When the stock market is volatile, trading volumes typically rise as investors reposition their portfolios. It's great for stockbroking platforms that earn revenue based on transaction volume, and with more broad-based participation in the markets over the last two years from newer investors, many of those broking firms have experienced roaring business. 

With the Nasdaq-100 technology index in a bear market, having lost 28% of its value this year, conventional wisdom suggests this could be a strong period for companies like Interactive Brokers (IBKR 1.71%) and Robinhood Markets (HOOD 1.08%). But these two popular providers are not created equal. Here's why one is worth investing in, while the other isn't. 

A person standing and pondering a decision while looking out the window.

Image source: Getty Images.

The stock to buy: Interactive Brokers

Interactive Brokers is a mainstay in the financial services industry. It was founded over 40 years ago and has survived every crisis since, from the dot-com bust to the global financial crisis to the highly erratic pandemic period of the last two years. 

The pandemic was actually the strongest stretch in Interactive Brokers' history; the company has added over 1 million new customer accounts since March 2020. For context, in the entire 42 years prior to March 2020 it had only amassed 759,600 accounts in total. Naturally, revenue and earnings therefore also soared during the pandemic period, peaking in the first quarter of 2021. 

Since then, the company's financial performance has tapered off along with the enthusiasm of small retail traders who appear to have reduced their presence in the markets. Still, Interactive has managed to pull together sequential revenue and earnings growth after both metrics bottomed near the end of last year -- this is in stark contrast to Robinhood.

A chart of Interactive Brokers' revenue and earnings.

Even with the market sell-off well underway during the first quarter of 2022, Interactive reported an 8% year-over-year increase in total client equity to $355 billion, which is the value of all the cash and assets the company's customers are holding. In addition, it saw a 14% increase in margin loans, and in March specifically, it recorded its highest-ever volume in options and futures contracts, which indicates investors still had a strong appetite for risk.

But it's the business case investors should be watching. In a bear market, profitable companies tend to offer more stability than high-flying stocks that are growing quickly but losing money. On a trailing-12-month basis, Interactive has earned $2.84 per share, which places its stock at a price-to-earnings multiple of 19.8, a 21% discount to the Nasdaq-100 index's 25 multiple.

Investors are likely trying to ascertain where Interactive's revenue trend will sit after the trading frenzy of early 2021, so the discount to the Nasdaq-100 is probably warranted for now. But with markets still selling off, there's a strong possibility that the rest of 2022 could be very strong for the company. 

The stock to sell: Robinhood Markets

Robinhood rose to prominence by marketing itself as the brokerage platform to Gen Z, and at the time of its initial public offering (IPO) in 2021, about half of all its customers were accessing the financial markets for the very first time. 

The company has amassed over 22.8 million customer accounts, which dwarfs Interactive Brokers' total of 1.8 million, but Robinhood's total assets under custody is 73% smaller at just $93 billion. This indicates Robinhood's average client is a much, much smaller investor than the average Interactive customer.

The company's focus on small retail clients is smart at face value because it creates an opportunity to become a lifelong partner in their investing journey, but Robinhood has been criticized for instead encouraging short-term risk taking through its gamified smartphone app. Additionally, it has routinely added speculative assets to its platform like popular meme-cryptocurrencies Dogecoin and Shiba Inu, both of which have collapsed in value by more than 80% from their all-time highs. 

Customers who lose money aren't always eager to return, and in the last 12 months Robinhood's monthly active user base has shrunk by 25% from 21.3 million to 15.9 million. That's not a recipe for growing revenue, and unlike Interactive Brokers, Robinhood has been unable to generate sequential quarterly growth recently. Not to mention, its net losses continue to mount. 

A chart of Robinhood's revenue and net losses.

While Interactive Brokers earns revenue by charging a commission per transaction, which is the traditional way, Robinhood engages in a highly scrutinized practice called payment for order flow (PFOF). It involves selling its customer's orders to third-party market makers that fill them at a worse-than-market price in order to pocket what's called the "spread." PFOF is banned in most major economies except the U.S., which makes it difficult for Robinhood to expand globally. 

Robinhood stock has collapsed by 89% from its all-time high. Its inability to generate a profit means it can't offer investors stability in the same way Interactive Brokers' stock can during this difficult bear market. And given its active customer base is now trending downward in a very convincing way, it's unclear whether Robinhood will ever make it back to the height of its popularity during the pandemic.