback loop and requires time for research<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<p><strong>Next Steps<\/strong><\/p>\n<p>The act\u00a0of placing a trade is a commodity; thus, unlike Li &amp; Fung for example, the middleman in this case does not provide much value-add. \u00a0All of these translate to high price elasticity, with customers rushing to platforms that charge minimal to no transaction fees. \u00a0Going forward, it is likely that Robinhood will roll out other features (<em>e.g.<\/em>, currency trading, options trading, <em>etc<\/em>.) that further slash fees for the middleman.\u00a0 To survive, the entire stock brokerage industry needs to rethink its business model. \u00a0Will we see an end to online brokerage firms? \u00a0Should the industry as a whole move into a subscription based model (as is Robinhood Gold)?\u00a0 What other sources of revenue are there to be reaped if not transaction fees?<\/p>\n<p>[762 Words]<\/p>\n","protected":false},"excerpt":{"rendered":"<p>A stock brokerage firm facilitates the buying and selling of tradable financial assets.  The present blog entry introduces the various forms of brokerages and explores the opportunities and threats posed by online brokerage firms\u2014especially Robinhood\u2014to the brokerage world.<\/p>\n","protected":false},"author":2428,"featured_media":15823,"comment_status":"open","ping_status":"closed","template":"","categories":[2232,2234,2233,2231],"class_list":["post-15822","hck-submission","type-hck-submission","status-publish","has-post-thumbnail","hentry","category-broker","category-no-fee","category-online-brokerage","category-robinhood"],"connected_submission_link":"https:\/\/d3.harvard.edu\/platform-rctom\/assignment\/digitization-challenge-2016\/","yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v27.3 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Online Brokers and Robinhood - Technology and Operations Management<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/d3.harvard.edu\/platform-rctom\/submission\/online-brokers-and-robinhood\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Online Brokers and Robinhood - Technology and Operations Management\" \/>\n<meta property=\"og:description\" content=\"A stock brokerage firm facilitates the buying and selling of tradable financial assets. 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