How Does Robinhood Make Money? • Benzinga

Founded in 2013, San Francisco-based Robinhood Markets Inc. (NASDAQ: HOOD) is an online broker that offers an app that lets users trade financial assets like stocks, exchange-traded funds (ETFs), options and cryptocurrencies commission-free. The broker was among the first to provide such a service without charging commissions, and it currently has over 22.5 million users and almost 10 million funded accounts.  

Commission-free trading has been around for a number of years, so how do brokerages like Robinhood make money if they don’t charge transaction commissions? In the following article, Benzinga explains in detail how Robinhood makes money, as well as what business model they use and the valuable services the broker’s platform provides. Read on to find out more about Robinhood’s commission-free broker business model and how it affects clients.

How Does Robinhood Make Money?

More than at any other time in human history, information and data have become the new currency. With recent progress toward digitalization, companies can now increasingly enhance their internal processes, systems and the overall structure of their businesses to take advantage of modern computing technology and artificial intelligence. Digitalization has become critical to success in today’s hyperconnected world, and Robinhood has capitalized on this phenomenon extensively. 

To start with, Robinhood offers its investment app services to users commission-free. The broker then stores their personal information and acts as a platform for brokerage clients to interact with each other. The consumer data thus generated can then be used internally or sold and transferred to interested third parties.

Robinhood also produces revenue by selling its customer data and by leveraging it internally to increase its advertising efficacy, so the short answer to this section’s question is that Robinhood makes the bulk of its revenue by selling its order flow and information about it.

In addition, Robinhood makes money through its stock app in the form of cash income from uninvested funds and interest paid on stock loans, selling premium memberships and other subscription fees. Find out more about the three main revenue sources that Robinhood derives income from below: 

Transaction-Based Revenue

Robinhood’s main source of revenue consists of selling its order flow, which is done by routing its order flow to companies like Apex Clearing, Two Sigma and Citadel, which in turn make their money through high-frequency trading (HFT). This type of revenue makes up over half of Robinhood’s net revenue. 

The way Robinhood makes money from selling order flow is that every time a Robinhood user places an order, Robinhood sends the order to one of these market-maker partner firms. A market maker typically quotes two-way prices in stocks and may hold long or short positions in them. The market maker can also serve as an intermediary between the investment app and the actual stock market. 

High-frequency market-making firms pay Robinhood for the right to execute their customer’s trades in the stock market. While the profit from this activity typically amounts to just a few pennies per trade, when you have more than 22 million subscribers making trades every day, the resulting gains can add up quickly.   

Net Interest Revenue

In addition to transaction-based revenue, Robinhood also receives revenue through net interest income. Typically, all stock brokers keep stock shares and excess cash for their clients from which receive a portion of the lending and interest income earned. 

Although Robinhood doesn’t pay interest on cash deposits itself, it moves its clients’ money into a network of FDIC-insured banks that hold and invest the cash while also paying interest on the deposits. Clients receive this interest at a rate above the Fed’s benchmark interest rate, but less Robinhood’s share, as part of Robinhood’s Cash Management program. 

Also, the stocks held in Robinhood’s client accounts can be loaned out to short-sellers to receive interest. The stock loan business makes up a significant revenue source for stockbrokers since short-sellers need to borrow shares they want to sell short. 

Such interest sources produce considerable income for Robinhood that can add up to as much as 12% of the firm’s overall revenues in any given quarter. Robinhood’s net interest revenue makes up for its interest expenses from the income generated.  

Membership Fee Revenue

Robinhood offers its users the Robinhood Gold premium service in exchange for a $5 monthly fee. This premium service gives subscribing customers access to margin trading and other valuable features.

Subscribing to Robinhood Gold gives you access to professional research and stock reports by the well-regarded independent investment research company Morningstar. You also get margin account access to increase your buying power or trading leverage that includes $1,000 of margin, although if you want to use a margin amount of over $1,000, then a margin interest rate charge of 2.5% applies.

Robinhood’s Gold package also includes access to Level II market data showing real-time bids and offers on virtually any security. In addition, you get instant deposit premiums that let you access additional funds when making a deposit ranging up to $50,000, versus only $1,000 for regular accounts.

Robinhood Gold graphic. Source: Robinhood.

What Does Robinhood Offer?

Robinhood offers its clients a wide range of financial products you can trade or invest in. They include:

Stocks and ETFs: You can trade U.S. listed and over-the-counter (OTC) securities and ETFs without paying commissions. These commission-free transactions must be done via Robinhood’s mobile app or website in one of the firm’s individual cash or margin brokerage accounts. While no commissions are charged, Robinhood does charge a $0.000119 per share Transaction Activity Fee (TAF) with a cap of $5.95 per trade.  

Options: Options transactions can also be made on the app or website free of commissions, although the TAF for options is $0.002 per contract with a per trade cap of $5.95.  

American Depository Receipts (ADRs): ADRs consist of shares of foreign companies that are traded on U.S. stock exchanges. They are issued by custodial banks that hold the actual shares. ADRs generally trade just like normal U.S. stocks, but some ADRs are subject to custody fees. Fee information for specific ADRs can be obtained from the ADR’s custodial bank. 

Cryptocurrencies: In February 2021, Robinhood introduced cryptocurrency trading. Its clients can make transactions in Bitcoin (BTC), Ethereum (ETH), Litecoin (LTE), Ethereum Classic (ETC), Dogecoin (DOGE), Bitcoin Cash (BCH) and Bitcoin SV (BSV). While most crypto exchanges charge as much as 4% of the amount traded per transaction, Robinhood charges no fee for these trades. 

Robinhood mobile app. Source: Robinhood

Initial public offerings access (IPOs): Robinhood recently introduced allowing clients access to IPOs. Now you can apply to buy new shares in companies initially issuing stock before the shares start trading on public exchanges. While the number of IPO shares you can buy may be limited, Robinhood requires no minimum or special qualifications to participate in IPOs. 

Fractional shares: You can trade fractional shares with Robinhood. This means you can trade less than a full share of equity in any stock. Fractional shares let you choose the exact amount of money you wish to invest, and Robinhood then converts the amount to parts of a whole share. You can start investing in fractional shares with as little as $1. This feature can come in very handy when you only have a small amount to invest but you still want to try to profit from an anticipated move in a high-priced stock.

Cash management: An additional feature of Robinhood accounts is the company’s cash management program. Through this program, all of your uninvested cash is placed with a program bank that currently pays a 0.30% average percentage yield (APY) interest on the balance. You also get a Robinhood debit card that works in 75,000 free ATMs and can be used anywhere that Mastercard Inc. (NYSE: MA) is accepted.      

Is Robinhood Worth It?

Robinhood’s commission-free brokerage transactions and its “freemium” business model revolutionized the retail brokerage business by giving millions of people with limited funds the chance to invest and trade stocks, ETFs and other securities and derivatives. Depending on your needs as a trader or an investor, Robinhood could be a very good choice as a broker.

Keep in mind, however, that the Robinhood platform is not really free. Basically, the company makes its money by marketing and selling all of your data while placing your orders with an HFT market maker instead of executing them directly in the market for you.

Also, the company has recently had considerable difficulty with untimely outages, market volatility and controversial intentional trading restrictions, such as those imposed on speculative buyers of Game Stop and some other stocks in January 2021. These adverse events could severely impact traders and investors who need to monitor and trade the market during normal trading hours on a reliable platform that will not arbitrarily restrict their stock choices.  

With regards to value, Robinhood offers a lot of value for very little out-of-pocket money. Besides the possibility to trade commission-free in U.S. stocks, options, ETFs and cryptocurrencies, the broker’s $5 a month charge for its premium Gold account gives you access to a significant amount of professional research, margin trading and Level II quotes that make this account type well worth the price.  

Compare Robinhood

After Robinhood entered the market in March of 2015, many other brokerages began to pop up offering similar low or zero-cost trading services. By October 2019, several major and well-established brokerage firms, including Charles Schwab, E-TRADE and TD Ameritrade, announced that they would eliminate trading fees in response to this brash new competitor. Benzinga offers insights and reviews on these and other brokers offering similar products and services as Robinhood, so check out the list provided below to compare Robinhood with these brokers. 

Frequently Asked Questions

What percent of profit does Robinhood take?

1

What percent of profit does Robinhood take?

asked 2022-03-03

Jay and Julie Hawk

1

None. Robinhood does not engage in managing portfolios for its clients; therefore, none of your profits and no percentage of your total assets would go to Robinhood if you trade on its platform. 

Answer Link

answered 2022-03-03

Benzinga

How does Robinhood make money on cash management?

1

How does Robinhood make money on cash management?

asked 2022-03-03

Jay and Julie Hawk

1

Robinhood makes money on its cash management program by depositing the excess funds in your account with major banks at market deposit rates while currently paying you just 0.30% interest on those funds. Robinhood pockets the difference between those rates as its net interest revenue.  

Answer Link

answered 2022-03-03

Benzinga