How Robinhood makes money

Robinhood Markets Inc. is a financial technology (fintech) company that operates an online discount broker that provides commission-free transactions. It provides a web-based and mobile-based financial services platform that allows users to invest and trade stocks, exchange-traded funds (ETF), options, and American Depository Receipts (ADR). It also allows users to invest in certain cryptocurrencies based on their geographic location. The company makes money by paying for order flows, premium membership fees, stock loans, interest on uninvested cash, exchange fees associated with debit cards, and other smaller revenue streams.

After Robinhood announced the confidential IPO filing on March 23, 2021, it filed an S-1 registration with the US Securities and Exchange Commission on July 1, 2021. On July 19, 2021, it revised its S-1, announcing that it would sell 52.4 million shares together with the founder and chief financial officer, and then sell 2.6 million shares for a total of 55 million shares. Robinhood goes public at a price of $38 per share and is valued at $32 billion. The stock is listed on NASDAQ under the ticker symbol HOOD. Robinhood expects that the IPO will raise approximately US$2 billion, and if the green shoe option is exercised, it may be as high as US$2.3 billion.

Robinhood faces fierce competition from other discount brokers, new and old financial technology companies, banks, cryptocurrency exchanges, asset management companies, and technology platforms. Its main competitors include Charles Schwab Corp. (SCHW), Morgan Stanley (MS) E*TRADE Financial Holdings LLC, Coinbase Global Inc. (COIN), Square Inc. (SQ) and River Financial Corp. (RVRF).

Key points

  • Robinhood is an online discount broker that provides a commission-free investment and trading platform.
  • The vast majority of the company’s revenue comes from order flow payments.
  • Robinhood plans to expand internationally, with a focus on Europe and Asia.
  • The company recently filed an S-1 form with the US Securities and Exchange Commission in anticipation of its IPO.
  • The Securities and Exchange Commission said in June that it is conducting an extensive review of the market structure, including payment for order flow. Robinhood stated in its S-1 that the SEC’s prohibition of this practice would pose a “risk” to its business model.

Robin Hood’s financial situation

In the most recently submitted Form S-1, Robinhood provided financial results for the first quarter of fiscal year 2021 (FY) for the three-month period ending March 31, 2021. The company’s net loss expanded from US$52.5 million for the year to US$1.4 billion-the previous quarter. However, revenue for the quarter more than quadrupled, reaching $522.2 million. The net loss was mainly caused by a one-time non-cash charge of US$1.5 billion related to changes in the fair value of convertible notes and warrant liabilities in a market value (MTM).

Robinhood’s net accumulation fund account is a key indicator that measures the number of accounts that users make initial deposits or transfers within a certain period of time. In the first quarter of fiscal 2021, it increased by 150.0% year-on-year to 18 million.

The company also provided results for the 2020 fiscal year ending December 31, 2020. Robinhood reported net income of 7.4 million U.S. dollars, a significant change from the net loss of 106.6 million U.S. dollars reported in the previous year. Annual revenue increased by 245.5% over the previous year, reaching 958.8 million U.S. dollars.

Robinhood’s business sector

Robinhood operates and reports its financial performance as a business unit. However, it does break down income into the following categories: transaction-based income; net interest income; and other income. Let’s take a closer look at these income categories below.

Transaction-based revenue

Robinhood generates transaction-based revenue by sending its users’ options, stocks, and cryptocurrency orders to market makers. This process is called Order Flow Payment (PFOF). Brokerage companies that use PFOF receive a small amount as compensation for directing orders to specific market makers. Payments are usually only a few cents per share, but can be an important source of income for companies that process large numbers of orders. PFOF is one of the main reasons Robinhood can provide zero commission trading. Robinhood’s transaction-based revenue increased by 339.6% to $420.4 million in the first quarter of fiscal 2021, accounting for more than 80% of the company’s revenue.

Net interest income

Robinhood generates net interest income (interest income minus interest expenses) in securities lending transactions. The margin loan provided to users can also earn interest, and the interest expense is related to the company’s revolving credit facility.Net interest income in the first quarter of fiscal 2021 increased by 160.2% to $62.5 million, accounting for approximately 12% of Robinhood’s total income.

Other income

Robinhood’s other sources of income mainly include Robinhood Gold membership fees. Robinhood Gold is a paid subscription service that provides users with advanced features, including enhanced instant deposit access, professional research, NASDAQ secondary market data, and access to margin investment for approved users. Other income includes agency rebates and miscellaneous user fees.Revenue from these sources increased by 396.5% in the first quarter of fiscal 2021 to $39.2 million, accounting for nearly 8% of the company’s revenue.

Latest news from Robinhood

In early June 2021, the U.S. Securities and Exchange Commission announced that it is conducting an extensive review of the market structure this year after the meme stock trading frenzy that drove up the share prices of companies such as GameStop Corp. (GME) and AMC Entertainment Holdings Inc. (AMC) Early astronomical level. The SEC will pay special attention to the PFOF process, in which individual investors’ trading orders are sent by brokerage firms to over-the-counter high-speed traders, that is, wholesalers, such as Citadel Securities LLC and Virtu Financial Inc. (VIRT). These over-the-counter traders must provide prices that are at least as good as the best quotes in the country provided by official exchanges. But as more and more transactions take place outside of official exchanges, the US Securities and Exchange Commission is concerned about the lack of transparency in the prices offered by over-the-counter traders to their customers.

SEC Chairman Gary Gensler recently took over as the head of the SEC in April. He has always been highly critical of PFOF. He and other critics of PFOF believe that this approach creates a conflict of interest for brokers because it incentivizes them to send customer orders to the highest bidder, rather than the market maker who offers the best price or the fastest execution. The US Securities and Exchange Commission’s plan to review PFOF has led to speculation that this practice might be banned. Robinhood pointed out in its recent S-1 form that the prohibition of PFOF poses a risk to its business model and will have a significant impact on its operations.


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