How Robinhood Makes Money
Robinhood Markets is a discount brokerage that offers commission-free trading through its website and mobile app. The company generates significant income from payments for order flow, a common although controversial practice whereby a broker receives compensation and other benefits for directing orders to different parties for trade execution. Robinhood refers to this revenue as “rebates from market makers and trading venues.” While the payments are negligible for small retail trades, a company that directs billions of dollars in trades to market makers can earn substantial amounts. Independent analysis suggests that payments for order flow generated an estimated $69 million in revenue for Robinhood in 2018, up 227% from the previous year, and accounted for more than 40 percent of its overall revenue.
Other sources of revenue include a $5 monthly fee for optional membership to Robinhood Gold, which gives the client access to margin loans and investing tools; interest on uninvested cash; lending stocks purchased on margin; and fees on purchases using the company’s debit card.
Key Takeaways
- Robinhood provides commission-free trading for stocks, ETFs, options, ADRs and cryptocurrencies.
- It generates revenue from a broad range of sources, including Gold membership fees, stock loans, and rebates from market makers and trading venues.
- In December 2019, FINRA fined Robinhood $1.25 million for failing to direct trades so that its customers received the best prices.
Robinhood’s Industry
Robinhood competes in the nascent but fast-growing fintech industry, where traditional and new players have invested billions of dollars to move investing, banking, money management and other financial services to digital platforms. In 2013, Robinhood announced its intention make zero-commission trading the centerpiece of its business offering. It would achieve this by keeping operational and administrative expenses low. By October 2019, much of the brokerage industry had followed suit in offering zero-commission fee structures.
Robinhood supports trading of more than 5,000 stocks, including most equities and exchange traded funds (ETFs) listed on U.S. exchanges; options contracts; cryptocurrencies such as Bitcoin and Ethereum; and American Depository Receipts (ADRs) for more than 250 globally-listed companies.
Fundraising and Financials
In May 2020, Robinhood raised $280 million in a Series F funding round, valuing the company at $8.3 billion. Sequoia Capital led the round. New and existing investors included NEA, Ribbit Capital, 9Yards Capital and Unusual Ventures. Robinhood completed its Series E round in July 2019, raising $323 million at a $7.6 billion valuation. The company has raised $1.2 billion in total funding.
History and Leadership
Robinhood is based in Menlo Park, California. Stanford University graduates Baiju Bhatt and Vlad Tenev co-founded the company in 2013, with the aim of democratizing finance and making it more accessible to young and less affluent investors. About half of Robinhood customers are first-time investors, and their median age is 30. In December 2019, Robinhood surpassed 10 million customer accounts, up significantly from the two million accounts it had in 2017.
Recent Developments
Robinhood is currently facing a civil fraud investigation levelled by the Securities and Exchange Commission (SEC) over the company’s early failure to fully disclose its practice of payment for order flow. The investigation is focused on Robinhood’s failure, until 2018, to fully disclose on its website that it received payments from high-speed trading firms for directing customers’ buy and sell orders to them. The company faces a potential $10 million fine if it agrees to settle.
A Robinhood client filed a class action lawsuit on behalf of himself and other traders against the company in early March after a two-day outage of the trading platform. The outage occurred during one of the market’s most active days of the year. Clients were unable to access their cash or securities during the outage, nor could they buy or sell securities, according to the lawsuit. Later that month, Robinhood offered vouchers to certain clients affected by the outage. But the vouchers were conditional on clients agreeing not to take legal action.
In December 2019, the Financial Industry Regulatory Authority (FINRA) fined Robinhood Financial, a subsidiary of Robinhood Markets, $1.25 million for best execution violations related to customer equity orders and related supervisory failures that occurred between October 2016 and November 2017. FINRA said Robinhood directed trades to four broker dealers that paid for the order flow, and the company failed to satisfy its best execution obligations. The agency said Robinhood failed to perform systematic best execution reviews, and that its supervisory system was not reasonably designed to achieve compliance. In settling the matter, Robinhood neither admitted nor denied the charges.
How Robinhood Reports Diversity & Inclusiveness
As part of our effort to improve the awareness of the importance of diversity in companies, we offer investors a glimpse into the transparency of Robinhood and its commitment to diversity, inclusiveness, and social responsibility. We examined the data Robinhood releases to show you how it reports the diversity of its board and workforce to help readers make educated purchasing and investing decisions.
Below is a table of potential diversity measurements. It shows whether Robinhood discloses its data about the diversity of its board of directors, C-Suite, general management, and employees overall, as is marked with a ✔. It also shows whether Robinhood breaks down those reports to reveal the diversity of itself by race, gender, ability, veteran status, and LGBTQ+ identity.
