Robinhood Markets Inc. is a discount-brokerage service that offers investors commission-free trading through its website and through mobile apps. As of October 2018 the company was generating nearly half of its revenue from payments for order flow, a ubiquitous, although controversial, practice whereby a brokerage firm receives compensation and other benefits for directing orders to different parties for trade execution. While the compensation is negligible for small retail trades, a company that directs billions of dollars in trades to market makers can earn substantial amounts. Robinhood refers to this source of revenue as rebates from market makers and trading venues. Other major sources of revenue include a $5 monthly fee for optional membership to Robinhood Gold, which gives the client access to margin loans and a suite of investing tools and data; interest on uninvested cash; lending stocks purchased on margin; and fees on purchases using the company's Cash Management debit card.

Key Takeaways

  • Robinhood provides commission-free trading for stocks, ETFs, options, ADRs, and cryptocurrencies.
  • It generates revenue from a broad range of sources, including Gold membership fees, rebates from market makers and trading venues, and stock loans.
  • Robinhood is a leading player in the emerging fintech industry.
  • In December 2019, Robinhood was fined $1.3 million by FINRA for failing to direct trades so that its customers received the best prices.

Robinhood's Industry

Robinhood competes in the nascent but fast-growing fintech industry, where traditional and new players have invested billions of dollars to move investing, banking, and money management and other financial services to digital platforms. Robinhood has leveraged technology to become one of the first companies to offer commission-free stock trading, forcing industry incumbents to lower their fees.

Robinhood has focused on developing proprietary software applications tailored to meet the specific investment and trading needs of its customers in several key areas. These include trading cryptocurrencies like Bitcoin and Ethereum, U.S. exchange-listed stocks and ETFs, options on U.S. exchange-listed stocks and ETFs, and American Depository Receipts (ADRs) on more than 250 globally-listed companies.

Fundraising and Financials

Robinhood was valued at $7.6 billion in a late-stage round of funding in July 2019, when it raised $323 million in the Series E funding round. Notable investors were DST Global, NEA, Sequoia, Thrive Capital, and Ribbit Capital. DST Global invested another $50 million in October 2019 to round out the total amount raised in the Series E round to $373 million. The company has raised $912 million in total funding.

History and Leadership

The Menlo Park, California-based company was founded in 2013 by the company's current co-CEOs, Stanford University graduates Baiju Bhatt and Vladimir Tenev. The two founders were looking for a way to democratize finance by making it more accessible to young and less affluent investors. They offered their first brokerage services to the public in 2015, and by 2016 had 1-million users. There are now more than 10 million people who have accounts on Robinhood. Their median age is 30 and about half of them are first-time investors. 

Recent Developments

In December 2019, the Financial Industry Regulatory Authority (FINRA) fined Robinhood Financial LLC, a subsidiary of Robinhood Markets, $1.25 million for best execution violations related to customers' equity orders and related supervisory failures that occurred between October 2016 and November 2017. Federal law requires that brokers provide the most advantageous order execution for their customers given the prevailing market environment, and FINRA specifies that this includes resultant prices to customers that are as favorable as possible under those prevailing conditions.

In early spring of last year Robinhood acquired MarketSnacks, a digital media company that publishes a daily newsletter aimed at explaining the world of Wall Street in simple terms. The co-founders of MarketSnacks, Jack Kramer and Nick Martell, joined Robinhood to perform roles as Managing Editors of News.