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How does Robinhood make money? Simple... Volume


bernorange

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Robinhood Markets Inc. has built a reputation on its origins in finance counterculture and a steal-from-the-rich ethos. But the firm, which offers no-fee stock trading, is making almost half its revenue from one of the most controversial practices on Wall Street.

The startup, valued at $5.6 billion, was bringing in more than 40 percent of its revenue earlier this year from selling its customers’ orders to high-frequency trading firms, or market makers, like Citadel Securities and Two Sigma Securities, according to three people with knowledge of the matter, who asked not to be identified because the details are private. Almost all retail brokerages employ the practice, called payment for order flow, but it’s an unlikely strategy for a company built on an anti-Wall Street message.

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Even so, the practice of selling to market makers has long attracted criticism from regulators and consumer advocates, who argue that it creates a conflict of interest where consumers can lose out. Citadel Securities and Two Sigma Securities declined to comment. 

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https://www.bloomberg.com/news/articles/2018-10-15/robinhood-gets-almost-half-its-revenue-in-controversial-bargain-with-high-speed-traders

That Bloomberg report doesn't expound upon the criticisms of the practice.  So what are they? 

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33 minutes ago, Parliament said:

I’ve never heard of any of these guys. How die these “fast traders” like Wolverine and Sigma Two make money if they’re paying for the right to place an order for Robinhood? Arbitrage?

RobinHood's orders don't process or execute instantaneously, so yes. Most of the orders on there are placed as market orders by inexperienced traders.  The sold orders can take minutes or hours to execute.  The investor is then out on wherever the price action may have moved to 

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Of course this is how they are making money. 

Did any one think any different? The HFT pay a bit to get access to guaranteed money on every single transaction they facilitate. 

Which, in some ways might be better than you paying a brokerage house a per transaction fee for them also to "sell" your trade to a match-making HFT. 

Either way, there is someone faster than you, and they are going to skim a bit off (rent-seeking FTW). 

 

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  • 1 month later...

the robin hood orders being sold to citadel and 2 sig are probably being routed to their dark market algos.  they're probably taking anywhere between half a penny to 5 cents profit on every share they transact.  and that's just on stuff under $75.  higher priced names the margins are probably 3 cents to 45 cents on average.

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For years, the website RobinTrack.net has been doing a great job of mining RobinHood's data to provide raw data and a visualization of which stocks the users of the retail brokerage have been holding and disposing of on a daily basis.

RobinTrack.net has been a wonderful way to keep an eye on exactly what stocks the bagholder crowd have been rushing into on a daily basis, providing insight into the hysteria of retail daytraders, allowing hedge funds to likely frontrun the data and providing opportunities for short sellers looking for ideas.

But those days appear to be all but over.

On Friday, CNBC reported that the brokerage will no longer display how many of its users hold a certain stock. In addition it is going to be taking down its public API data that allows other sites, like RobinTrack.net, to source its data for visualization and analysis purposes.

"The data has been used to show booms in retail stocks," a CNBC report said on Friday. "You guys know RobinTrack well. A lot of financial news outlets use it for reporting, including CNBC."
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Like its order flow, we're guessing "everything's for sale" at Robinhood and wouldn't be surprised if the brokerage creates a hedge fund "product" with this data moving forward.
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https://www.zerohedge.com/markets/days-tracking-robinhood-data-are-now-officially-over

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