9 ms·

If there no fees then how does Robin Hood make money? On the bid ask spread? Do you trade with Robin Hood as a counterpart rather than with other peers on an e

by chvid 9y ago

If there no fees then how does Robin Hood make money? On the bid ask spread? Do you trade with Robin Hood as a counterpart rather than with other peers on an exchange? (Just to clarify - I am wondering how they make money on crypto currencies not stocks).

tjpaudio 9y ago
Robinhood makes money on it's "gold" service, which is $10/month. For that $10 they float you the cash to immediately reinvest cash after stock sales (rather than waiting 3 days) and they give you $2000 in margin. Really it's pretty genius. They figured out that transaction costs for exchanges are essentially free. With their gold service they are monetizing at least 6% profit margin, i.e. you can think of the $120 yearly as a cost of borrowing $2000, which would boil down to 6% interest rate. Since that money is secured by assets in your account, this is actually a really attractive rate for the risk profile, and, likely scenario, few people are constantly maxed out at $2000. So membership / margin lent is their total profit margin. I bet its well over 10%. Not bad.
- skellera 9y ago
  I'm not exactly sure how it works but people are able to take much more than $2000 on margin. If you saw on the Robinhood reddit after XIV crashed, there are people who owe over $30,000. Maybe someone else can chime in on how the "gold" currency works in Robinhood to allow that.
  - tjpaudio 9y ago
    People doing stupid things with shorts and options.
encoderer 9y ago
I doubt robinhood is acting as a market maker (counterparty), I think they're just widening the spread to cover fees.
- andrewla 9y ago
  This is out-and-out illegal, and I can pretty much guarantee they are not doing it. The SEC has a group of regulations, RegNMS, which mean that you will never trade at a worse price than the best price offered in the marketplace. There are two ways that they can easily make money aside from fees. One is to lend their securities to other parties that want to make short sales; that's a fair amount of money. The other is to sell their order flow and keep the price improvement -- if a dark pool or router can fill the order at a better price than the NBBO (National Best Bid/Offer), then they can keep the difference. While the latter sounds a lot like "widening the spread", it is still guaranteed to be inside the best spread offered on all the trading centers that publish market data. EDIT: Note that I am referring strictly to their equities side; the cryptocurrency side has no such regulations and they could well be doing it. I interepreted the GP comment to mean how they make money as a company, rather than on these particular trades.
  - chvid 9y ago
    I was wondering how they make money on crypto currencies.
  - encoderer 9y ago
    Yeah, you're totally right about NBBO in equities. I'm talking about crypto, where fees are non-trivial and Robinhood is not just covering out of pocket.
vthallam 9y ago
Just like they make money on stocks, selling their order flow. There are tons of cryptocurrency hedge funds who would be more than happy to Robinhood to get that kind of data.
perl4ever 9y ago
I was listening to a podcast the other day where someone from the financial industry said retail order flow (from Robin Hood) has value, because you can simply make the exact opposite trades and make money off them. Nothing tricky involved, because retail traders (on average) consistently do the opposite of what is smart. So, Robin Hood would be getting paid for order flow and someone else would be paying them, and making money off the trades.
- coastal-fiesta 9y ago
  Which podcast is this?

by chvid 9y ago

tjpaudio 9y ago

Robinhood makes money on it's "gold" service, which is $10/month. For that $10 they float you the cash to immediately reinvest cash after stock sales (rather than waiting 3 days) and they give you $2000 in margin. Really it's pretty genius. They figured out that transaction costs for exchanges are essentially free. With their gold service they are monetizing at least 6% profit margin, i.e. you can think of the $120 yearly as a cost of borrowing $2000, which would boil down to 6% interest rate. Since that money is secured by assets in your account, this is actually a really attractive rate for the risk profile, and, likely scenario, few people are constantly maxed out at $2000. So membership / margin lent is their total profit margin. I bet its well over 10%. Not bad.

skellera 9y ago
I'm not exactly sure how it works but people are able to take much more than $2000 on margin. If you saw on the Robinhood reddit after XIV crashed, there are people who owe over $30,000. Maybe someone else can chime in on how the "gold" currency works in Robinhood to allow that.
- tjpaudio 9y ago
  People doing stupid things with shorts and options.

encoderer 9y ago

I doubt robinhood is acting as a market maker (counterparty), I think they're just widening the spread to cover fees.

andrewla 9y ago
This is out-and-out illegal, and I can pretty much guarantee they are not doing it. The SEC has a group of regulations, RegNMS, which mean that you will never trade at a worse price than the best price offered in the marketplace. There are two ways that they can easily make money aside from fees. One is to lend their securities to other parties that want to make short sales; that's a fair amount of money. The other is to sell their order flow and keep the price improvement -- if a dark pool or router can fill the order at a better price than the NBBO (National Best Bid/Offer), then they can keep the difference. While the latter sounds a lot like "widening the spread", it is still guaranteed to be inside the best spread offered on all the trading centers that publish market data. EDIT: Note that I am referring strictly to their equities side; the cryptocurrency side has no such regulations and they could well be doing it. I interepreted the GP comment to mean how they make money as a company, rather than on these particular trades.
- chvid 9y ago
  I was wondering how they make money on crypto currencies.
- encoderer 9y ago
  Yeah, you're totally right about NBBO in equities. I'm talking about crypto, where fees are non-trivial and Robinhood is not just covering out of pocket.

vthallam 9y ago

Just like they make money on stocks, selling their order flow. There are tons of cryptocurrency hedge funds who would be more than happy to Robinhood to get that kind of data.

perl4ever 9y ago

I was listening to a podcast the other day where someone from the financial industry said retail order flow (from Robin Hood) has value, because you can simply make the exact opposite trades and make money off them. Nothing tricky involved, because retail traders (on average) consistently do the opposite of what is smart. So, Robin Hood would be getting paid for order flow and someone else would be paying them, and making money off the trades.

coastal-fiesta 9y ago
Which podcast is this?