The market maker takes on risk by purchasing stock without the guarantee of that stock being later sold for a higher price than that at which it was bought. Since investors need to liquidate assets for different reasons at different times, a market maker provides brokerages with the opportunity to sell bundles of stock for cash. A “market maker” is a company that offers to both buy and sell a stock at different prices, hoping that the difference between the bid price offered for the amount of stock they want to buy will be lower than the price at which they will ultimately sell. In 2018, Bloomberg reported that more than 40% of Robinhood’s revenue came from selling its customers’ orders to high frequency trading firms or “market makers”, which is a controversial practice on Wall Street (Bloomberg). Robinhood’s user base grew to 13 million in May 2020 and is estimated to be near 18 million today based on an estimate by JMP Securities (NYT and Morningstar). In 2019, it had 6 million users, up from 3.7 million the previous year (), which is more than the traditional online brokerage of E*Trade. Robinhood has $20 billion assets under management with an average account size of $3,500 (BusinessofApps). Robinhood has a subscription based service that allows members to use instant deposits to trade before the market has opened and after it has closed (FastCompany). It was founded in 2013 and the app was launched in 2015 by two former Stanford University roommates, with the hopes of “democratizing” the financial markets, which were not charging fees to the big investment banks but were charging fees to everyday investors (). According to their website, “Robinhood’s mission is to democratize finance for all” (Robinhood). Robinhood is an American app-based stock brokerage company that offers commission free stock and ETF trading (FastCompany). Thus, newer and smaller companies hold a small fraction of the industry market share but are fast growing with effective marketing strategies. While the top four industry players account for around 60% of the revenue, the 20 companies in the middle share 10% of revenue, and the bottom 300 companies share 30% of the revenue, making the industry somewhat fragmented with a medium barrier to entry (IBISWorld). The average account size for Charles Schwab, Fidelity, and TD Ameritrade are $240,000, $112,000, and $110,000, respectively. with 19.7% of the market and $2.5 trillion assets under management, and TD Ameritrade, recently acquired by Schwab, with 12.5% of the market and $1.3 trillion assets under management (IBISWorld and TopRatedFirms). The largest companies in this industry are Charles Schwab Corporation with 23.7% of the market and $3.8 trillion assets under management, Fidelity National Information Services Inc. Additionally, trading costs and fees have decreased due to advancements in industry software, increased data storage, and reductions or eliminations of commissions (IBISWorld). Another growth factor is due to people’s preference for online services that, in the past, used to only be conducted offline. The projected growth of this industry is based, in part, on the rise of exchange traded funds and index investment vehicles, which are making it easier for people to get general investment exposure. Within the industry, revenue is expected to increase 3.5% over the next five years, due to increased demand. This is a $10.4 billion dollar industry with a 34% profit margin and 325 operators. The e-Trading Software Developers industry is an industry that allows institutional and retail investors to trade securities online and access and track stock performance. Furthermore, the social media company, Reddit, which provided the platform for users to connect and rally behind GameStop and purchase shares, will also be explained and examined.Ģ. Did Tenev make the right choice? Did he have a choice? If not, then what should Robinhood do to make amends for the role it played in causing monetary damages to its customers? In order for students to debate the appropriateness of the decision and response, we will provide an overview of the e-Trading industry Robinhood is a part of and their role within it, in addition to providing a background on the video game retailer, GameStop. 28 th, 2021 Robinhood CEO, Vlad Tenev, decided to halt the trading of GameStop stock on his company’s stock trading app. In this business ethics case study, we will focus on the history making GameStop short and stock price surge that occurred during January 2021. Amy LaCombe is associate dean for undergraduate curriculum in the Carroll School’s undergraduate program. Sarah Cabral is a teaching and research fellow in the Carroll School of Management at Boston College.
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