43% of Robinhood’s Q1 2021 Revenue is from Citadel
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43% of Robinhood’s Q1 2021 Revenue is from Citadel

When zooming out, Robinhood and Citadel joined at the hip couldn’t have happened any other way.
Neither the author, Tim Fries, nor this website, The Tokenist, provide financial advice. Please consult our website policy prior to making financial decisions.

Editorial note: The title of this article was updated on May 5th, 2021, to provide further clarification on Robinhood’s source of revenue. The previous title may have been confusing.

As one delves deeper into the underpinnings of high finance, it is becoming more clear that a ‘true’ free market has difficulty existing outside of decentralized finance. Although the Robinhood-Citadel relationship sheds light on little-known dealings, these two particular entities are merely placeholders for a system that works, well, the only way it can work.

Robinhood Made Massive Gains from the GME Drama

Many have wondered what the financial outcome of WallStreetBets’ GameStop trading for Robinhood is—the brokerage that can be thanked for introducing zero-commission trading. No matter Robinhood’s subsequent reputation, it is safe to say it changed the stock market landscape, forcing all other brokerages to follow. Now that Robinhood Securities filed an SEC earnings report for Q1 2021, we can see that Robinhood’s revenue increased by 263% when compared to Q1 2020.

Robinhood almost tripled its income from Q1 2020 (image by The Tokenist).

More importantly, we can visualize Robinhood’s relationship with Citadel Securities market maker, to whom it sold market order flows among four other market makers: Virtu Americas, Two Sigma Securities, G1X Execution Services, and Wolverine Securities.

Citadel’s impact in options and stocks on Robinhood’s revenue (image by The Tokenist).

Overall, out of the $331 million pie for Q1 2021, Robinhood generated $133 million from stock trading and $198 million from options trading. As Robinhood is scheduled to be listed on Nasdaq in the first half of 2021, it will be interesting to see its stock performance given these revelations and remaining unresolved lawsuits.

A Lesson in Centralized Market Makers

In the same Q1 2021 period, Melvin Capital – a hedge fund – lost about half of its total capital during the GME action as it tried to short sell the gaming retail chain. It then came to light that Citadel Securities, Robinhood’s core income source for order flows, also had a large stake in Melvin Capital. Conspicuously, at the height of GME’s short squeeze, Robinhood restricted the trading of GME and a number of other affected stocks.

More conspicuously, it has been revealed that Citadel Securities has a rich history of collecting FINRA/SEC violations. In the meantime, its conglomerate serves as both an exchange and a market maker. Last year, Citadel captured just over 13% of all trading volume in the US. For GME trading specifically, Robinhood supplied the market maker with up to 40% of trading volume, including both options and stocks.

You see, a brokerage like Robinhood has no choice but to route its order flows to market makers. After all, Robinhood is merely an intermediary for the trader. It is MMs that facilitate the orders by infusing the market with liquidity. For this task, they have to be large financial institutions like Citadel, in order to cover for a large volume of ask and bid positions.

By actively participating on the both sides of the market, MMs not only pay for order flows (PFOF), but they also charge for ask and bid spreads to cover for the risk of holding securities that may devalue after the purchase. Of course, by doing this, they also detect trading patterns unavailable to retail traders.

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The Real MVP: Market Makers vs. Automated Market Makers

As you can tell, that’s a lot of faith to be placed in a system ridden with vested, conflicting interests. Various lawsuits and violations may come and go, but the system will remain as it is— in large part, because it is centralized. In this light, following the emergence of blockchain and smart contracts, a project like Uniswap could be considered a more significant pioneer than Robinhood.

The DeFi protocol introduced automated market makers (AMMs) consisting of liquidity pools and liquidity providers, thus creating a decentralized exchange (DEX). Currently pooling $7.5 billion, Uniswap rewards liquidity providers for locking in their crypto assets. These rewards are commonly called yield farming.

Uniswap total value locked (TVL) over one year (image credit: DeFipulse.com).

There are no brokerages and market-making behemoths looking to put a spike in certain trades. Everything is automated and decentralized. Just today, on May 5th, Uniswap is set to launch a massive v3 upgrade on the Ethereum mainnet, introducing a number of improvements that give yield-farmers greater control to customize their gains and increase their capital efficiency.

Given the way Ethereum has been outperforming Bitcoin in anticipation of its proof-of-stake (PoS) transition, this may be the time to consider which kind of finance instills more confidence: One that is highly susceptible to the corruptibility of human minds, or one that relies on an open-source, blockchain-fortified code of ones and zeros?

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Have you looked into Ethereum network’s staking or DeFi protocols since GME trading? Let us know in the comments below.