Robinhood’s troubles continue as disappointing Q2 prompts layoff of nearly a quarter of staff

The news: A $30 million fine and plans to lay off almost one-quarter of its workforce are the latest signs that digital broker Robinhood is struggling.

Bad news comes in threes

1. More job cuts:

• As part of a restructuring, the trading app will close two offices and slash its headcount by around 23%, or about 780 people. The move follows redundancies made in April when Robinhood let go 9% of its staff.
• CEO Vlad Tenev blamed the “deterioration of the macro environment,” inflation, and a broader cryptocurrency crash for declining trading volumes.
• The firm will incur $30 million to $40 million for the restructuring and layoffs and $15 million to $20 million related to office closures, per the same filing.

2. Disappointing earnings:

• The firm’s Q2 earnings highlighted its changing fortunes over the past year. Revenues declined 44% year-over-year (YoY) to $318 million.
• Robinhood blamed the “volatile market environment” for falling monthly active users which dropped by roughly one-third to 14 million for June 2022 compared with 21.3 million in the second quarter of 2021.

3. Slapped with a fine:

• Robinhood was also fined $30 million by New York’s financial regulator for “significant failures” in keeping anti-money laundering and cybersecurity rules.
• The firm must also retain an independent consultant to evaluate compliance.

What’s behind the decline? Robinhood was hugely successful during Covid lockdowns due to a trading frenzy among amateur investors. But trading cooled as the cost of living increased and interest rates rose, and its share price has plummeted more than 70% since last July.

This year, Robinhood has tried to diversify its offering to counter tumbling volumes, with limited success. Various efforts include:

• A new debit product to replace an earlier debit card.
• Offering Individual Retirement Accounts (IRAs) and support for pension plans.
• Extending trading hours.
• Expansion into crypto including meme tokens, growth in Europe, and a new crypto wallet.

Robinhood’s extensive efforts to expand its offerings have appeared increasingly desperate as it continues to pursue younger users. It’s not been helped by a wider crypto market slump. But it has also suffered from its narrow focus on a single age demographic and on notoriously volatile products, like crypto and app-based trading.

The big takeaway: Persistent missteps and a wider decline in trading activity have combined to hurt Robinhood. Going forward, digital brokers need to explore revenue-generating avenues more resistant to downturns. If Robinhood is unable to pull out of the ongoing nosedive, it may be better served by seeking a buyout before the year is over. FTX has already been linked to a takeover. If not, Robinhood needs to hunker down, cut costs, and wait for the slumping retail trading market to pick up.