MW Retail traders are getting spooked by a market downturn. That's bad news for brokerage stocks.

By Gordon Gottsegen

Some investment brokerages' stocks saw their biggest declines in years

While stocks across the board tumbled on Monday, the pain was acutely felt by shares of brokerages like Robinhood Markets Inc. (HOOD), Interactive Brokers Group Inc. $(IBKR)$ and Charles Schwab Corp. $(SCHW)$

Some of these companies saw their largest stock-price declines in years. Shares of Robinhood fell 19.8% on Monday, their largest percentage drop since August 2021. Schwab's stock was down 4.5%, its largest drop since July 2024. And Interactive Brokers shares were down 13%, their largest drop since October 2009, according to Dow Jones Market Data.

The broader stock market reacted to a recent interview in which President Donald Trump didn't rule out the U.S. economy going into a recession as the result of his economic policies, which have included tariffs and widespread federal layoffs. With the heightened threat of a recession on the table, investors pulled money out of certain growth sectors and stocks that usually get hit the hardest during economic downturns - including brokerage stocks.

Retail brokerages like Schwab, Robinhood and Interactive Brokers do well when investors have more money invested or trade stocks more actively, due to the firms' interest-based and transaction-based revenues.

But how much money retail investors invest is highly influenced by how the stock market is performing. Recent data from JPMorgan found that individuals move more money into their investment accounts during sustained periods of stock-market growth.

"Retail-brokerage stocks do tend to perform well in bull markets due to higher trading volume and more activity in markets. Although the brokerage industry has moved towards zero-commission trading, these firms still derive some commissions from certain trades along with order-flow revenue," Suryansh Sharma, a senior equity analyst covering the financial-services industry for Morningstar, told MarketWatch. "Along with this, bull markets typically boost equity prices, which then increases fees on assets under management and administration. In a market selloff, the opposite effect should hold true in theory."

While JPMorgan's data also found that volatility and sudden drops also spur trading activity, an economic downturn or prolonged bear market can have a chilling effect, as investors trade less actively and have less money to put into the market.

A recent example of this can be seen by looking at Robinhood's financial reports over the course of 2022, when high inflation and the Federal Reserve's rate-hiking cycle pushed stocks into a bear market. Robinhood's total number of funded accounts ticked up from 22.7 million in the fourth quarter of 2021 to 23 million in the fourth quarter of 2022. Despite this, the number of monthly active users and assets under custody declined. Total net revenues and average revenue per user declined from the fourth quarter of 2021 to the first quarter of 2022, and didn't reach 2021 levels again until the fourth quarter of 2022 - thanks to higher net interest revenues.

It's worth noting that Robinhood's stock was hit with a double whammy on Monday when S&P Dow Jones Indices announced that the company wouldn't be included in the S&P 500 SPX following the index's rebalancing, despite the company meeting the index's qualifications.

Biut investors also sold off other stocks in the financials sector XX:SP500.40 as they tried to reduce their exposure to stocks affected by economic downturns.

-Gordon Gottsegen

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March 10, 2025 17:25 ET (21:25 GMT)

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