How Does Robinhood Make Money?

Robin Hood is a financial institution that helps individuals invest their funds through the discount borage method. The trading is off commission-free trading where you can invest in and trade on various stocks available in the market. The good thing about Robin Hood Investment is that there is easy access to the trading platform to engage in trading and monitor your asset. As a user of the Robin Hood financial services, you have the option to trade on American depositary receipts (ADR) options, exchange-traded funds and many more. Meanwhile, some users interested in investing in the Robin Hood platform can leverage cryptocurrencies. However, before you can invest, you must be located in a certain geographical location where cryptocurrencies are allowed. Lets know how Robinhood Makes Money

How Does Robinhood Make Money

Robin Hood is a popular online broker who is now a public trading company. It makes its revenue and increases its income based on the potential translating on money valuation. The organization is said to have valued up to $35 billion. The Robin Hood makes its revenue from premium membership subscription fees, interest on cash left on the platform un-invested, smaller revenue streams and other related charges on the debit card issued.

Indeed, the effort put in place by Robin Hood to bring investment to the common people of the United States. Through an investment from the common people, Robin Hood makes its money through online investment involving transactional-based, rebate and other minor segments. This is also another method based on the net interest revenue model where Robin Hood also makes its money.

After the company announced its initial public offering filing, the company approached the SEC on the 1st of July 2012 and finally released that it would be selling about 52.4 million. In the long run, the founder and the CFO sold an extra 2.6 million shares, which amounts to 55 million in total.

The Robin Hood Business Model

Robin Hood is an online brokerage platform where you can invest in various options, stocks, exchange-traded funds, all on a commission free. Although users of the platform aren’t directly charged, the revenue generated by the organization comes from the frequency of trading activity paid for in the order flow, while the market makers also contribute to Robin Hood’s revenue. About 75 percent of Robin Hood’s income last year is accrued from payment for order flow. Also, earnings and revenue come to the company through securities and margins loans. Another service which includes Gold premium subscription service is another option that poses a revenue stream for the business. 

Jeff Bezos Career Advice
Jeff Bezos Career Advice

How Does Robinhood Make Money Revenues performed so far?

In the year 2020, there was an increase in the income of Robin Hood from $179 million to more than $720 million. By the end of first quarter in 2021, the transactional income has realized by the company was already more than $420 million. The increase realized by Robin Hood has was believed to be as a result of retail investors attracted to the stock market, consequently  influenced by Covid -19 pandemic. 

By the year end of 2019, Robin Hood investment income went up to more than 5.1 million, while the company realized 12.5 million as of 2020, and there was an indication that at the end of 2021 second quarter the business has realized 22.5 million.

Meanwhile, the income increase shows that Robin Hood was managed properly by the organization’s head, which helped them achieve an increase in revenue. Between 2019 to 2020, an average user income on the Robin Hood platform rose from $65.70 to $108.90, and by the end of the first quarter of 2021, their revenue had turned to $137 every year. The largest driver of Robin Hood investment was options trading, about 47 percent of Robin Hood’s total sales. In addition, the cryptocurrency quickly rose as the most preferred trading towards the tail end of 2020. Revenue from cryptocurrency continually grew in the first quarter of 2021 to about 20 times the previous revenue rate, totaling about $88 million. However, other segments of the Robin Hood business have witnessed exceptional growth aside from the core transactions of the business that have been expanding recently. The combined revenue of these other segments has tripled at the end of the first quarter of 2020. There has been more than an 81 percent increase in the Robin Hood income in 2021 against the 71 percent increase realized in 2020, which was realized from transactions revenues.

How Does Robinhood Make Money Segment?

The practice of Robin Hood financial report is done based on a single business; meanwhile, the organization always provides a simplified breakdown for the income streams. The company’s income categories are specified into four: transaction-based revenue, net interest revenue, rebate, and other revenue streams.

The transaction-based form of revenue

Robin Hood is a process of generating income from transaction-based methods through the payment for order flow, which means Robin Hood routes its user’s orders on cryptocurrencies, equities and options to the market makers. Firms that use this method only receive a tiny payment as their compensation fees for directing their orders through these systems. The payment method is only a few cents on a dollar share but can become very bogus if the firm deals with a high volume of transactions. One of the real reasons why Robin Hood offered the zero-commission trading platforms Is due to the PFOF method. More than 81 percent of the business revenue has been attributed to transaction-based income. 

The Net Interest revenue for Robin Hood

The organization also makes money through net interest revenue on capital used as lending for transactions. The interest can easily be accrued on the loans offered to users and other interest expenses the company has incurred in terms of credit facilities. The nest revenue was said to have increased from 160.2 percent totaling up to $62.5 million as of 2021 first quarter-end. This type of revenue is pegged at approximately 12 percent of the total income. 

Rebate

Although the income generated from this option is very limited, Robin Hood has reportedly said they do make some extra earnings from this method. Based on the company CEO’s report, Vlad Tenve, Robin Hood, was said to have earned approximately $0.00026 as a rebate on a dollar that is traded on tier platform. This connotes that if you have bought a $100 stock, Robin Hood is eligible to earn 2.6 cents from the market makers your investment is sold to. The company further explains that their per dollar rebate structure was due to their agreement with the market makers. This is major because the business is trying to push all possible boundaries to increase its revenue streams. However, the director of Healthy Markets, which is an investor advocacy group, told Bloomberg in 2028 that the revenue model used by Robin Hood could easily disappear in the coming years. However, the business has known that they are comfortable with the regulatory methods they used to accrue their income. 

Other revenue streams for the business

The business also depends on other means to generate its revenue, including Robin Hood Gold, for which a user has to pay membership fees. This is a subscription-based service that gives premium features to the users; such features include professional research, enhanced instant access to deposits, investment for approved users and Nasdaq Level II market data. Some other means of the income generation method include rebates and user fees that are miscellaneous. 

What are the possible risks associated with Robin Hood investment?

Although the recent trading figure shows that Robin Hood has been growing and increasing in revenue, there have been robust and juicy offers from the platform. With that being said, some risks could be associated with the business. The stock market has improved greatly and grew up to 90 percent, against what was witnessed at the end of 2020 first three months. That aside, there has been consistent inflation in the economy, and the U.S. Federal Reserve has predicted that there could be a more damming effect of inflation by the year 2023. This is roughly a year ahead, which poses a great challenge to the success of the business.  A tilt in the market or sideways movement could impair the foreseen interest in the Robin Hood market platform, which is what the majority of the investors leverages on.  

Aside from this, many people have considered the Robin Hood payment for order flow method as controversial. Critics have continually argued that it is a way to pay the retail investors the worst income on their investments. Meanwhile, the SEC rolled out an indication that it might soon ban the infamous payment for order flow method used by Robin Hood, which has already been declared illegal ins countries like the U.K.

Although the payment of order flow has become the basics of standardization for Robin Hood, other investment competitors in the same industry like Charles Schwab and E-Trade are less dependent on this system as a revenue stream, while they pay out larger interest to their investors and accumulate revenue through other services. 

The recent developments in Robin Hood

In the early part of 2021, the SEC announced that it would be conducting several examinations on the market structure in the United States. This was after businesses like Robin Hood were the sole driver of the share prices in companies like the AMC Entertainment holdings, GameStop Corp to an unimaginable level. Therefore the SEC has taken it upon itself to pay close attention to the payment for order flow method where the users’ investments on Robin Hood are routed through other brokerage firms. The brokerage’s firms are therefore responsible for off-exchange and high-speed traders like Virtu Financial International. The increased number of trading outside the watch of SEC is the major concern that has been considered a lack of trustworthiness and transparency over the prices offered by off-exchange traders to their investors. 

The chairman of SEC, Gary Gensler, who took over in April 2021, has not been a fan of the payment for order flow system. Some critics and the chairman believed that the method brings up a conflict of interest for brokerages because they did prefer to send the customer’s order to the highest bidder as against the market makers who are offering the best and regulated market prices for the orders. The SEC has then vowed to review the method, and there have been numerous speculations that the method can be banned finally. However, it was later learned that Robin Hood has files that banning the payment for order flow is a big threat to its business model, which could cause a collapse in its firm existence. 

Conclusion

As a potential investor, you would perfectly understand the business is booming now, but things could change in the opposite direction in a short while. For example, it could be as a result of new regulations or other business method implementation. Whichever way the outcome has turned out to be, Robin Hood’s investment might become a non-profitable investment soon. With this in mind, you should agree that the business can easily afford to pay its investors as it currently makes enough funds to cater to the needs of the investors who are willing to trade on its platform. 

FAQs

Does Robin Hood take a cut of your money?

The Robin Hood online brokerage does not charge you a trading commission. However, it makes money through an infamous trading method referred to as payment for order flow. The investors’ orders are passed to the high-frequency market marker.

Does Robin Hood report to the IRS?

Yes, the IRS cares about transactions done through Robin Hood and any of the payouts you receive from Robin Hood as profit needs to be declared as income so that your income tax return would be effectively processed.

What is the catch with Robin Hood trading?

The major catch is that, unlike other online brokers, Robin Hood only specializes in ETFs, Stocks, Cryptocurrencies and options. Meanwhile, the business also offers commission-free trading, while it earns from numerous ways.

How Does Robinhood Make Money?

Leave a Reply

Your email address will not be published.

Scroll to top
Land your Dream Job
Get actional first hand insights from people who share their job search stories.