Intro
Robinhood is a US-based online discount broker established in 2013. Robinhood offers commission-free trading of stocks, exchange-traded funds (ETFs), options, cryptocurrencies and gold, primarily via its popular, easy-to-use mobile app.
Robinhood business model
How does Robinhood make money?
While commission-free stock trading is no longer such a novel concept as it was a few years ago, the question still begs itself: if it charges no fees for trading, how does Robinhood make money?
The primary revenue source for Robinhood is payment for order flow (PFOF). What is payment for order flow? It means that rather than routing client orders via exchanges such as the New York Stock Exchange, Robinhood sends client orders to so-called market makers, who pay a small sum to Robinhood in return, typically about $1 or less per executed trade. Market makers - such as Citadel, one of Robinhood's main partners - profit from the bid-ask spread on securities whose trade they facilitate.
Revenue from PFOF made up 73% of Robinhood's total revenue in the fourth quarter of 2021, and 77% of total revenue in all of 2021. This is up from 75% in 2020, and much higher than at competing brokers, where such revenue typically only amounts to about 10% of revenue, or often close to zero in the case of non-US brokers.
Within total PFOF revenue, options trading was the biggest revenue source, contributing 49% in 2021, up from 46% in 2020.
Trading with cryptocurrencies such as Bitcoin or Dogecoin was the fastest-growing segment. It made up 30% of Robinhood's PFOF revenue in 2021, compared with just 4% in 2020 as the meteoric rise of crypto prices lured an increasing number of novice traders to the market.
At the same time, equities trading, such as the trading of stocks and ETFs now plays a less prominent role in how Robinhood makes money through payment for order flow. It amounted to 21% of PFOF revenue in 2021, down from 35% in 2020.
PFOF is the main pillar of Robinhood's business model, but it is not the only one. Among others, Robinhood also makes money from interest charged on margin loans, whereby the company lends money to its customers so that they can buy more assets than they could otherwise afford.
Robinhood also makes money from miscellaneous other fees, such as the subscription fee of its Robinhood Gold premium service.
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