How Does Robinhood Make Money?
Robinhood is an industry leader with commission-free stock trading. But how does the millennial-loved mobile app make money?
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You don’t have to be the 21st century “Wolf of Wall Street” to trade stocks on Robinhood. 🐺
The pioneer mobile trading platform makes the stock market easy—and low key kind of fun.
The user-friendly app has a mission to make trading stocks accessible to everyone, not just to the wealthy. It gives you less of a classic Wall Street executive vibe and more of a heroic archer in tights one.
And racking up a total of over 13 million users in 2020, it’s clear Robinhood is a go-to for many DIY investors.
So, what’s the biggest way the mobile broker increases its accessibility to everyone? By offering no fee and commission-free trades. Yep, this means exactly what you think—trading on Robinhood is free. And this is not something many traditional brokers can say for themselves. Well, at least before Robinhood entered the game in 2013.
If Robinhood is commission and fee-free, then how do they make money? How does the broker giant with an $11.2 billion valuation gain revenue? 🤔
Robinhood actually has many sources of income. The largest chunk comes from their Gold accounts, interest, and high-frequency trading practices. The mobile broker also makes money from market maker rebates, cash management, and other services.
Still scratching your head? Here are the specific ways Robinhood makes money.
1. Upgraded Accounts: Robinhood Gold 🥇
Robinhood Gold is the premium account tier on the trading platform. Becoming a Gold account holder has perks for both the user and the broker. The perk for Robinhood themselves? The large amount of money they make from Gold accounts and the associated features.
Gold members pay a monthly fee of $5 (as of 2020) for a slew of extra features standard users can’t access. With Gold, Robinhood allows users access to margin trading or “Buying on margin.” Margin trading is when the broker (Robinhood in this case) lends money to the investor to trade stocks.
Margin lending is a standard loan offered by many online brokers. The margin is the amount of equity (what you can borrow) in your account. Margin accounts on Robinhood also require an account minimum of $2000. This is a regulatory requirement for collateral purposes. Margin users on Robinhood can borrow to trade on approximately 50% of their balance.
Gold customers also have access to more in-depth research tools. This includes Morningstar research reports and NASDAQ level II Market Data. Another Gold feature is instant access for deposits over $1000. This is a big deal considering standard users have to wait 2 trading days to trade with a $1000+ deposit.
2. Interest 💰
Another large chunk of the money Robinhood makes comes from interest. Interest income is a standard for most of the financial sector including brokerages and banks.
Robinhood earns interest in a couple of different ways. Firstly, the broker earns interest on funds lent for margin trading. Users pay 5% yearly interest if they utilize more than the $1000 margin for trading.
😳 Spoiler alert: Several margin users wind up paying interest to buy stocks on margin.
Additionally, Robinhood earns interest by lending out investor’s uninvested cash. While this practice sounds a little fishy at first, this is actually a common practice. Compare it to how a bank makes interest on cash deposits. Idle funds are lent to other consumers and injected into other projects. These loans then collect interest, generating income for the institution.
3. Market Maker Rebates 💸
When you place an order on Robinhood, it’s then sent to a market maker for fulfillment. Market makers are professional traders and are key to the function of the stock market.
These market makers compete with exchanges by offering rebates to brokerages. And typically, makers offer better prices than exchanges. According to this October 2018 statement, market makers pay Robinhood around ~$0.00026 per dollar traded. This amounts to 2.6 cents per every $100.00 trade.
While $0.00026 per dollar traded may seem minuscule, these numbers can add up. Robinhood reported a daily average of 4.3 million trades in June of 2020. There are currently no reports as to the average dollar amount per trade. But, it’s easy to visualize lots of dollar signs with trade numbers like those.
4. High-Frequency Trading Firms 📈
Robinhood makes a ton of money from High-Frequency Trading (HFT.) More than 40% (Bloomberg, 2018) of their revenue comes from this controversial practice. HFT consists of directing the execution of trades to third party market makers.
In Robinhood’s case these are makers like Citadel and Two Sigma. These trades execute on the DL instead of being processed on a public exchange.
Robinhood advertises that these private makers allow better execution quality for their trades. This is especially in comparison to the public exchanges.
The real jaw-dropper? Robinhood makes money from selling customer orders to HFT firms. Alphacaution Research reported in Q1 of 2020 that Robinhood received around $18,955 for every dollar traded. For a comparison, TD Ameritrade received $1,881 and Schwab $195.
5. Cash Management Services 💳
Another way Robinhood makes their money is through their cash management services. Robinhood offers the Robinhood Mastercard® in partnership with Sutton Bank. This debit card allows account holders to use their brokerage account to make purchases.
The cash sweeps to a network of partner banks, earning a little bit of interest for the cardholder.
Robinhood receives an interchange fee from the debit card issuer. The issuer sends this fee with the intention to cover transaction processing and fraud. Robinhood also receives routine payments from the program banks. This fee is a direct payment for sweeping funds to them.
6. Other Services and Fees 💲
Though a smaller source of income, Robinhood does have a few fees for other services. This includes fees for foreign stock transactions and live broker trading via the phone.
Robinhood also charges a $75 transfer fee if the account holder wishes to switch their account to another broker. You can find Robinhood’s full fee schedule on their website.
The Bottom Line: Robinhood Makes Money ✅
Robinhood became a real game-changer upon its launch in 2013. By a show of hands, who would much prefer to trade stocks for free? ✋
But, allowing investors to trade for free does not mean Robinhood skimps out on their revenue. Robinhood is an industry leader in the trading game and their numbers don’t lie. With 13 million users, Robinhood is one of the top stock trading apps available—with soaring popularity among millennials.
“Free” may subconsciously trigger a sense of low-quality in our minds. But, rest assured, free means no such thing when it comes to Robinhood!
Compare Robinhood
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All reviews, research, news and assessments of any kind on The Tokenist are compiled using a strict editorial review process by our editorial team. Neither our writers nor our editors receive direct compensation of any kind to publish information on tokenist.com. Our company, Tokenist Media LLC, is community supported and may receive a small commission when you purchase products or services through links on our website. Click here for a full list of our partners and an in-depth explanation on how we get paid.
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