Introduction

Robinhood has revolutionized the world of investing by offering commission-free trades to its users. However, many people wonder how the company is able to make money without charging fees. In this article, we will explore the various ways that Robinhood generates revenue, providing users with a better understanding of the platform’s business model.

Commission-Free Trades

The primary way that Robinhood generates revenue is through offering commission-free trades to its users. Despite the lack of fees, Robinhood still earns money through the practice of selling order flows to third-party firms. Essentially, Robinhood sells the right to execute trades placed by its users on the open market. The third-party firm then pays Robinhood for the chance to execute these trades, providing Robinhood with a stream of revenue. While this practice has sparked concerns over conflicts of interest and market manipulation, it remains a key revenue stream for Robinhood.

Interest on Cash Balances

Another way that Robinhood earns revenue is through interest on cash balances held in users’ accounts. When users deposit cash into their Robinhood account, that money sits in a bank account until it is used to purchase a stock or other investment. During this time, Robinhood earns interest on that cash balance. Given the size of Robinhood’s user base, this can add up to a substantial amount of money over time. For example, in 2020, Robinhood reported earning $234 million from interest on cash balances.

Robinhood Gold

For users who want additional features and perks, Robinhood offers a premium subscription service called Robinhood Gold. For a monthly fee, users gain access to a variety of benefits such as access to margin trading, larger instant deposits, and after-hours trading. While users pay for this service directly, Robinhood also generates revenue through the practice of lending out the Gold members’ marginable securities. This allows the company to earn interest on these securities and create an additional revenue stream.

Receiving Rebates

Another way that Robinhood generates revenue is by receiving rebates from market makers. Essentially, a market maker is a firm that helps facilitate trades on the stock market. When users place trades on Robinhood, the platform will route the trade to a market maker who will execute the trade. In exchange for this service, the market maker will pay Robinhood a small fee. This practice is known as receiving a rebate and is a common revenue stream for brokerages like Robinhood.

Borrowing from Customers

Robinhood Snacks is a feature that allows users to lend money to the company and earn interest in return. Users can choose to lend out cash to Robinhood, who will then use that money to lend out to other users as part of its margin trading feature. In return for lending out their money, users receive annualized interest rates. This feature not only serves as a way for Robinhood to earn revenue through interest payments but also allows the company to generate additional margin trading revenue.

Offering Margin Trading

While not a revenue stream in and of itself, margin trading is a feature that Robinhood offers that can generate significant profits. Margin trading allows users to trade with borrowed funds, essentially increasing their buying power. While this can lead to larger potential gains, it also comes with significant risks. Additionally, Robinhood charges interest on any funds that are borrowed, providing the company with an additional revenue stream.

Securities Lending

Finally, Robinhood earns money by lending out its users’ securities to other brokerages. Essentially, Robinhood lends out the stocks that its users hold in exchange for other securities or cash collateral. The other brokerage then uses those stocks to execute trades and earns revenue in the process. This practice allows Robinhood to generate additional revenue without having to charge its users fees.

Conclusion

By utilizing a variety of revenue streams, Robinhood has been able to offer commission-free trades while still generating significant profits. From selling order flows to third-party firms to offering a premium subscription service like Robinhood Gold, the company has found multiple ways to earn money. By understanding how the platform generates revenue, users can make more informed decisions about their investments and potentially use this knowledge to their advantage.