Robinhood Markets, Inc. (HOOD) Earnings Call Transcript & Summary

All right. Good morning. So to everyone in the room and those of you joining us on the webcast, I'm really pleased to introduce our next speaker, Steve Quirk, Chief Brokerage Officer at Robinhood. Look, Robinhood has delivered really extraordinary growth. I was trying to think about the right analogy. It's almost like a hamster on a wheel in terms of the sheer product velocity that we've seen, but you've really expanded the offering from being focused almost exclusively on the brokerage side to broadening it out to more like a wealth offering, attracting some more affluent clients to the platform. So a lot of exciting initiatives that you're working on, again, hamster on the wheel, but it's something which we're really excited to hear more about.

So just given no shortage of stuff you're working on in terms of the product road map, why don't you give us an update in terms of what you're planning to launch by the end of this year and then maybe into 2026 that can support incremental growth from here?

Sure. And thanks for having me, and thanks for showing up. Yes, Vlad occasionally put some pellets in that hamster just to keep us going in the evenings and weekends. So I think we've -- you've heard from Vlad and Jason and others, we really kind of focus on 3 pillars. And the first of which is the self-directed active trader. And we set a goal about 3.5 years ago to be #1 there. And we measure that by market share across all our peers. So whether that's in equities, options, margin, all the other areas that are visible in publicly traded companies. And if you look at the 606 data, which just came out the quarterly data, and Larry Tabb, I don't know if you guys follow him on Bloomberg, he does a really nice job of breaking it down. Been already #1 in a couple of places, but we're still driving pretty hard there. And things we're delivering there across the spectrum, I kind of think of it as like almost a barbell. There's a bunch of things that we need to deliver for customers. We're starting to attract customers that are much larger than the customers that we historically have had. And you've seen that reflected in the size of our account. But you need to deliver the things, even though you're delivering all the asset classes and all the other capabilities, you need the core capabilities, which are account types. So retirement account, a joint account, a yield account, multiple brokerage accounts or people that are very, very fixated on mental accounting. This is my aggressive account. This is my nonaggressive account. A lot of that work is happening, and a lot of the things are being delivered there. You'll see trust accounts, custodial accounts. Those will come in the next year. But then on the other end, we're working very hard to deliver. We've delivered a lot of asset classes already that were the #1 request of our more active customers, index options, futures. And again, like we can talk about how explosive the growth has been in those asset classes. But if you go talk to the CME or CBOE, they will tell you that this is the fastest growth they've seen from a market participant in both of those. And -- so our customers are very engaged in asking for a lot of these capabilities when we deliver them, they come really quickly and engage. And it's just -- it's a way to get more of their share of wallet because they express the desire to deliver more of their share of wallet and have it happen within Robinhood's ecosystem, but we have to give them the capabilities to do it. So I didn't cover a lot of it, but I'm assuming we're going to ask more questions.

We are going to ask many more questions.

Okay. Okay. Because I didn't get into a lot of the wealth management. You kind of asked about the wealth management.

We'll get into wealth stuff in a moment, but I know that active trader is also near and dear to your heart, so...

Well, it is, yes. I mean, I am -- it's really easy to build when you are that person because I know what I want. And I know what -- I mean I think what -- what you have to be able to do in this -- in my experience in this industry is, of course, you listen to your customer, you do research, you interact with them. They tell you what they want. But you also have to be a little bold and have some conviction about what you know they're going to want. Even when they don't know if they're going to want it. And that's not the easy part because you basically are sticking your neck out there a little bit and saying, I think that they're going to want -- I'll give you a perfect example, 24-hour trading. I've been fixated on that for a long time. And I went to every single exchange and pitched this a long time ago, and they all told me there's no demand. I went to my Board and pitched it, no demand. And I gave them this analogy. I'm like an exchange is a restaurant. We are mass transit. If mass transit ran 24/5 to that restaurant, they would be open. So we're asking the wrong question. You got to ask the people who basically are saying, why is this whole thing designed, no offence, on East Coast hours? Like 70% of the research and education that happens, happens after the market is closed. And so if I'm a 20-some year or early 30-year-old and I say, "I just want to buy stock ABC at this price. I've done my research. This is my thesis. Why do I have to wait for some old person who looks like me to ring a bell in the morning. It doesn't make any sense to me. Amazon is not closed, right? It's an electronic exchange. I watched what happened during COVID. There weren't any humans there. It worked, right? And now every single exchange is going to do it. Everybody is going to do it. And so I think like just having the conviction to say this is where the market is going. And by the way, I think every asset class will be trading 24/7 within 5 years. It might not even take 5 years.

That's pretty bold, but I know you guys have some big ambitions in tokenization and those assets...

That helps because the technology part of the hurdle is bringing along the legacy, infrastructure of the exchange, but helping -- or exchanges and everything else, clearing firms, but if you have technology that can advance that, then everybody is on board.

We'll drill down into that in a moment. But there was one question I was quite keen to ask before digging deeper into the product road map and what you're planning to launch. And that's specifically related to Jason Warnick's retirement. And so Shiv Verma is going to be replacing him, you've worked very closely with both of them. I was hoping to get your perspective on just what Jason's management philosophy was like, how Shiv's might be similar or different. And for those of you that don't know Shiv, he's worn just loads of hats at Robinhood, but he is like deeper knowledge across the entire business than anyone. So maybe just to speak to what unique perspective he can bring to the table as well?

Well, so yes, I've worked with both of them very closely. And to your point, Shiv has been -- Shiv is somebody who's been in the weeds, deep in the weeds in every facet of finance and he understands the business in a way that very few do at Robinhood, I mean every business that we're in. So he's quite -- he's basically like an AI agent if you ask him a question. But he and Jason, they started within weeks of each other. And Jason has been spending a lot of time in the last 2 years just bringing him into more meetings, strategic meetings and everything -- everything that he is attending, you'll see Shiv. Shiv is in all these meetings. And I'm going to miss Jason because he's a friend, and he's been a really great guiding hand, but I will tell you, Shiv is pretty amazing. He's really knowledgeable. And he has the same steady hand. He's a little bit more of a hammer on the business. I would say, I usually get the bad news from Shiv as opposed to from Jason, but maybe that's because I'm too tight with Jason. So he sent Shiv over there. But if your concern is OpEx, you got the right guy.

That's great. Well, it's funny you mentioned that because, look, like I too am going to focus on the areas for improvement. And the next question, just given, look, like the momentum that you're seeing in terms of retail engagement, nothing short of extraordinary. And if I look at equities, options growth, it has been remarkably steady and consistent. There's probably one area where there's been a little bit more volatility, which is around net deposit growth. You guys do have this 20% plus net deposit growth target out there. It's quite an ambitious target. What gives you confidence that you'll be able to deliver that sustainably as the business scales? And then how do international markets factor into that outlook?

Yes, I think that it is aggressive. But I would also say -- and we push ourselves and we set our targets pretty aggressively. Our equity option margin, they've all been aggressive. But 1.5 years ago, our book margin book was 1/4 of the size of what it is today. And as exciting as that is and how much we look at that and say, wow, that's impressive. If we look at the size of our peers and the size of their book, oh man, we have so much more to go. It's amazing. And so that kind of -- all those things feed into the deposit goal. The thing that we found to be particularly effective is when we're rolling out capabilities and ones that are really noteworthy and been customer requests and you match that with a match program, which we've been doing. And now we're getting much more scientific in. It used to be -- when we rolled it out, it was blunt. 1% for everybody. Bring your account over, we'll give you 1% of the account size. Now we're personalizing it. We have the ability to personalize that based on the account behaviors, everything else that we know, and that's become very effective, extremely effective to the point where, in some instances, we'll look at it and say, the payback period was so short that we may do that at a higher level. That's something our peers struggle with because they don't have the infrastructure and the operational efficiency that we do to be able to hand back economics and margin in ways that are exciting for customers. I think where it helps is -- so if I'm a person who is similar in age to me, and I have a legacy impression of what Robinhood was, I really haven't come back and taken a look. I'm not incented to take a look. I've been at broker XYZ, trading pretty actively for quite some time. But now suddenly, there's this offer, which is enticing. So I'm coming and take a look. And I sit in on some of the calls with some of these big customers, and they're like, wait a minute, you can do this, you can do this, you can do this, you have this, you have this, you have this, I'm in. And so I think that's quite powerful, and that's what gives me confidence from a net deposit standpoint because we see our average account size, it's about 12,000 now. It's gone up from 4. But when we do these match programs, the accounts are well over $100,000 that are coming in.

That's great. Well, I imagine that at least these customized offers are going to be part of the discussion at the AI Summit in December if I had to venture you guys.

Yes. Yes. It will be.

Yes. So the other piece too is around activity rates. And look, the account growth has been low double digit. But when I look at the actual volumes, I mean, the numbers are pretty staggering. Options up 40% year-on-year. I believe they're up 100% year-on-year for both crypto volumes as well as equities. What are you seeing in terms of the offering that's resonating most with that active trader that clearly you're attracting to your platform? And as you think about some of the gaps that remain, what are some of the holes that you're still hoping to fill?

I think the gaps are the ones that I mentioned a little earlier. It's account types. It's -- we're largely there in asset classes, but some of these asset classes trade more hours than what we're now giving our customers the ability to do, you should expect some enhancements there. The other thing we're missing, like mutual funds, fixed income, some account types, those are all on the road map to be delivered over the course of the next year, 1.5 years. And so -- and then trust accounts, corporate accounts, those things. When you get into the next segment, they have different needs than our current segment. And even some of our current customers say, "hey, look, I'm getting this point in life where I'm going to -- I need to set these things up." But I'll tell you the reason why I'm so encouraged is because every time we deliver something like that, the speed in which our customers bring over their existing assets or we get new customers is pretty startling. I'll give you an example. We have a lot of customers that said, "Great, you're amazing, it self-directed. But you know what, I'm at that point in my life, just had -- got married, got a house, had a kid. I just -- my portfolio is a little larger than what I'm comfortable managing. I would bring over more assets, but I need advice solution." So we build Strategies 7 months ago. It took 7 months for us to get $1 billion in assets there. That's as quick as, I think, we've seen in the industry. But we always do it in a unique way. Strategy, our advisory product is designed to kind of attack the advisory products that exist today. And what I mean by that is, if you think about the way those are designed. If I'm getting charged 25 bps, whether I have $100,000 or $25 million. And if it appreciates, guess what, I pay that person more. They're not doing anything more, right? So we cap it. And the amount of work necessary to manage a $250,000 portfolio is not different -- not that different than one that's much larger. So we always try to approach it in a way that's going to make it something more compelling because now the customers get to keep more of their returns. So long-winded way of saying, when we roll out a capability that customers have been asking for, they come so quickly. And that's a great story from a deposit standpoint and share of wallet.

And we're in an environment too, where retail engagement has been quite strong, and you're also launching some additional tools, whether it's AI tools or social -- Robinhood Social, which presumably could drive even higher engagement from here. It might be helpful, Steve, if you could just speak to like the durability of that engagement levels. What gives you confidence that you can continue to drive some of those activity rates higher?

So I'm going to start with the last part of the question because I think this question has been asked of people in the industry, especially on the brokerage side for -- since just prior to COVID, but certainly during COVID and after COVID, and I think there was a thought that this blip in retail engagement because now if you look at percentage of retail equity flow, option flow, et cetera, et cetera, it's all gone like this. So retail is more of a force in this space. I don't see that changing. I do not see that changing. I never thought it was going to change. I think there was a thought that this was just -- this too shall pass. I do not believe that. And the reason I don't believe it is because it's not just happening in the asset class, it's happening across the board. Like we have an IPO access product. We've rolled out 40 IPOs to customers. We used to scratch and claw to get a firm -- to get any kind of allocation. Now those firms, the ones that are going to IPO come to us and say, "Hey, we used to get single digit in percentage of allocation. We're getting up to 20% now." People are starting to understand that retail is a powerful voice in the market, and I think that's going to continue to grow. To your point on AI and Social, Social is going to be really cool here at Robinhood because I've seen Social used across the board in my time, in retail brokerage and with some success, but not a lot of success. The reason why it hasn't had a lot of success is, there isn't a lot of validity to it. In other words, if I'm a person who really has a strong thesis about a trader or an investment, as much as I have conviction enough to make that, I really want to validate it with somebody who kind of looks and thinks like me or somebody who, I think, can give me a counter opinion, that would be helpful and make it a better investment. But too often, that's been all message board pump and dump [indiscernible] that's not validated. And so the way we're going to do it is you are a Robinhood customer, you have an account and you've made that investment. And if you haven't, then you're not going to be -- you're not going to be allowed to demonstrate or say, like make your fate, whatever it is and put it out there, which happens all over Social. And so I think that's going to be really powerful. The other powerful aspect of it is we're doing it across everything. So it's equities, options, crypto, prediction markets, like there is nobody else that's going to have such a wide breadth of market exposure and ability to talk about that on social and then validate it. And then if you are somebody who says, I am very -- I am very confident that this person is really competent in this asset class, and I want to follow them and see what they trade with their permission, you can just look at that trade. And if you want, you can do the same thing. It's going to be -- I think it's going to be pretty cool in 2 ways. Number one, that validation is huge. But remember, of our 26 million customers, half of them are brand new to the market. They've never had a brokerage account before. So it's an educational tool for them. Like when they first get into the market, now they can look at people who have had more experience than them, follow them and understand not only what their trade is, but what's the thesis behind it, explain what your thesis is. That's going to be extremely powerful. Then I'll finally marry the AI component to that, which we have a lot more coming in that regard. But the world of algo trading or scanning or doing all these other -- I came from the market making side, are quite interesting, but the percentage of people who can do it is like this, right? And that's because like I got to learn a scripting language. I have to do a lot of things that a lot of people don't either have the time or capability to do. But if I make that something that is easily to do from a text or chat, I mean that's game changing. That's really cool. And it's going to generate or find opportunities for people in a way that they previously would never be able to do. I think that's going to be really huge.

We're excited for the event in December...

Now, I can share that on Social too. So the combination of those things is going to be pretty cool.

Is there any willingness on your part to take it one step further and say we're going to actually allow for a copy trading on the platform despite the regulatory barriers? Or do you like Social fills that void sufficiently?

Social fills the void, you'll be able to do it, but "copy trading" is not really permissible in the U.S. The companies that do it largely do it outside of the U.S. But you can do it in a way where there's a couple of steps. So if I'm a customer, I have to take some steps. Like it's not just blanket, whatever Nancy Pelosi buys, it automatically buys from me, which, by the way, does exist. And it's been pretty successful.

So I've heard.

Yes.

This is why now she can retire.

Yes, exactly.

The other piece, too, just you mentioned margin lending. There's a lot of runway for growth despite all the success you've had there, similar runway within sec lending. It might be helpful if you could frame just how you benchmark relative to peers when you try to evaluate that opportunity for Robinhood?

I mean we look at it across a couple of different planes. Obviously, the size of the margin book, even though we've had explosive growth, we're still small compared to our larger peers in margin, which would be IBKR, Schwab. And so we just have a lot more room to grow there. And we are the most competitive in terms of rates. And now we've gotten as scientific there with what we're offering customers as we are on the match program. So in other words, we can do some personalized margin, promotions, which have been highly effective. That feeds into this in sec lending. As soon as you get more -- the bigger margin book and larger accounts, it kind of feeds itself. So the whole ecosystem sort of grows collectively. And then I would say, and I'll kind of pivot over into a little bit more of the wealth management side. And if you start to think about -- because the amount of assets that are -- that are out there in terms of the self-directed side or let's call it 1x, the amount of assets that exist on the wealth management side are 2x to 3x that. And so when you start getting -- when you start attracting those assets through advisory products or even RIAs, now your assets under custody go up and that naturally is going to pop your margin book in your sec lending.

So I was going to ask you on prediction markets, but clearly, you're chomping at the bit to talk more about wealth. So rest assured, I will still touch on prediction markets to be clear. But I know there's a lot of enthusiasm and certainly, you and Vlad have conveyed it around the $100 trillion wealth transfer opportunity...

$124, it keeps going on...

$124...

I don't know where these people are getting all this money. But yes, it goes up. I guess it's from the market.

It's a market tailwind. I'm just going to say predominantly. But do you envisage Hood as being an outsized beneficiary of that trend. And how are you positioning the firm to take advantage of that, especially in the context of your relationship with TradePMR?

Yes, I think there's a massive opportunity there. And like I'll start with the context of why we even bought TradePMR. Robinhood, incredibly successful, crack the code in terms of self-directed, attracting new market participants at a pace that nobody has ever seen before. And now taking those customers and having a dominant position with respect to retail as we continue to attract more. But they all get to that point where they say, "Hey, look, as I said earlier, I'm going to need some help managing some of this wealth or maybe even all this wealth. And they told us, look, I can't give you more of my share of wallet because you don't have an advisory product or a full-blown adviser solution. And so that was really what we were trying to do is just round out the offering. The reason why we thought TradePMR was so interesting is they're kind of tech forward, but they're also quite aggressive in understanding that a lot of the advisers are struggling with the idea that there's going to be a lot of wealth decumulation happening, the $124 trillion. And it's an industry stat. I think it's 72% of people, whether they're a child or a grandchild, they just fire that adviser the day they get the money because they're not going to -- they don't have a relationship with that person and they're probably not going to manage money in the way that they would like them to manage money. So they're desperately in the advisory space looking for a connection to the recipients of that $124 trillion. You know where those recipients live? They live in Robinhood. Those are the 26 million customers that live in Robinhood. So that's a natural connection for advisers. The second component is, I'm going to be a little judgmental here, but the wealth management side hasn't really been very innovative. The last thing I think that was -- we would consider innovative would be Robo adviser. I think those rolled out in 2010. And I don't -- I'm not being critical of the space. I'm just saying they haven't needed to be innovative. Like you had Schwab gobbled TD Ameritrade, Fidelity, now you have 70% of the industry controlled by a couple of firms. And so if I'm an adviser, I'm a little frustrated because they've taken away their referral programs. There used to be 3,000 RIA firms getting those. Now it's like 250. They've squeezed them on economics. They compete with them. These are all the things we hear from advisers, and we get together with the largest ones in the country to help us because we have a blank canvas now. We can build a program or referral program, which we are doing that will be world-class. And it will also be built in such a way that this next generation is accustomed to doing business, which means I'm probably not walking into a branch somewhere. I'm okay with having my interaction be done digital. We know that. We understand our customers very well. I think there's a huge opportunity here, and we're going to seize upon it. The other component I would say is we do things in an operational manner that is much more efficient than some of our larger peers. So we're going to be able to deliver -- give back some of the margins and economics to these customers to attract many more assets.

All right. Well, waited long enough, we do have to pivot to the prediction market discussion immediately...

I could have predicted when we were going.

Yes.

You have a market on that?

Pun very intended clearly. The record prediction market volumes in October in excess of what you did for the entire 3Q. As we think about the opportunity set here, what percentage of your customer base is utilizing prediction markets today? And what's that North Star in terms of what you think that could get to over time? And how are you driving that higher?

It's pretty small. And the reason why it is small is because if you think about how quickly this all materialized, I mean it started with -- for us, it started with the election in November. And then now it's grown from there. And now we're probably over 1,000 contracts across a variety of categories, sports, cultural, economic, although we're waiting on economic indicators, it's -- you have contracts with economic indicators, and we're relying on the government to give us those indicators so when they do, those will settle. But -- so we haven't really had time yet to sort of have it be, what I'll call, really ingrained in the experience on Robinhood. Now we're working like mad to create an ecosystem, which is better for customers and more discoverable. But like the interesting things that happen today are millions of people on Robinhood on a Sunday, billions of people on Robinhood on a Saturday morning, which normally wouldn't happen. And so they're not only interacting with the prediction markets, they're actually interacting with other things, which is really beneficial. So I think we have a huge amount of runway there with respect to getting deeper adoption there. And if you look at -- the question often gets asked, well, who are using this? Is it active traders or what segment of your customer base is using those? And it's really kind of interesting because it varies based on what it is. On the economic side, it's this segment. On the sports side, it's this segment. On the cultural side, it's this segment. And there are so many places you can go with event contracts that it's -- like it's pretty cool in thinking about it.

But the challenge is because it's so cool and because it's growing so nicely, inevitably, that breeds more competition?

Oh, yes, I mean, who isn't getting into this space. By the way, there's a thought that that's a bad thing. I actually think it's a good thing. And what I mean by that is you're just creating a bigger ecosystem. And for us, we're the giant already. We're the first, and we're the giant. And when I say first, we're the first scale player, right? So everybody who enters this space, our phone rings. "Hey, would you like to partner? Hey, would you like to route to us? Hey, would you like to acquire us? Would you like to, et cetera, et cetera, et cetera. Because if you think about it, the most important facet of this whole space is scale. That's what we have. We have 26 million people. And so for every new entrant that's an exchange or a market maker or a potential provider of these, we're getting that call and building a bigger ecosystem that more closely resembles like the equity market structure or something like that, where we have -- I can go to this exchange, this exchange, this exchange, this exchange. That competition is good for us because they're going to deliver hopefully better margins, better products and everything that we want them to deliver or we're probably not going to route to them.

How do you protect that competitive moat? Just you noted that you have leading share in this space. The exchanges are going after it. The sports books have effectively conceded. I acknowledge that prediction markets could be the wave of the future, so might as well embrace it? Any actions you're taking just to create some higher barriers and protect that...

I don't know that we've really thought about it from a barrier standpoint. We're more opportunistic. Like we have 26 million people and a small percentage are using it. So that's pretty -- if you look at what the hardest component for anybody in this space or the ancillary space is, it's to get the customer. They spend a lot of money to get the customer. We already have the customer. So that makes it a lot easier. But I would also say there's going to be benefits. Now you have a 225-year-old institution over here that's getting in. CME, a 150-year-old institution that's getting in. They're knocking on our door. They want our flow over there. So that's beneficial. And I think that, that lends well for the industry at large.

And you also talked about the fact that you're having a lot more success attracting some larger accounts to the platform. I did want to go back to the custody discussion for a moment because there are quite a few asset classes that you don't yet custody on the platform today. How big of a deterrent is that for some of those larger accounts to move over? And what's the timing for when you're going to be able to custody a wider range of assets on the platform?

Yes. So the ones here, I think, the biggest gaps we have specifically are mutual funds and fixed income. And if we didn't buy TradePMR and we weren't getting into the sweet spot of larger accounts with legacy holdings, I don't know if I'd ever build mutual funds because some of the mutual fund companies are already converting them to ETFs, and we're kind of hopeful that, that was going to accelerate, but I don't know that it's going to. So I think we realized we need to get those because what happens today is somebody with a large account tries to ACAT, they can do a partial ACAT, and they'll do that, but they really would prefer to ACAT the entire thing over. So I would anticipate that in the next year or 2 that those will be filled. Because we know it's -- we're basically leaving money on the table. And part of that is also a need from -- more so on the advisory side as well because there's obviously a larger pool of assets that are custodied in those 2 asset classes, even on the self-directed side.

Well, I know we have less than a minute here, but maybe just in closing, you're innovating at a neck-breaking pace. There's a lot of new initiatives you're working on, which of the new initiatives you think will be the biggest contributors over the next couple of years? And what does success look like for your queue over the next 5?

Well, I think if we continue the success, and I anticipate we're going to on the self-directed side, it's always very interesting to get into areas where it's complete white space. And so wealth management, largely white space for us; international, largely white space for us. I've been very passionate about international and the opportunity here because, look, when we go talk to any country, go to any region, go to elected officials, regulators, et cetera, industry participants in any of these countries, they immediately bring up the fact that Robinhood is largely accredited with bringing 26 million young diverse people in the marketplace. And now we have 60% of U.S. households participating in the market. In any of those countries, it's in the teens. And they know what's going to happen if those people don't start saving and doing so with a great wealth creation vehicle like a market anywhere. And so they're very, very enthusiastic about us coming there and helping them solve that issue for them. So I think there's -- if you think about the TAM there, it's pretty mind blowing. And it's exciting. Kind of fun.

Well, I know you were excited about international when Ameritrade acquired Scottrade. So it was a different shop, but equally excited...

That gave us a leap. We didn't understand when I was at TD Ameritrade, how much of a leap forward that was going to do. They had a really -- Scottrade had a real strong presence in Asia, stronger than we ever thought. And it was -- it really kind of gave us like a 3-step bumps ahead.

So it's not your first rodeo?

Not my first rodeo, no.

Well, this was a great discussion, Steve. Thank you so much. Really appreciate it. Hope, we'll have you back next year.

Yes, definitely.