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This year may be shaping up to be one of the most volatile in recent memory for the US stock market. But that has done little to douse retail investors’ enthusiasm for trading, happily for the companies that help them do it.
Small investors, typically known in the US as “Mom and Pop”, are snapping up equities and exchange traded funds at a record pace this year, surpassing that of the meme-stock mania of 2021, according to Vanda Research.
This has been a boon for brokerages like Charles Schwab, Robinhood Markets and Interactive Brokers, whose platforms are frequented by individual investors. All reported record number of users during the second quarter. Between them, they added around 2.8mn new customers during the first half of the year.
Shares in Schwab, which were hard hit by the fallout from 2023’s regional US banking crisis, are trading at a record high after gaining more than 50 per cent over the past year. Interactive’s stock has more than doubled. Robinhood, buoyed by its embrace of cryptocurrency trading, has done even better, with the stock up 520 per cent.
Since the industry moved towards free stock trades for retail customers — a model championed by Robinhood when it was founded in 2013 — being popular is no longer an automatic ticket to profitability.
At Schwab, with nearly 37.5mn active brokerage accounts, the real money comes from selling other kinds of investment, and also monetising idle cash in client accounts. It does this by “sweeping” it into its bank, where it can reinvest in higher-yielding products. The company gets around half its revenue from interest, which rose 25 per cent in the first six months of the year, compared with the same period in 2024
Robinhood and upstarts like Webull, meanwhile, rely on so-called “payment for order flow”, selling customers’ trades to wholesale market makers. That helped Robinhood generate $1.1bn in transaction-based revenue, more than half the group total, in the first half of the year. Regulators have quizzed this practice in the past, but it has paid off for Robinhood. Its shares trade at 60 times forward earnings, compared with Schwab’s 20 times.
The brokers’ fortunes depend, still, on what happens to retail investors. Initiatives like Robinhood’s credit card are intended to make it less exposed to market swings. But in any case, small investors have stayed in the game. Those who bought the dip when President Donald Trump’s tariff negotiations rattled global markets back in April have ridden a 27 per cent gain in the S&P 500.
The exuberance of retail investors might have seemed like a flash in the pan in 2021; now, to brokers’ benefit, it’s a feature of the market.
