How Robinhood makes money: order flow, interest, subscriptions


Robinhood Markets Inc. is a fintech company that operates an online discount brokerage that offers commission-free trading. It provides a web-based and mobile-device-based financial services platform that enables users to invest and trade stocks, exchange-traded funds (ETFs), options, and US deposit receipts (ADRs). It also allows users to invest in certain cryptocurrencies based on their geographic location. The company makes money by paying for order flow, premium membership dues, stock loans, interest on uninvested cash, exchange fees related to your debit card, and other smaller sources of income.

After announcing a confidential IPO filing on March 23, 2021, Robinhood filed an S-1 filing with the SEC on July 1, 2021. On July 19, 2021, it amended its S-1 to announce that it would be selling 52 , 4 million shares. with its founders and CFO selling another 2.6 million for a total of 55 million. The range given for the IPO price was $ 38 to $ 42. The shares will trade under the ticker symbol “HOOD” on the Nasdaq. Robinhood will be valued at approximately $ 33 billion at the midpoint of its price range and will raise $ 2 billion from the offering, increasing to $ 2.3 billion from the greenshoe option being exercised.

Robinhood faces significant competition from other discount brokerages, new and established fintech companies, banks, cryptocurrency exchanges, asset management companies, and technology platforms. Some of its main competitors include Charles Schwab Corp. (SCHW), Morgan Stanley’s E * TRADE Financial Holdings LLC (MS), Coinbase Global Inc. (COIN), Square Inc. (SQ) and River Financial Corp. (RVRF).

Key takeaways

  • Robinhood is an online discount brokerage agency that offers a commission-free trading and investment platform.
  • The company derives the vast majority of revenue from order flow payment.
  • Robinhood plans to expand internationally, focusing on Europe and Asia.
  • The company recently filed an S-1 form with the SEC prior to its IPO.
  • In June, the SEC said it was conducting a comprehensive review of the market’s structure, including payment for order flow. Robinhood said in its S-1 that a ban on this practice by the SEC would pose a “risk” to its business model.

Robinhood Finance

On its recently filed S-1 form, Robinhood provided financial results for the first quarter of its fiscal year 2021 (FY), the three-month period ending March 31, 2021. The company’s net loss expanded to $ 1.4 billion from $ 52.5 million in the year. Fourth ago. However, revenue for the quarter more than quadrupled to $ 522.2 million. The net loss was primarily driven by a one-time non-cash charge of $ 1.5 billion related to a market-to-market change in the fair value of the convertible notes and the warrant liability.

Robinhood’s net accumulated funds accounts, a key metric that measures the number of accounts users made an initial deposit or money transfer to during a specified period, increased 150.0% year-over-year (YOY) to 18 million in the first quarter of fiscal year 2021.

The company also provided results for fiscal 2020, which ended December 31, 2020. Robinhood posted net income of $ 7.4 million, a significant change from the net loss of $ 106.6 million reported the prior year. Annual revenue increased 245.5% over the prior year to $ 958.8 million.

Robinhood Business Segments

Robinhood operates and reports its financial results as a business segment. However, it provides a breakdown of income into the following categories: transaction-based income; net interest income; and other income. We take a closer look at these income categories below.

Transaction-based revenue

Robinhood generates transaction-based revenue by routing its users’ orders for options, stocks, and cryptocurrencies to market makers, a process known as payment per order flow (PFOF).Brokerage firms using PFOF receive a small payment as compensation for directing orders to a particular market maker. The payout is usually only a fraction of a penny per share, but it can be a major source of income for companies handling a large number of orders. PFOF is one of the main reasons Robinhood can offer commission-free trading. Robinhood’s transaction-based revenue increased 339.6% to $ 420.4 million in the first quarter of fiscal 2021, representing more than 80% of company-wide revenue.

Net interest income

Robinhood generates net interest income (interest income minus interest expense) on securities lending transactions. Interest is also accrued on margin loans to users and interest expense is incurred in connection with the company’s revolving lines of credit.Net interest income increased 160.2% to $ 62.5 million in the first quarter of fiscal 2021, representing approximately 12% of Robinhood’s total income.

Other income

Robinhood’s other sources of income consist primarily of Robinhood Gold membership dues. Robinhood Gold is a paid subscription service that offers users premium features, including instant enhanced deposit access, professional research, Nasdaq Tier II market data, and access to margin investments for approved users. Other income also includes proxy rebates and miscellaneous user fees.Revenue from these sources increased 396.5% to $ 39.2 million in the first quarter of fiscal 2021, representing nearly 8% of company-wide revenue.

Recent Robinhood developments

In early June 2021, the SEC announced that it was conducting a comprehensive review of the market structure after the meme stock trading frenzy earlier this year that pushed up the stock prices of companies like GameStop Corp. (GME) and AMC Entertainment Holdings Inc. (AMC). ) at astronomical levels. The SEC will pay particular attention to the PFOF process by which brokerage firms submit individual investors’ trade orders to high-speed off-exchange traders known as wholesalers, such as Citadel Securities LLC and Virtu Financial Inc. (VIRT). These off-exchange traders must offer prices that are at least as good as the best national offering, which is what official exchanges offer. But with a growing number of trades taking place off official exchanges, the SEC is concerned about the lack of transparency about the prices that off-exchange traders offer to their clients.

SEC Chairman Gary Gensler, who recently took over as director of the SEC in April, has been highly critical of PFOF. He and other critics of PFOF believe that the practice creates a conflict of interest for brokers, because it incentivizes them to send client orders to the highest bidder rather than the market maker offering the best prices or fastest execution. The SEC’s plan to review PFOF has led to speculation that the practice could be banned. Robinhood noted in its recently filed S-1 form that banning PFOF is a risk to its business model and would have a substantial impact on its operations.

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Mark Holland

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