Retail Brokers Need to Remodel to Steal Business Back from Robinhood

The dominance of Robinhood in the U.S. retail investing market poses a major challenge to traditional brokers, leaving them scrambling to regain lost ground. But the competition is not just about brokers vying for flow — it’s the story as old as time where the incumbent struggles against a disruptor that has revolutionised the market. For traditional retail brokers to stand a chance of competing, they must evolve by not just adopting new technology, but also rethinking how they engage with today’s digital friendly investors. In the U.S., Robinhood has had the largest share of the retail investing market since at least 2020, with its market share fluctuating between one third and one half of the market. Traditional retail brokers have a major job on their hands if they are to steal back the business that they have lost from retail investors to Robinhood. The thing is, they aren’t competing against another retail broker – they are competing against a technology company. And make no bones about it, Robinhood isn’t just a technology company, it is one that has been able to completely shake up the status quo of the retail investing market. With the SEC proposals to make changes to equity market structure, including a now approved move to reduce the tick size of trades, an opportunity could be presenting itself to the embattled traditional retail broking community – if they are prepared to take advantage before these changes come into effect next November. A reduction in tick size is, in part, designed to rebalance the U.S. equity market. The tighter spreads would see less profitability for high frequency traders (HFTs) and could lead to a pull back from market making in U.S. stocks. This is significant in the retail trading world because of the ‘payment for order flow’ (PFOF) phenomenon which has acted as a lifeblood for firms like Robinhood. The smaller tick size would have a direct impact on companies like Robinhood, who are able to fund the rebates that are offered to brokers to draw order flow to their platform through PFOF. Unsurprisingly, parts of the market are pushing back as they sense their advantage could be taken from them. If the plans remain in place, there is no doubt that the door is opening, with Robinhood’s dominant position in this market standing on shaky ground. So, what stands between traditional retail brokers and winning back the business they have lost over the past decade? Technological evolution. For too long now, these companies have ignored the move to digitization, and their internal operational processes are significantly outdated as a result, which has a direct impact on how well they can service clients. Take the move to T+1 settlement for US securities as an example. Many of these firms have been throwing body count at the issue to ensure that trades are settled within the new constrained timeframe. However, by investing in modern execution order management systems, these retail brokers would be able to better ensure that they can meet these new settlement requirements in a sustainable way, one that is built with future adaptability in mind. Traditional retail brokers also need look at the usability of their trading systems. The new wave of retail brokers has brought the user experience of Netflix and Amazon to trading, which people are flocking to. This provides intuitive applications which can be accessed more easily wherever people are. Not only this, but the technology is able to perform well during periods of high volatility, which is where firms like Robinhood have been able to step up and stand out. And, let’s face it, these periods of increased volatility have become far more common over the last five years across markets, which makes it even more important to adapt so that user experience and market trading are not infringed for technology savvy customers. The proposed changes to US equity market structure have opened the door back up for traditional retail brokers to win back the business they have lost, by targeting the payment for order flow method that is central to driving volumes to Robinhood. However, if they are to take advantage, they need to differentiate themselves and adapt to modern trading conditions. This means embracing technology, while recognising how today’s retail investor wants to interact with their brokerage firm.