To answer the question “how does Robinhood make money?” we will first look at how the platform works. Unlike traditional brokerages, Robinhood uses market makers to execute trades. Market makers provide two-way pricing on stocks and may hold long or short positions. They act as a middleman between investors and the stock market and help the platform meet its Best Execution obligations. In other words, these companies are the middlemen between Robinhood and the stock market.
To earn money from this model, Robinhood routes order flow to other companies. Two Sigma and Citadel Securities both receive their income through high-frequency trading. Together, these two companies earn more than half of Robinhood’s net revenue. In short, they make money from your trading. This means that the system isn’t a scam. If you’re wondering how Robinhood makes money, read on! It may surprise you to know that the service costs $5 per month to use, but it’s worth it to avoid fees.
In the first quarter of 2020, the Robinhood app processed over $1 billion worth of transactions. The company raised $50 million and became the first fintech startup to win the Apple Design Award. In 2016, it launched its Robinhood Instant service, which enabled users to borrow up to $1,000 for trading and cash out their profits instantly. These services are a perfect fit for the millennial generation. There are so many reasons why Robinhood is so successful.
In addition to charging its users for its services, Robinhood also earns money from the interest on the funds they borrow. Robinhood receives a high interest rate when lending out capital to other customers. It also earns money from margin loans and uninvested cash in its accounts. While this isn’t entirely transparent, it’s easy to see how Robinhood makes money. These fees are a necessary part of running a business.
While Robinhood doesn’t pay interest on cash deposits, they do make money on their stock trading services. Robinhood receives a small percentage of each trade as its commission. This money can add up quickly if you have 22 million customers trading on the platform daily. In addition to this, the company also earns net interest on its stock loans. In fact, this portion is the most profitable part of the Robinhood model, and it’s a source of revenue for the service.
Aside from trading commissions, Robinhood also receives interest on margin deposits, which are used by its algorithm to trade stocks and other financial assets. They charge users a five-dollar monthly subscription to use their margin account. Users also get access to Morningstar research reports, Nasdaq Level II Market Data, larger instant deposits, and margin investing. The company earns money by using this model to facilitate their investors and users.
Another interesting aspect of Robinhood is that it has no commission on trades made in US stocks, options, and even cryptocurrency. Other than charging commissions, the service provides free stock trading on foreign stocks, ETFs, and options. However, there are some fees for ADRs, but these fees are small compared to the commissions the trading app charges. However, the overall service is free and easy to use.