How Robinhood Makes Money

Payment for order flow generates most of Robinhood’s revenue

Robinhood Markets Inc. is a financial technology (fintech) company that operates an online discount brokerage offering commission-free trading. It provides a web- and mobile-based financial services platform that allows users to invest in and trade stocks, exchange-traded funds (ETFs), options, and American depositary receipts (ADRs). It also allows users to invest in certain cryptocurrencies based on their geographic location.

Robinhood makes money through payment for order flow, premium membership fees, stock loans, interest on uninvested cash, interchange fees related to its debit card, and other smaller revenue streams.

After announcing a confidential initial public offering (IPO) filing on March 23, 2021, Robinhood submitted an S-1 registration to the U.S. Securities and Exchange Commission (SEC) on July 1, 2021. On July 19, 2021, it amended its S-1 to announce that it would be selling 52.4 million shares with its founders and chief financial officer (CFO) selling another 2.6 million for a total of 55 million. Robinhood went public at $38 a share, giving it a valuation of $32 billion. The shares are listed under the ticker HOOD on the Nasdaq.

Robinhood faces significant competition from other discount brokerages, new and established fintech companies, banks, cryptocurrency exchanges, asset management firms, and technology platforms. Some of its major competitors include Charles Schwab Corp. (SCHW), Morgan Stanley’s (MS) E*TRADE Financial Holdings LLC, Coinbase Global Inc. (COIN), Square Inc. (SQ), and River Financial Corp. (RVRF).

Key Takeaways

  • Robinhood is an online discount brokerage that offers a commission-free investing and trading platform.
  • The company gets the vast majority of revenue from transaction-based revenues, including payments for order flow.
  • Robinhood’s net funded accounts increased by 81% in 2021, with about 10 million accounts added over the course of the year, but fell during the year's fourth quarter.
  • After more than doubling its workforce during 2021 to 3,800 by the end of the year, Robinhood said in April 2022 it would lay off about 9% of its full-time workers.

Robinhood’s Financials

In its most recent quarterly report for the fourth quarter (Q4) of fiscal year (FY) 2021, ended Dec. 31, 2021, Robinhood posted a net loss of $423.3 million compared with net income of $13 million for the prior-year quarter, as well as 14.2% year-over-year (YOY) growth in net revenue. Net loss was impacted by share-based compensation expenses totaling $318 million for the quarter.

Robinhood’s net cumulative funded accounts, a key metric that gauges the number of accounts into which users made an initial deposit or money transfer during a specified period, rose by more than 81% YOY for Q4 FY 2021 to 22.7 million. The company’s monthly active user base grew by about 48% YOY but declined by roughly 8% on a sequential basis for Q4 FY 2021.

The company also provided results for FY 2021, which ended Dec. 31, 2021. Robinhood posted a net loss of $3.7 billion for the year, compared with net income of $7.4 million for FY 2020. Share-based compensation expenses were nearly $1.6 billion for FY 2021, significantly higher than $24 million in these expenses for FY 2020. Annual revenue rose 89.3% from the previous year to $1.8 billion.

Robinhood’s Business Segments

Robinhood operates and reports its financial results as one business segment. However, it does provide a breakdown of revenue into the following categories: transaction-based revenues; net interest revenues; and other revenues. We take a closer look at these revenue categories below.

Transaction-based revenues

Robinhood generates transaction-based revenues by routing its users’ orders for options, equities, and cryptocurrencies to market makers, which is a process known as payment for order flow (PFOF). Brokerage firms that use PFOF are paid to direct customers' orders to a particular market maker. The payment is usually only fractions of a penny per share but can be a significant source of revenue for companies dealing with a large number of orders. PFOF is a major reason why Robinhood is able to offer zero-commission trading. Robinhood’s transaction-based revenue rose 12.2% to $362.7 million in Q4 FY 2021, accounting for nearly 73% of company-wide revenue.

Net interest revenues

Robinhood generates net interest revenue (interest revenue minus interest expenses) on securities lending transactions. Interest is also earned on margin loans to users, and interest expenses are incurred in connection with the company’s revolving credit facilities. Net interest revenues rose 0.5% to $63.4 million in Q4 FY 2021, comprising 17.5% of Robinhood’s total revenue.

Other revenues

Robinhood’s other sources of revenue primarily consist of memberships fees for Robinhood Gold. Robinhood Gold is a paid subscription service that offers users premium features, including enhanced instant access to deposits, professional research, Nasdaq Level II market data, and access to margin investing for approved users. Other revenues also include proxy rebates and miscellaneous user fees. Revenue from these sources rose 84.0% to $35.4 million in Q4 FY 2021, accounting for about 9.8% of company-wide revenue.

Robinhood’s Recent Developments

On April 26, 2022, Robinhood chief executive and co-founder Vlad Tenev announced the company would lay off about 9% of full-time employees. Robinhood increased its workforce sixfold since the end of 2019 to 3,800 by the end of 2021, Tenev noted. "This rapid headcount growth has led to some duplicate roles and job functions, and more layers and complexity than are optimal," he wrote. Robinhood's share price set a record low the next day, for a decline of 75% from its IPO price. 

In its Q4 2021 report, Robinhood saw the fastest growth in cryptocurrency revenue, which more than quadrupled as the company launched Crypto Gifts, a platform enabling customers to send crypto to family and friends. Robinhood’s crypto presence is likely to continue to expand in 2022, as the company anticipates a full launch of cryptocurrency wallets and related services in Q1 2022. It also expects to open its crypto platform to customers internationally in 2022.

In early June 2021, the SEC announced that it was conducting a broad examination of market structure after the meme stock trading frenzy that drove the share prices of companies like GameStop Corp. (GME) and AMC Entertainment Holdings Inc. (AMC) up to astronomical levels earlier this year. The SEC was focusing on payments for order flow ensuring trade orders from individual investors are routed by brokerage firms to off-exchange, high-speed traders known as wholesalers, such as Citadel Securities LLC and Virtu Financial Inc. (VIRT). These off-exchange traders must offer prices that are at least as good as the national best offer, which is what is offered by the official exchanges. But with the growing proportion of trades taking place off the official exchanges, the SEC is concerned about a lack of transparency for the execution prices for such trades.

SEC Chairman Gary Gensler has been a critic of PFOF, arguing the practice creates a conflict of interest for brokerages because it incentivizes them to send customer orders to the highest bidder as opposed to the market maker offering the best prices or fastest execution. The SEC is reportedly considering a variety of other issues that may affect Robinhood as well, including so-called “digital trading prompts” that gamify the trading process to encourage excessive trading, issues of market concentration and pricing, and settlement times. Retail brokerages were forced to put up extra collateral following the meme stock trading volatility, and blamed the two-day settlement process for stock trades. The SEC was reportedly considering reducing settlement time to a single day.

Article Sources
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  1. U.S. Securities and Exchange Commission. “Form S-1 for Robinhood Markets Inc. Dated July 1, 2021,” Page 9.

  2. Robinhood Markets. “Investments You Can Make on Robinhood.”

  3. Robinhood Markets. “How Robinhood Makes Money.”

  4. U.S. Securities and Exchange Commission. “Form S-1 for Robinhood Markets Inc. Dated July 1, 2021,” Page 18.

  5. U.S. Securities and Exchange Commission. “Form S-1 for Robinhood Markets Inc. Dated July 1, 2021,” Page 52.

  6. Robinhood Markets, Investor Relations, Press Releases. “Robinhood Reports Fourth Quarter and Full Year 2021 Results.”

  7. U.S. Securities and Exchange Commission. “Form S-1 for Robinhood Markets Inc. Dated July 1, 2021,” Page F-9.

  8. U.S. Securities and Exchange Commission. “Form S-1 for Robinhood Markets Inc. Dated July 1, 2021,” Page 133.

  9. U.S. Securities and Exchange Commission. “Form S-1 for Robinhood Markets Inc. Dated July 1, 2021,” pp. F-9 and F-10.

  10. Robinhood. "A Message From our CEO and Co-Founder Vlad Tenev."

  11. The Wall Street Journal. “SEC to Review Market Structure as Meme Stocks Stir Frenzy.”

  12. The Wall Street Journal. “Robinhood’s Debut Is Clouded by SEC Scrutiny of Payment for Order Flow.”

  13. Reuters. “Factbox: How the SEC Is Cracking Down on the Equity Market After GameStop Saga.”

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