Robinhood Markets is a discount brokerage that offers commission-free trading through its website and mobile app. The company generates significant income from payments for order flow, a common although controversial practice whereby a broker receives compensation and other benefits for directing orders to different parties for trade execution. Robinhood refers to this revenue as "rebates from market makers and trading venues." While the payments are negligible for small retail trades, a company that directs billions of dollars in trades to market makers can earn substantial amounts.
Independent analysis suggests that payments for order flow generated an estimated $69 million in revenue for Robinhood in 2018, up 227% from the previous year, and accounted for more than 40 percent of its overall revenue. In Q2 2020, Robinhood generated approximately $180 million from payments for order flow.
Other sources of revenue include a $5 monthly fee for optional membership to Robinhood Gold, which gives the client access to margin loans and investing tools; interest on uninvested cash; lending stocks purchased on margin; and fees on purchases using the company's debit card.
- 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, stock loans, and rebates from market makers and trading venues.
- Robinhood restricted trading in some heavily-traded stocks that were part of a short squeeze in late January, sparking public outcry.
Robinhood competes in the nascent but fast-growing fintech industry, where traditional and new players have invested billions of dollars to move investing, banking, money management, and other financial services to digital platforms. In 2013, Robinhood announced its intention to make zero-commission trading the centerpiece of its business offering. It would achieve this by keeping operational and administrative expenses low. By October 2019, much of the brokerage industry had followed suit in offering zero-commission fee structures.
Robinhood supports trading of more than 5,000 stocks, including most equities and exchange traded funds (ETFs) listed on U.S. exchanges; options contracts; cryptocurrencies such as Bitcoin and Ethereum; and American Depositary Receipts (ADRs) for more than 650 globally-listed companies.
Fundraising and Financials
On February 1, 2021, Robinhood announced that it had raised an additional $3.4 billion with investments coming from Ribbit Capital, ICONIQ Capital, Andreessen Horowitz, Sequoia, Index Ventures, and NEA. In September 2020, Robinhood raised $660 million in a Series G funding round, which valued the company at $11.7 billion. In May 2020, Robinhood raised $280 million in a Series F funding round, valuing the company at $8.3 billion. Robinhood completed its Series E round in July 2019, raising $323 million at a $7.6 billion valuation. The company has raised $5.6 billion in total funding.
History and Leadership
Robinhood is based in Menlo Park, California. Stanford University graduates Baiju Bhatt and Vlad Tenev co-founded the company in 2013, with the aim of democratizing finance and making it more accessible to young and less affluent investors. The majority of Robinhood customers are new to investing, and their median age is 31. By October 2020, Robinhood had amassed a totalof 13 million users on its app, up significantly from the two million accounts it had in 2017.
On December 17, 2020, it was reported that Robinhood had agreed to pay $65 million to settle a civil fraud investigation launched by the Securities and Exchange Commission (SEC) over the company's early failure to fully disclose its practice of payment for order flow. The investigation was focused on Robinhood's failure, until 2018, to fully disclose on its website that it received payments from high-speed trading firms for directing customers' buy and sell orders to them. As part of the settlement with the SEC, Robinhood is being required to hire an independent consultant within 60 days to review how the company's policies address payment for order flow and its duty to offer best execution of orders to its clients.
On December 16, 2020, Massachusetts securities regulators filed a complaint against Robinhood for exposing investors to unnecessary risks associated with trading. The enforcement arm of the Massachusetts Securities Division alleges that Robinhood aggressively marketed to inexperienced investors and failed to ensure proper controls were implemented to protect them. The complaint also addresses recent outages on the company's platform that prevented traders from accessing their accounts at various times throughout the past year. The case is set to be heard by an independent hearing officer and Robinhood will be able to appeal the decision.
A Robinhood client filed a class action lawsuit on behalf of himself and other traders against the company in early March after a two-day outage of the trading platform. The outage occurred during one of the market's most active days of the year. Clients were unable to access their cash or securities during the outage, nor could they buy or sell securities, according to the lawsuit. Later that month, Robinhood offered vouchers to certain clients affected by the outage. But the vouchers were conditional on clients agreeing not to take legal action.
In December 2019, the Financial Industry Regulatory Authority (FINRA) fined Robinhood Financial, a subsidiary of Robinhood Markets, $1.25 million for best execution violations related to customer equity orders and related supervisory failures that occurred between October 2016 and November 2017. FINRA said Robinhood directed trades to four broker dealers that paid for the order flow, and the company failed to satisfy its best execution obligations. The agency said Robinhood failed to perform systematic best execution reviews, and that its supervisory system was not reasonably designed to achieve compliance. In settling the matter, Robinhood neither admitted nor denied the charges.
A number of major short squeezes, coordinated by investors on online forums including the subreddit r/Wallstreetbets, were executed over the week ending Jan. 29, 2021. Robinhood, the primary platform of the investors involved with the short squeezes, raised margin requirements and froze the ability to purchase additional shares in the squeezed stocks in order to tamp down on market volatility. The trading restrictions sparked substantial public outcry as several of the heavily-traded stocks fell. Robinhood lifted trading restrictions by the week's end. In mid-February, Robinhood issued a note to the public indicating that the reason it had to restrict trading was so that it could meet regulatory deposit requirements. The company said that the spike in trading related to the short squeeze triggered the need to post additional capital as collateral to support its clearinghouse deposit demands.
How Robinhood Reports Diversity & Inclusiveness
As part of our effort to improve the awareness of the importance of diversity in companies, we offer investors a glimpse into the transparency of Robinhood and its commitment to diversity, inclusiveness, and social responsibility. We examined the data Robinhood releases. It shows Robinhood does not disclose any data about the diversity of its board of directors, C-Suite, general management, and employees overall. It also shows Robinhood does not reveal the diversity of itself by race, gender, ability, veteran status, or LGBTQ+ identity.