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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. In Q2 2020, Robinhood generated approximately $180 million from payments for order flow.


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 to 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 Depositary Receipts (ADRs) for more than 650 globally-listed companies


Fundraising and Financials

In September 2020, Robinhood raised $660 million in a Series G funding round, which valued the company at $11.7 billion. New and existing investors included Andreessen Horowitz, Sequoia, DST Global, Ribbit Capital, Yards Capital, and D1 Capital Partners. In May 2020, Robinhood raised $280 million in a Series F funding round, valuing the company at $8.3 billion. Robinhood completed its Series E round in July 2019, raising $323 million at a $7.6 billion valuation. The company has raised $2.2 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

On December 17, 2020, it was reported that Robinhood had agreed to pay $65 million to settle a civil fraud investigation launched 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 was 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.  As part of the settlement with the SEC, Robinhood is being required to hire an independent consultant within 60 days to review how the company's policies address payment for order flow and its duty to offer the best execution of orders to its clients. On December 16, 2020, Massachusetts securities regulators filed a complaint against Robinhood for exposing investors to unnecessary risks associated with trading. The enforcement arm of the Massachusetts Securities Division alleges that Robinhood aggressively marketed to inexperienced investors and failed to ensure proper controls were implemented to protect them. The complaint also addresses recent outages on the company's platform that prevented traders from accessing their accounts at various times throughout the past year. The case is set to be heard by an independent hearing officer and Robinhood will be able to appeal the decision.


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. It shows Robinhood does not disclose any data about the diversity of its board of directors, C-Suite, general management, and employees overall. It also shows Robinhood does not reveal the diversity of itself by race, gender, ability, veteran status, or LGBTQ+ identity.

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