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Comment by michaelcampbell | Hacker News Reader

How do THEY make money? The article didn't say, or I missed it.

Since this question always comes up, I'll aggregate:

- Payment for order flow - Interest on idle cash - Robinhood Gold, a subscription model with side benefits, the most notable of which is... - Margin lending

It's unclear whether Robinhood is profitable or has a road towards profitability since none of these are really unique in the retail brokerage space, but it certainly seems possible that these combined with a huge customer base and the right amount of frugality could allow for it.

They answer this themselves -

https://support.robinhood.com/hc/en-us/articles/202853769-Ho...

> How does Robinhood make money?

> With Robinhood Gold, you get up to 2x your buying power and access to after hours trading for as little as $6 per month. This is the only product Robinhood charges you for, and is completely optional. Trading is still commission free.

> Additionally, Robinhood earns revenue by collecting interest on the cash and securities in Robinhood accounts, much like a bank collects interest on cash deposits.

They are selling Robinhood Gold's extra features, but I bet they make much more on the interest in deposits. If I recall this was their initial path to profitization.

Margin trading..the real money-maker. Charge clients 8%/year for a loan that costs you 3%.

Do they mention that they're also selling your order flow?

Interesting that they don't mention payment for order flow. From what I've read, that's major way in which they make income.

Note that most (almost all?) retail brokerages accept payment for order flow, i.e. getting paid to direct their order flow to certain firms for order execution.

For example, these are the firms that TD Ameritrade receives payment for order flow from: https://www.tdameritrade.com/retail-en_us/resources/pdf/AMTD...

Replying to instead of editing my original comment, for posterity:

From this article, it appears that they do not currently take payments for order flow:

Originally, Robinhood planned to make money off of order flows – a common tactic used by discount brokerages in the 1990s to generate revenue. According to the company's FAQ, Robinhood backpedaled on the idea because it executes orders through a clearing partner and, as a result, receives little to no payment for order flow. The company is willing to return to its original plan in the future if it receives order flows directly or begins to generate a lot of revenue from them.

Definitely surprised by this; I assume that if they did take payment for order flow, that they would be required to disclose this due to some SEC rules, so I'll take it at face value.

https://www.investopedia.com/articles/active-trading/020515/...

Another update: Actually, they do take payment for order flow, and here's the relevant disclosure: https://brokerage-static.s3.amazonaws.com/assets/robinhood/l...

Apex Clearing Corporation – Robinhood receives payment from Apex Clearing Corporation for directing equity order flow to this venue. Payment varies based upon a number of factors including but not limited to: the type of security, time of order placement, and the underlying price. Payments received averaged less than $0.00008 per dollar of executed trade value for order flow in the first quarter 2018.

Citadel Execution Services – Robinhood receives payment from Citadel Execution Services for directing equity order flow to this venue. Payment varies based upon a number of factors including but not limited to: the type of security, time of order placement, and the underlying price. Payments received averaged less than $0.00026 per dollar of executed trade value for order flow in the first quarter 2018.

Two Sigma Securities, LLC – Robinhood receives payment from Two Sigma Securities, LLC for directing equity order flow to this venue. Payment varies based upon a number of factors including but not limited to: the type of security, time of order placement, and the underlying price. Payments received averaged less than $0.00026 per dollar of executed trade value for order flow in the first quarter 2018.

Wolverine Securities, LLC – Robinhood receives payment from Wolverine Securities, LLC for directing equity order flow to this venue. Payment varies based upon a number of factors including but not limited to: the type of security, time of order placement, and the underlying price. Payments received averaged less than $0.00026 per dollar of executed trade value for order flow in the first quarter 2018.

If you're not the paying customer, you're the product. It is likely that your data on Robinhood is sold to third parties, although I can't speak to the exact scope or whether it should be of any concern to users.

Come on. Robinhood wants you to be a paying customer, it's a freemium model, not an advertising business like FB

1) Cash (from users) can be loaned out for a small return

2) Individual investor flow is good flow. Trading companies pay for this flow. Uncertain whether robinhood does this, but (all?) other Joe-Shmo facing brokerages do.

I read them stating the money comes from the interest on the money of yours they hold.

They sell orders/trading data of small retail investors to Big High Frequency Traders so that they can gain an edge in the zero sum game of day trading. 'Robinhood' seems like an apt name.

I have heard from the horse's mouth that small retail investors orders/trading data is used as a contrarian signal. In other words the Big Traders see what the small retail investors are doing, and do the opposite.

It's somewhat similar to that.

Assume you are a market maker - you make money off of the bid-ask spread. Specifically, you supply liquidity by issuing standing orders: To buy at the bid, and sell at the ask.

For a market maker, you typically want the price to "stable", and you set your bid/ask to reflect the current order flow supply/demand - this is the "equilibrium" price.

When prices are volatile, your risk is greater. Typically, market makers have to maintain some position in the securities they transact in, and if they don't effectively hedge this position and the price moves against them, they could take big losses.

The optimal condition for a market maker is to have supply and demand balanced, and unchanging. Then you can simply make money off the bid-ask spread without much risk. (All else being equal, having fast access, i.e. HFT, and fast processing systems to detect upcoming likely prices changes also helps)

Market makers are worried about adverse selection; that is, if a huge buy order comes into them, they are worried that the buyer knows more about the price of the security than they do. If they sell to them, the price could subsequently increase, and they could take a loss. (The same applies for a big sell order)

That is why they would prefer not to transact on the open market - i.e. the exchange. It's difficult to tell who are the informed traders.

Instead, they would rather transact against "uninformed" traders. "Uninformed" here does not imply "stupid", but rather just implies that, on average, these traders don't possess any special information or any more information than they do.

In the optimal sense, market makers would prefer to transact against an order flow that is unbiased; one example of this would be an order flow where there are equal numbers of buy and sell orders.

This is why market making firms pay for retail order flow. Retail order flow is assumed to be uninformed, and therefore unbiased relative to the information that the market makers themselves have. Being able to transact against retail order flow thus gives them a relatively unbiased order flow from which they can profit off of the bid-ask spread with much lower risk.

None of the market makers as far as I know consider retail orders to carry any information at all, which is precisely why they love then so much.

They can fill retail orders with no real concern about adverse selection (unlike on an exchange where an informed institution is trading against you) and make much more of the spread per trade. Hence why they pay for the orders and give price improvement

Source: work at a market maker

In my experience, if you stick to highly liquid stocks/options (SPY for example) the bid/ask is a penny and you don’t experience much slippage, less liquid stocks you can end up getting a worse price (0.01-0.02, in my experience)

The amount of capital I actively trade with makes Robinhood a good fit for me, the amount of contracts/shares I trade in an average position would need to gain 1-2% more to get the same profit if I was paying fees (particularly on options)

Other brokers do this too, like TDA.

spread

What does that mean, for those of us not in finance?

The spread (bid-ask spread) is the difference between the bid (what the seller is willing to accept to sell it) and the ask (what the buyer is willing to pay for it).

When you buy a stock, you're buying at the ask price, when you sell you're selling at the bid price. The difference is what the clearer keeps.

https://www.investopedia.com/terms/b/bid-askspread.asp

This is mostly correct except for the last sentence, for any conventional definition of "clearer." You could replace "clearer" with "market maker" to be more correct, but it is important to note that the market maker isn't earning the spread every time they trade with you. They're only earning the spread in the aggregate, which is to say that they hope to both buy and sell with many people like you so that over time they are effectively earning the spread.

If you look on any exchange or broker for any security, the sell price at any given time will almost always be lower than the buy price. The instantaneous gap between the sell price and the buy price is known as the spread.

This spread reflects how much the exchange makes.

It's a very indirect relationship to how much the exchange makes.

Market makers profit off the bid/ask, not exchanges.

They also get rebates for trades from the exchanges to encourage liquidity.

This would imply Robinhood is itself is a market maker, which is not true.

Information.

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