Technology has continued to be a disruptive force in the financial services industry. In the late 1990's online brokerage platforms built by companies such as E-Trade (ETFC), TD Ameritrade, and Scottrade reduced the costs of trading for retail investors to a fraction of previous levels. They also caused the extinction of the stockbroker, and took down many full service stock brokerages with it. However, with the innovations of tech upstart Robinhood, Inc., online brokerages such as E-Trade may become dinosaurs themselves.
Robinhood, Inc. is displacing online brokerages by offering 100% free trades for cash stock and ETF trades. In fact the company has found a way to turn a profit, and will be charging commissions for margin-based trades, and derivatives trades (futures, FX, and options). Not having to pay brokerage fees will open trading up to millions of traders and likely increase volumes, but will cause failures of the business models existent within current online brokerage houses. Robinhood is a serious threat due to receiving venture backing from both Google and Andresson Horowitz along with already having 154,000 subscribers before launch. When the expected app launch occurs in Q2 2014, expect the subscriber base to be much higher. Skeptics argue that the lack of a marketing budget would prevent Robinhood from challenging the big brokers. The case of apps such as Skype, Dropbox, Evernote, Whatsapp, and Facebook disproves this notion. Translating a normally paid service to a free app is strong enough of selling point that awareness of the company will spread from user referrals and social media.
Since Robinhood is private and likely faces a bubble-like valuation in venture capital circles, the best bet to capture on this trend is to short online brokerages. Scottrade is privately held, Interactive Brokers (IBKR) is the leader in cost and in
