Robinhood's challengers are plotting as the popular brokerage startup faces scrutiny

As Robinhood licks its wounds after a historically hectic week, several upstart challengers sense an opportunity. 

Last week the popular California-based brokerage firm came under fire after it temporarily suspended trading in several stocks whose prices have soared in recent days because of retail trading social media groups. The firm said in a blog post Friday that a spike in its clearinghouse-mandated deposit requirements led to the decision to pause trading in names like GameStop and AMC.

Monday morning, the Wall Street Journal reported that Robinhood raised more than $2 billion from existing shareholders — just days after borrowing more than $1 billion from Wall Street banks — to shore up its position.   

But Robinhood's explanation of "what happened last week" and its subsequent raise did not ease the backlash coming from certain corners of the finance world — particularly from people sympathetic with Wall Street Bets, the Reddit-based movement driving retail activity and pushing brokers like Robinhood to their limits. 

The turmoil might be a welcome development for some upstart firms in the stock brokerage world. Other private firms with stock trading ambitions, including Public.com and FTX, have made announcements looking to capitalize while the dominant play in the market is stumbling.

JMP Securities' Devin Ryan is expecting those competitive dynamics to come to the forefront. "We believe this could drive some level of account movement, but the faster that firms like Robinhood get back to normal operations, the less attrition we would expect," he said. 

FTX announced Thursday that it would offer stock trading to certain international users through its subsidiary Blockfolio, which so far is best-known for being a crypto price tracking app with 6 million users.

On Monday — in a clear shot at RobinHood — Public.com said that it would no longer route its orders to market-making firms. The practice,  known as payment for order flow (PFOF) is a common way brokers, Robinhood included, make money. But it has a bad reputation, in part because some market participants argue that it creates conflicts between brokers and their end clients. Critics say that brokers could route flows to the venue where they'll get the biggest pay-out, as opposed to where they'll get their clients the best price. 

Indeed, last week demonstrated how relying on market makers to match orders internally can be problematic. According to The Journal, the surge in trading last week caused glitches at several trading firms, which made it unable for them to take in Robinhood's order flow. Brokers then had to route to other venues. 

To off-set the cost of routing directly to exchanges, Public.com plans to launch a tipping feature. 

"Trades will remain commission-free and tipping is entirely optional," the firm said in a blog post. "Members of the Public.com community can freely decide if they’d like to leave a tip to help pay for the cost of executing their trades. The reality is that there is no such thing as free trades."

At FTX, CEO Sam Bankman-Fried is drawing up his own plan to take on Robinhood. 

"Our primary plan is to build out the Blockfolio experience and user base," he said in a message to The Block. "In addition to rolling out stock trading for more users on it, we'll keep adding more features and UI upgrades. In addition, we're going to be more active marketing it than we have been in the past."

It's not clear how long it will take for FTX to acquire the necessary regulatory approvals for it to roll-out stock trading in the US, however. The firm is currently working on acquiring a broker-dealer to make this possible. 

Still dominant

But taking on Robinhood will be easier said than done. Despite Robinhood's recent troubles, the app continues to add more users, according to a report that JMP's Ryan published this week. The firm led brokerages in downloads, adding more than 600,000 users.

Robinhood may simply experiencing growth pains similar to those that some of today's most prominent Wall Street firms faced on their way up, according to Ryan. 

"These firms were able to appropriately manage operations through the storm, learn from those experiences with humility, and ultimately reestablish confidence in their platforms," he wrote.