How Does Robinhood Make Money?

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How Does Robinhood Make Money?

Robinhood Markets Inc. is a financial technology (fintech) company that operates an online discount brokerage with commission-free trading. It provides a web- and mobile-based financial services platform that investors can use to buy and sell stocks, exchange-traded funds (ETFs), options, and American depositary receipts (ADRs) (ADRs).Its users also can invest in certain cryptocurrencies.

How does Robinhood make money? Robinhood makes money in a number of ways, notably through a system known as payment for order flow. That is, Robinhood routes its users’ orders through a market maker who actually makes the trades and compensates Robinhood for the business at a rate of a fraction of a cent per share.

Robinhood also generates money by earning a greater interest rate on consumer deposits.

Furthermore, the firm gets money via its premium Robinhood Gold services, debit card fees, and other minor income sources.

Key Takeaways

  • Robinhood is a low-cost online brokerage that provides a commission-free investing and trading platform.
  • The great bulk of the company’s income comes from transaction-based fees, which include payments for order flow.
  • Robinhood’s net funded accounts climbed by 81% in 2021, with around 10 million new accounts opened throughout the year, but decreased during the fourth quarter.
  • After more than tripling its employment to 3,800 by the end of 2021, Robinhood announced in April 2022 that it will lay off around 9% of its full-time employees.

Robinhood’s Financials

Robinhood reported a net loss of $423.3 million in the fourth quarter (Q4) of fiscal year (FY) 2021, which ended Dec. 31, 2021, compared to a net gain of $13 million in the prior-year quarter, as well as 14.2% year-over-year (YOY) increase in net sales. Share-based compensation expenditures totalling $318 million affected net loss for the quarter.

Robinhood’s net cumulative funded accounts, a crucial indicator that measures the number of accounts into which customers made an initial deposit or money transfer over a certain time, increased by more than 81% year on year to 22.7 million in Q4 FY 2021. The company’s monthly active user base increased by around 48% year on year but decreased by approximately 8% sequentially in Q4 FY 2021.

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The firm also released its fiscal year 2021 results, which concluded on December 31, 2021. Robinhood reported a $3.7 billion financial loss for the fiscal year, compared to a $7.4 million net profit in FY 2020. Share-based compensation expenditures were almost $1.6 billion in FY 2021, a considerable increase from $24 million in FY 2020. Annual sales increased by 89.3% year on year to $1.8 billion.

Robinhood’s IPO

On July 1, 2021, Robinhood filed an S-1 registration with the U.S. Securities and Exchange Commission (SEC) after announcing a confidential initial public offering (IPO) filing on March 23, 2021.

It updated its S-1 on July 19, 2021, to declare that it will sell 52.4 million shares, with its founders and chief financial officer (CFO) selling an additional 2.6 million for a total of 55 million. Robinhood went public for $38 per share, valuing the company at $32 billion.

The shares are listed under the ticker HOOD on the Nasdaq.

Robinhood’s Competitors

Other discount brokerages, new and existing fintech businesses, banks, cryptocurrency exchanges, asset management organizations, and technology platforms all provide considerable competition to Robinhood.

Charles Schwab Corp. (SCHW), Morgan Stanley’s (MS) E*TRADE Financial Holdings LLC, Coinbase Global Inc. (COIN), Square Inc. (SQ), and River Financial Corp. are among its significant rivals (RVRF).

Robinhood’s Business Segments

Robinhood operates as a single business sector and presents its financial results as such. It does, however, categorize revenue into the following categories: transaction-based revenues, net interest revenues, and other revenues. These revenue types are examined in further detail below.

Transaction-Based Revenues

Robinhood earns transaction-based income by sending its customers’ orders for options, stocks, and cryptocurrencies to market makers, a practice known as payment for order flow (PFOF).Brokerage companies that employ PFOF are compensated for directing clients’ orders to a certain market maker. The payment is normally just a fraction of a cent per share, but it may be a major source of income for businesses that deal with a high volume of orders. PFOF is one of the main reasons Robinhood can provide zero-commission trading. In Q4 FY 2021, Robinhood’s transaction-based revenue increased 12.2% to $362.7 million, accounting for roughly 73% of total revenue.

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Net Interest Revenues

On securities lending transactions, Robinhood earns net interest income (interest revenue minus interest expenditures). In addition, interest is generated on margin loans made to users, and interest charges are spent in conjunction with the company’s revolving credit facilities. Net interest revenue increased 0.5% to $63.4 million in Q4 FY 2021, accounting for 17.5% of overall income at Robinhood.

Other Revenues

Robinhood’s other income streams are mostly subscription fees for Robinhood Gold. Robinhood Gold is a paid membership service that provides consumers with premium services like as increased fast deposit access, expert research, Nasdaq Level II market data, and margin investing access for authorized users. Other sources of income include proxy refunds and other user fees. Revenue from these sources increased by 84.0% to $35.4 million in Q4 FY 2021, accounting for about 9.8% of total revenue.

Robinhood’s Recent Developments

On April 26, 2022, Robinhood CEO and co-founder Vlad Tenev stated that the firm will lay off around 9% of its full-time workers. Tenev highlighted that Robinhood has raised its personnel sixfold from the end of 2019 to 3,800 by the end of 2021. “This fast expansion in personnel has resulted in some duplicate positions and job tasks, as well as more levels and complexity than are optimum,” he wrote. The following day, Robinhood’s share price hit a new low, representing a 75% drop from its IPO price.

Robinhood reported the largest rise in bitcoin income in its Q4 2021 report, which more than doubled as the firm introduced Crypto Gifts, a platform that allows consumers to gift cryptocurrency to relatives and friends. Robinhood’s crypto footprint is expected to grow further in 2022, as the business plans to provide cryptocurrency wallets and associated services in Q1 2022. It also plans to expose its crypto platform to users worldwide in 2022.

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After the meme stock trading frenzy that pushed the share prices of firms like GameStop Corp. (GME) and AMC Entertainment Holdings Inc. (AMC) to stratospheric heights earlier this year, the SEC announced in early June 2021 that it was undertaking a thorough study of market structure. The SEC was concentrating on payments for order flow, which ensures that trading orders from private investors are directed to off-exchange, high-speed traders known as wholesalers, such as Citadel Securities LLC and Virtu Financial Inc. (VIRT).Off-exchange merchants must give pricing at least as good as the national best offer, which is what the legitimate exchanges offer. However, with an increasing amount of transactions occurring outside of recognized exchanges, the SEC is worried about a lack of transparency in execution pricing for such deals.

PFOF has been criticized by SEC Chairman Gary Gensler, who claims the practice creates a conflict of interest for brokerages by incentivizing them to send client orders to the highest bidder rather than the market maker giving the best pricing or quickest execution. The SEC is apparently reviewing a number of additional concerns that may impact Robinhood, such as “digital trading prompts” that gamify the trading process to promote excessive trading, market concentration and price difficulties, and settlement timelines. Following the recent stock market turbulence, retail brokerages were required to put up more collateral, and they blamed the two-day settlement procedure for stock deals. According to reports, the SEC was contemplating cutting settlement time to a single day.

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