The meme-stock trading era has mainly ended, and the online trading sites that brought the soar are struggling to seek another source of profit.
Robinhood had huge advantages from meme investors mounting into AMC, GameStop, and more utterly shorted stocks last year. But in contrast, Robinhood currently expects the vital move to its survival to be allowing investors to lend their securities to short-sellers.
In this year’s first quarter, Robinhood’s monthly active users decreased to 15.9 million from the 17.7 million last year and 17.3 million in the last quarter. In addition, the firm’s average profit per user stands at $53, lower than last year’s $137 and the $64 in the last quarter.
Transactional revenue – the money accumulated from the purchasing stocks by investors – accounts for around three-fourths of the firm’s profit this quarter. However, it declined 48% from the previous year.
As a retaliation, Robinhood has presented a set of new products to expand its income and revive user rise.
In late March, the broker-dealer said it was extending its trading hours. Furthermore, in early April, it launched crypto wallets for its users. This month, the firm revealed it was offering a new stock lending program in which users can lend shares of firms they own to other market members while gathering a fee percentage.
The securities lending industry is surging, with global securities lenders accumulating $828 million in April 2022 profit – higher by 20% from April 2021, as per DataLend, a research company. Robinhood looks to snag a lump of that away from bigger institutions such as BlackRock and State Street.
“We’re excited to break down yet another barrier and democratize product that has been historically preserved for the wealthy with high barriers entry,” said Robinhood’s chief brokerage officer, Steve Quirk, in a blog post regarding the new program.
To avail, Robinhood customers need to have an account value of $5,000 and a reported income or trading experience of $25,000.
Quirk defined the program as a means for customers to “put their investments to work while keeping it simple” and “add a potential source of passive recurring income to their portfolio.
However, many point out that there’s conventionally an increased barrier for entry into stock lending for a reason.
Stock lending is a significant aspect of short-selling, in which investors borrow securities and then put them on sale instantly with the expectation of a price decrease. The investors then look to purchase the stock back at a designated date in the future and hand it back to the original stock owner with a bit of a fee.
However, stocks don’t always perform in the way they’re hoped to, and if the valuation increases, the borrower is responsible for handing back the security in any case. If a stock with countless short interest surges in price, short-sellers withdrawing the investment usually launch it even higher.
Those moments have almost overturned billion-dollar firms and high-profile investors.
Stock lending is quite a dodgy for short-sellers, as well as lenders. There are no assurance Robinhood users who lend stocks will be compensated if a huge short-squeeze becomes too massive for the firm to manage.
“There is a risk that Robinhood Securities could default on its obligations to you under the Stock Lending Program and fail to return the securities it has borrowed,” the company cautioned. “If Robinhood Securities defaults and is unable to return loaned securities, you will not be able to trade such securities as usual.”