Two days ago, Zero Hedge claimed that "Robinhood sells their orderflow to HFT algos who frontrun the trades and massively accentuate the momentum."
This is incorrect.
Time for a thread 👇
blockworksgroup.io/blog/robinhood…
This is incorrect.
Time for a thread 👇
blockworksgroup.io/blog/robinhood…
Quick Robinhood highlights.
- Launched 2013
- Raised $3M seed (shoutout @howardlindzon)
- $1.2B raised, 10M+ users
- 80% of users are millennials, average age is 26
Robinhood’s marketing pitch is that you can trade for free.
So how do they make money?
- Launched 2013
- Raised $3M seed (shoutout @howardlindzon)
- $1.2B raised, 10M+ users
- 80% of users are millennials, average age is 26
Robinhood’s marketing pitch is that you can trade for free.
So how do they make money?
“If You're Not Paying for the Product, You are the Product.”
It's hot on FinTwit to explain that Robinhood sells data to HFTs. @zerohedge got this right.
But this relationship is much more nuanced that "they're front running trades".
It's hot on FinTwit to explain that Robinhood sells data to HFTs. @zerohedge got this right.
But this relationship is much more nuanced that "they're front running trades".
Robinhood does indeed make some money (probably $150-250M/year) by sending customer orders to market makers in exchange for cash.
But so does everyone else!
This practice is called payment for order flow (PFOF).
Brokerages such as TD Ameritrade, Schwab, and E*Trade all do it.
But so does everyone else!
This practice is called payment for order flow (PFOF).
Brokerages such as TD Ameritrade, Schwab, and E*Trade all do it.
MMs make money on the spread between the bid and the ask.
So, trading firms are taking retail orders from Robinhood. But they’re not doing anything illegal.
They’re just providing liquidity and making markets.
So, trading firms are taking retail orders from Robinhood. But they’re not doing anything illegal.
They’re just providing liquidity and making markets.
Around 40% of Robinhood revenue is from PFOF.
What makes up the 60%?
- Robinhood Gold
- Net interest from cash deposits
- Income from lending stocks purchased on margin
What makes up the 60%?
- Robinhood Gold
- Net interest from cash deposits
- Income from lending stocks purchased on margin
Net Interest Margin is the key here.
@patio11 explains this business better than I ever could.
You can read about it here:
kalzumeus.com/2019/6/26/how-…
@patio11 explains this business better than I ever could.
You can read about it here:
kalzumeus.com/2019/6/26/how-…
Summary: Schwab and E*Trade make 50-70% of their revenue from their net interest margin.
This is the spread between what the brokerage pays their customers on their cash vs. what the brokerage can earn on its investments in 2-year Treasuries.
This is how Robinhood makes money.
This is the spread between what the brokerage pays their customers on their cash vs. what the brokerage can earn on its investments in 2-year Treasuries.
This is how Robinhood makes money.
We love to say the fictional Robinhood stole from the rich and gave to the poor.
And that @RobinhoodApp sells data from the poor so the rich get richer.
In reality, Robinhood is just another brokerage with clean UI/UX and hundreds of millions in the bank to spend on marketing.
And that @RobinhoodApp sells data from the poor so the rich get richer.
In reality, Robinhood is just another brokerage with clean UI/UX and hundreds of millions in the bank to spend on marketing.
