Robinhood shook up the trading world when Redditors used the platform to make unconventional trades on struggling stocks like GameStop and Bed, Bath, and Beyond. Now, the company is introducing a key product to its lineup for U.K. customers.
Robinhood has now launched margin trading for U.K. customers, six months after the initial launch of its app in the country.
Margin trading, also known as leveraged trading, allows retail traders to increase the size of their position through a loan from a broker, potentially amplifying the rewards of a successful trade.
Initially, Robinhood was a niche brokerage for its first seven years in operation since its formation in 2013. It attracted customers by offering what it claimed was genuine commission-free trading, arguing that competitors provided commission-free models while charging hidden fees.
However, in 2021, Robinhood became a household name when Redditors congregated on the subreddit “WallStreetBets” to fuel the “meme stock” phenomenon.
One of the most notable examples was GameStop. Institutional investors heavily bet against the brick-and-mortar gaming store, predicting its long-term decline as digital gaming gained popularity.
Contrastingly, nostalgic Redditors viewed the stock differently and overwhelmed investors by purchasing options in GameStop. This sudden surge caused a “short squeeze” as institutional investors closed their short positions, driving the stock price even higher.
Many of these Redditors chose Robinhood as their preferred brokerage, utilizing margin trading to increase their stakes in the business. This trend also introduced a new generation of young traders to the potential for quick profits.
Currently, Robinhood has 24 million customers in the U.S. The company 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, initially offering commission-free stock trading. Although the company briefly advertised margin trading, it was removed from its website post-launch due to regulatory obstacles.
Jordan Sinclar, Robinhood’s U.K. president, did not delve into the specifics of the regulatory challenges that delayed the introduction of leveraged trading.
“In the U.S., we’ve had this product for a long time, and I suppose that demonstrates that it took a bit of time to get regulators comfortable with our product, the education, the rates, and how it’s delivered to customers,” Sinclair told Fortune.
In addition to margin trading, Robinhood has also introduced 24/5 trading to its U.K. customers, enabling them to trade around the clock alongside U.S. retail traders.
“Earnings volatility is something we see more frequently. Traditionally, U.K. customers have been unable to access the markets,” Sinclair stated.
For now, U.K. traders can trade U.S. stocks with leverage. U.K. stocks are not yet available for trading on the platform, although Sinclair did not provide reasons for this. He assured that new products for U.K. customers were in development.
“Would we like to do it tomorrow? Yes, absolutely,” he said.
Competitors such as IG and Plus500 also offer margin trading in the U.K. Robinhood aims to broaden its appeal beyond retail trading and position itself as a long-term investment platform for U.K. customers.
Sinclair mentioned that the U.K. has traditionally been more “conservative” than the U.S. in terms of investing, a mindset he hopes to help change.
“We don’t have a culture quite comparable in terms of discussing stocks from the age of 16, having a 401K that you’re always thinking about, or even just engaging with news and the market and monitoring stock performance,” he said.
Trader’s Remorse
Robinhood’s gradual expansion follows several turbulent years for the platform, during which it attracted millions of users and increased its revenues substantially, while also facing controversy.
In June 2021, Robinhood was directed to pay $57 million to the U.S. Financial Industry Regulatory Authority (FINRA) and an additional $12.6 million plus interest in restitution to customers for providing misleading information on margin trading. This penalty was the largest ever imposed by the regulator.
The platform experienced outages on its app during the pandemic and settled a lawsuit with customers who claimed they missed out on trading during potentially lucrative market volatility.
Robinhood has positioned itself as a platform that democratizes finance and provides trading access beyond the traditional institutional finance sector, backed by significant liquidity that can sway markets.
Sinclair mentioned that historically, just under half of users make their first trade ever with Robinhood. However, this democratization has led to the participation of young, inexperienced retail traders who might have otherwise stayed away from the challenging day trading market.
Brokers commonly caution traders that they should be prepared to lose all the money they invest in stocks. Leveraging short-selling, however, could result in an investor losing more than 100% of their position if a stock rises, leaving them in substantial debt.
Successful retail traders, although inspiring for beginners, are rare. Disclosures from various brokerages have shown that over 70% of retail traders incur losses.
The New York Times interviewed Robinhood traders in 2020, who stated that they were attracted by the gamified features of the app, but many ended up with excessive debt as their trades turned sour.
Sinclair explained that in the U.K., the company offers two-to-one leverage, but “only for the right customers.” Traders must have a minimum of $2,000 to open an account and can only borrow 50% of their holdings for leveraged trading.
“Our main objective is to ensure that customers always have the right information and to prevent them from incurring losses,” he stated.
He also mentioned that customers who initially joined the platform during the meme stock craze had largely stayed on and “matured” with the broker, now holding retirement savings accounts with Robinhood.
Robinhood intends to enhance its role as an educational platform to empower traders in the U.K.
The company operates a separate news service that offers stock analysis. It is currently seeking a data reporter based in London, according to a LinkedIn job posting.