Founded in 2013, Menlo Park-based Robinhood Markets Inc. (NASDAQ: HOOD) is an online broker that offers an app that lets users trade financial assets like stocks, exchange-traded funds (ETFs), options and cryptocurrencies commission-free and with no account minimums. The broker was among the first to provide such a service without charging commissions, and it currently has over 22.8 million funded accounts.
Commission-free trading has been around for a number of years, so how do brokerages like Robinhood make money if they don’t charge transaction commissions? In the following article, Benzinga explains in detail how Robinhood makes money, as well as what business model they use and the valuable services the broker’s platform provides. Read on to find out more about Robinhood’s commission-free broker business model and how it affects clients.
How Does Robinhood Make Money?
Robinhood offers its investment app services to buy and sell stocks without paying a commission. When you buy or sell stocks, ETFs, and options on your Robinhood account, your orders are sent to one or more market makers or exchanges who execute your trade. Robinhood makes money by receiving compensation from those market makers in return for receiving the right to fill your order. This practice is commonly referred to as Payment for Order Flow (PFOF) and it is regulated by the U.S. Securities and Exchange Commission. Many other online brokerages, including TD Ameritrade, E*Trade, Schwab, SoFi, CashApp, and WeBull also generate revenue through PFOF.
In addition, Robinhood makes money in the form of cash income from uninvested funds and interest paid on stock loans, selling premium memberships and other subscription fees. Find out more about the three main revenue sources that Robinhood derives income from below:
Robinhood’s main source of revenue consists of selling its order flow, which is done by routing its order flow to companies like Two Sigma and Citadel Securities, which in turn make their money through high-frequency trading (HFT). This type of revenue makes up over half of Robinhood’s net revenue.
The way Robinhood makes money from routing order flow is that every time a Robinhood user places an order, Robinhood sends the order to one of these market-maker partner firms. A market maker typically quotes two-way prices in stocks and may hold long or short positions in them. The market maker can also serve as an intermediary between the investment app and the actual stock market. Robinhood and other retail brokers use market makers to meet their Best Execution obligations by providing price improvement to customer orders versus the Market price (the “National Best Bid and Offer”).
High-frequency market-making firms pay Robinhood for the right to execute their customer’s trades in the stock market. While the profit from this activity typically amounts to less than one penny per trade, when you have more than 22 million customers making trades every day, the resulting gains can add up quickly.
Net Interest Revenue
In addition to transaction-based revenue, Robinhood also receives revenue through net interest income. Typically, all stock brokers keep stock shares and excess cash for their clients from which receive a portion of the lending and interest income earned.
Although Robinhood doesn’t pay interest on cash deposits itself, it moves its clients’ money into a network of FDIC-insured banks that hold and invest the cash while also paying interest on the deposits. Clients receive this interest at a rate above the Fed’s benchmark interest rate, but less Robinhood’s share, as part of Robinhood’s Cash Management program.
Also, the stocks held in Robinhood’s client accounts can be loaned out to short-sellers to receive interest. The stock loan business makes up a significant revenue source for stockbrokers since short-sellers need to borrow shares they want to sell short.
Such interest sources produce considerable income for Robinhood that can add up to as much as 12% of the firm’s overall revenues in any given quarter. Robinhood’s net interest revenue makes up for its interest expenses from the income generated.
Membership Fee Revenue
Robinhood offers its users the Robinhood Gold premium service in exchange for a $5 monthly fee. This premium service gives subscribing customers access to margin trading and other valuable features.
Subscribing to Robinhood Gold gives you access to professional research and stock reports by the well-regarded independent investment research company Morningstar. You also get margin account access to increase your buying power or trading leverage that includes $1,000 of margin, although if you want to use a margin amount of over $1,000, then a margin interest rate charge of 2.5% applies.
Robinhood’s Gold package also includes access to Level II market data showing real-time bids and offers on virtually any security. In addition, you get instant deposit premiums that let you access additional funds when making a deposit ranging up to $50,000, versus only $1,000 for regular accounts.
What Does Robinhood Offer?
Robinhood offers its clients a wide range of financial products you can trade or invest in. They include:
Stocks and ETFs: You can trade U.S. listed and over-the-counter (OTC) securities and ETFs without paying commissions or maintaining account minimums. These commission-free transactions must be done via Robinhood’s mobile app or website in one of the firm’s individual cash or margin brokerage accounts. While no commissions are charged, Robinhood does charge a $0.000119 per share Transaction Activity Fee (TAF) with a cap of $5.95 per trade.
Options: Options transactions can also be made on the app or website free of commissions, although the TAF for options is $0.002 per contract with a per trade cap of $5.95.
American Depository Receipts (ADRs): ADRs consist of shares of foreign companies that are traded on U.S. stock exchanges. They are issued by custodial banks that hold the actual shares. ADRs generally trade just like normal U.S. stocks, but some ADRs are subject to custody fees. Fee information for specific ADRs can be obtained from the ADR’s custodial bank.
Cryptocurrencies: In February 2021, Robinhood introduced cryptocurrency trading. Its clients can make transactions in Bitcoin (BTC), Ethereum (ETH), Litecoin (LTE), Ethereum Classic (ETC), Dogecoin (DOGE), Shiba Inu (SHIB), Compound (COMP), Polygon (MATIC), Bitcoin Cash (BCH) and Bitcoin SV (BSV). While most crypto exchanges charge as much as 4% of the amount traded per transaction, Robinhood charges no fee for these trades.
Initial public offerings access (IPOs): Robinhood recently introduced allowing clients access to IPOs. Now you can apply to buy new shares in companies initially issuing stock before the shares start trading on public exchanges. While the number of IPO shares you can buy may be limited, Robinhood requires no minimum or special qualifications to participate in IPOs.
Fractional shares: You can trade fractional shares with Robinhood. This means you can trade less than a full share of equity in any stock. Fractional shares let you choose the exact amount of money you wish to invest, and Robinhood then converts the amount to parts of a whole share. You can start investing in fractional shares with as little as $1. This feature can come in very handy when you only have a small amount to invest but you still want to try to profit from an anticipated move in a high-priced stock.
Cash management: An additional feature of Robinhood accounts is the company’s cash management program. Through this program, all of your uninvested cash is placed with a program bank that currently pays a 0.30% average percentage yield (APY) interest on the balance. You also get a Robinhood debit card that works in 75,000 free ATMs and can be used anywhere that Mastercard Inc. (NYSE: MA) is accepted.
Is Robinhood Worth It?
Robinhood’s commission-free brokerage transactions and its “freemium” business model revolutionized the retail brokerage business by giving millions of people with limited funds the chance to invest and trade stocks, ETFs and other securities and derivatives. Depending on your needs as a trader or an investor, Robinhood could be a very good choice as a broker.
It's important, however, to understand how Robinhood makes money. Basically, like many retail brokers, the company makes its money by selling your orders to market makers.
Also, in March 2020, the company had considerable difficulty with untimely outages and in January 2021 the company, like some other retail brokers imposed temporary but controversial trading restrictions on buyers of Game Stop and some other meme stocks in order to meet its federal clearinghouse deposit requirements. These adverse events could severely impact traders and investors who need to monitor and trade the market during normal trading hours on a reliable platform that will not impose unanticipated restrictions on their stock transactions.
With regards to value, Robinhood offers a lot of value for very little out-of-pocket money. Besides the possibility to trade commission-free in U.S. stocks, options, ETFs and cryptocurrencies, the broker’s $5 a month charge for its premium Gold account gives you access to a significant amount of professional research, margin trading and Level II quotes that make this account type well worth the price.
After Robinhood entered the market in March of 2015, many other brokerages began to pop up offering similar low or zero-cost trading services. By October 2019, several major and well-established brokerage firms, including Charles Schwab, E-TRADE and TD Ameritrade, announced that they would eliminate trading fees in response to this brash new competitor. Benzinga offers insights and reviews on these and other brokers offering similar products and services as Robinhood, so check out the list provided below to compare Robinhood with these brokers.
- Best For:Intermediate Traders and Investorssecurely through Webull's app
- Best For:Active and Global TradersSecurely through Interactive Brokers’ website
- Best For:Demo Accountssecurely through eToro Stocks's website
eToros securities trading offered by eToro Securities, Inc, (“the BD”), member of FINRA and SIPC. Investing involves risk.
- Best For:Fund Investingsecurely through Charles Schwab's website
Frequently Asked Questions
What percent of profit does Robinhood take?
None. Robinhood does not engage in managing portfolios for its clients; therefore, none of your profits and no percentage of your total assets would go to Robinhood if you trade on its platform.
How does Robinhood make money on cash management?
Robinhood makes money on its cash management program by depositing the excess funds in your account with major banks at market deposit rates while currently paying you just 0.30% interest on those funds. Robinhood pockets the difference between those rates as its net interest revenue.
Whats one downside to Robinhood?
One downside to Robinhood is that they dont offer mutual funds like most stock brokers do.
Why did Robinhood make staff cuts?
On August 2nd, 2022 Robinhood announced they cut around a quarter (23%) of their staff due to their sixth quarterly loss.
About Jay and Julie Hawk
During her financial career, Julie developed world-class expertise in technical analysis, including Elliott Wave Theory, and was deeply involved in initiating research into automated trading and trading signal systems. As a member of the San Francisco Writers’ Guild, Julie regularly wrote trade strategies, educational material, market commentary, foreign exchange newsletters, reports, articles and press releases. In addition, Julie was interviewed for various financial markets magazines and news wires in her professional capacity as a forex and derivatives expert. Since retiring from working at banks, Julie has been writing and editing books and articles about financial markets for companies like Benzinga, as well as trading forex online and mentoring other traders as part of TheFXperts’ financial team.
In addition to trading stock index, forex and commodity futures and options professionally on exchange floors, Jay also has experience trading stocks and options for private investors and trading forex online for his own account. He has also developed extensive experience in performing and using fundamental economic and corporate analysis to inform his trading and investment activities. Jay is also an expert financial writer with particular expertise in reviewing online brokers and investor services.