4 ms·

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

by michaelcampbell 8y ago

cdelsolar 8y ago
spread
- stochastic_monk 8y ago
  What does that mean, for those of us not in finance?
  - throwaway4job 8y ago
    He’s referring to the spread between bid and ask prices, but he’s wrong, so you can safely ignore him.
  - xcasperx 8y ago
    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 https://www.investopedia.com/terms/b/bid-askspread.asp
    - pgwhalen 8y ago
      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.
  - frutiger 8y ago
    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.
    - vostok 8y ago
      It's a very indirect relationship to how much the exchange makes.
    - optionsguy 8y ago
      Market makers profit off the bid/ask, not exchanges.
      - adrr 8y ago
        They also get rebates for trades from the exchanges to encourage liquidity.
- pgwhalen 8y ago
  This would imply Robinhood is itself is a market maker, which is not true.
jameslevy 8y ago
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.
- deleted 8y ago
  [deleted]
- vasilipupkin 8y ago
  Come on. Robinhood wants you to be a paying customer, it's a freemium model, not an advertising business like FB
abhi3 8y ago
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.
- deleted 8y ago
  [deleted]
- Mc91 8y ago
  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.
  - stygiansonic 8y ago
    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.
deepnotderp 8y ago
Information.
throwaway4job 8y ago
Currently, main revenue source is Robinhood gold (a margin loan), and the secondary source is selling order flow. The stated goal is eventually add more financial services.
mpd 8y ago
They answer this themselves - https://support.robinhood.com/hc/en-us/articles/202853769-How-Robinhood-Makes-Money https://support.robinhood.com/hc/en-us/articles/202853769-Ho...
- tomrod 8y ago
  > 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.
  - paulpauper 8y ago
    Margin trading..the real money-maker. Charge clients 8%/year for a loan that costs you 3%.
  - ericd 8y ago
    Do they mention that they're also selling your order flow?
- stygiansonic 8y ago
  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/AMTD2054.pdf https://www.tdameritrade.com/retail-en_us/resources/pdf/AMTD...
  - stygiansonic 8y ago
    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/how-robinhood-makes-money.asp https://www.investopedia.com/articles/active-trading/020515/...
Misdicorl 8y ago
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.
SirYandi 8y ago
I read them stating the money comes from the interest on the money of yours they hold.
pgwhalen 8y ago
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.

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

cdelsolar 8y ago

spread

stochastic_monk 8y ago
What does that mean, for those of us not in finance?
- throwaway4job 8y ago
  He’s referring to the spread between bid and ask prices, but he’s wrong, so you can safely ignore him.
- xcasperx 8y ago
  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 https://www.investopedia.com/terms/b/bid-askspread.asp
  - pgwhalen 8y ago
    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.
- frutiger 8y ago
  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.
  - vostok 8y ago
    It's a very indirect relationship to how much the exchange makes.
  - optionsguy 8y ago
    Market makers profit off the bid/ask, not exchanges.
    - adrr 8y ago
      They also get rebates for trades from the exchanges to encourage liquidity.
pgwhalen 8y ago
This would imply Robinhood is itself is a market maker, which is not true.

jameslevy 8y ago

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.

deleted 8y ago
[deleted]
vasilipupkin 8y ago
Come on. Robinhood wants you to be a paying customer, it's a freemium model, not an advertising business like FB

abhi3 8y ago

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.

deleted 8y ago
[deleted]
Mc91 8y ago
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.
- stygiansonic 8y ago
  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.

deepnotderp 8y ago

Information.

throwaway4job 8y ago

Currently, main revenue source is Robinhood gold (a margin loan), and the secondary source is selling order flow. The stated goal is eventually add more financial services.

mpd 8y ago

They answer this themselves - https://support.robinhood.com/hc/en-us/articles/202853769-How-Robinhood-Makes-Money https://support.robinhood.com/hc/en-us/articles/202853769-Ho...

tomrod 8y ago
> 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.
- paulpauper 8y ago
  Margin trading..the real money-maker. Charge clients 8%/year for a loan that costs you 3%.
- ericd 8y ago
  Do they mention that they're also selling your order flow?
stygiansonic 8y ago
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/AMTD2054.pdf https://www.tdameritrade.com/retail-en_us/resources/pdf/AMTD...
- stygiansonic 8y ago
  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/how-robinhood-makes-money.asp https://www.investopedia.com/articles/active-trading/020515/...

Misdicorl 8y ago

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.

SirYandi 8y ago

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

pgwhalen 8y ago

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.