How Does Robinhood Make Money? An Overview

Robinhood Markets Inc. is a monetary expertise (fintech) firm that operates an internet low cost brokerage with commission-free buying and selling. It offers a web- and mobile-based monetary companies platform that buyers can use to purchase and promote shares, exchange-traded funds (ETFs), choices, and American depositary receipts (ADRs). Its customers can also spend money on sure cryptocurrencies.

Robinhood makes cash in a lot of methods, notably by means of a system often called cost for order stream. That’s, Robinhood routes its customers’ orders by means of a market maker who truly makes the trades and compensates Robinhood for the enterprise at a fee of a fraction of a cent per share.

Robinhood additionally makes cash by investing customers’ money deposits at the next rate of interest.

As well as, the corporate earns cash from its premium Robinhood Gold companies, charges associated to its debit card, and different smaller income streams.

Robinhood’s Financials

In its most up-to-date quarterly report for the fourth quarter (This autumn) of fiscal yr (FY) 2021, ended Dec. 31, 2021, Robinhood posted a internet lack of $423.3 million in contrast with internet earnings of $13 million for the prior-year quarter, in addition to 14.2% year-over-year (YOY) development in internet income. Internet loss was impacted by share-based compensation bills totaling $318 million for the quarter.

Robinhood’s internet cumulative funded accounts, a key metric that gauges the variety of accounts into which customers made an preliminary deposit or cash switch throughout a specified interval, rose by greater than 81% YOY for This autumn FY 2021 to 22.7 million. The corporate’s month-to-month lively person base grew by about 48% YOY however declined by roughly 8% on a sequential foundation for This autumn FY 2021.

The corporate additionally offered outcomes for FY 2021, which ended Dec. 31, 2021. Robinhood posted a internet lack of $3.7 billion for the yr, in contrast with internet earnings of $7.4 million for FY 2020. Share-based compensation bills had been practically $1.6 billion for FY 2021, considerably increased than $24 million in these bills for FY 2020. Annual income rose 89.3% from the earlier yr to $1.8 billion.

Robinhood’s IPO

After asserting a confidential preliminary public providing (IPO) submitting on March 23, 2021, Robinhood submitted an S-1 registration to the U.S. Securities and Change Fee (SEC) on July 1, 2021.

On July 19, 2021, it amended its S-1 to announce that it might be promoting 52.4 million shares with its founders and chief monetary officer (CFO) promoting one other 2.6 million for a complete of 55 million. Robinhood went public at $38 a share, giving it a valuation of $32 billion.

The shares are listed below the ticker HOOD on the Nasdaq.

Robinhood’s Opponents

Robinhood faces vital competitors from different low cost brokerages, new and established fintech corporations, banks, cryptocurrency exchanges, asset administration companies, and expertise platforms.

A few of its main rivals embrace Charles Schwab Corp. (SCHW), Morgan Stanley’s (MS) E*TRADE Monetary Holdings LLC, Coinbase World Inc. (COIN), Sq. Inc. (SQ), and River Monetary Corp. (RVRF).

Robinhood’s Enterprise Segments

Robinhood operates and studies its monetary outcomes as one enterprise section. Nonetheless, it does present a breakdown of income into the next classes: transaction-based revenues; internet curiosity revenues; and different revenues. We take a better have a look at these income classes under.

Transaction-based revenues

Robinhood generates transaction-based revenues by routing its customers’ orders for choices, equities, and cryptocurrencies to market makers, which is a course of often called cost for order stream (PFOF). Brokerage companies that use PFOF are paid to direct prospects’ orders to a selected market maker. The cost is normally solely fractions of a penny per share however generally is a vital income for corporations coping with numerous orders. PFOF is a serious cause why Robinhood is ready to provide zero-commission buying and selling. Robinhood’s transaction-based income rose 12.2% to $362.7 million in This autumn FY 2021, accounting for practically 73% of company-wide income.

Internet curiosity revenues

Robinhood generates internet curiosity income (curiosity income minus curiosity bills) on securities lending transactions. Curiosity can also be earned on margin loans to customers, and curiosity bills are incurred in reference to the corporate’s revolving credit score services. Internet curiosity revenues rose 0.5% to $63.4 million in This autumn FY 2021, comprising 17.5% of Robinhood’s whole income.

Different revenues

Robinhood’s different sources of income primarily include memberships charges for Robinhood Gold. Robinhood Gold is a paid subscription service that provides customers premium options, together with enhanced instantaneous entry to deposits, skilled analysis, Nasdaq Degree II market information, and entry to margin investing for accredited customers. Different revenues additionally embrace proxy rebates and miscellaneous person charges. Income from these sources rose 84.0% to $35.4 million in This autumn FY 2021, accounting for about 9.8% of company-wide income.

Robinhood’s Current Developments

On April 26, 2022, Robinhood chief govt and co-founder Vlad Tenev introduced the corporate would lay off about 9% of full-time workers. Robinhood elevated its workforce sixfold for the reason that finish of 2019 to three,800 by the tip of 2021, Tenev famous. “This speedy headcount development has led to some duplicate roles and job capabilities, and extra layers and complexity than are optimum,” he wrote. Robinhood’s share worth set a report low the subsequent day, for a decline of 75% from its IPO worth. 

In its This autumn 2021 report, Robinhood noticed the quickest development in cryptocurrency income, which greater than quadrupled as the corporate launched Crypto Presents, a platform enabling prospects to ship crypto to household and mates. Robinhood’s crypto presence is more likely to proceed to increase in 2022, as the corporate anticipates a full launch of cryptocurrency wallets and associated companies in Q1 2022. It additionally expects to open its crypto platform to prospects internationally in 2022.

In early June 2021, the SEC introduced that it was conducting a broad examination of market construction after the meme inventory buying and selling frenzy that drove the share costs of corporations like GameStop Corp. (GME) and AMC Leisure Holdings Inc. (AMC) as much as astronomical ranges earlier this yr. The SEC was specializing in funds for order stream making certain commerce orders from particular person buyers are routed by brokerage companies to off-exchange, high-speed merchants often called wholesalers, corresponding to Citadel Securities LLC and Virtu Monetary Inc. (VIRT). These off-exchange merchants should provide costs which can be at the very least nearly as good because the nationwide finest provide, which is what is obtainable by the official exchanges. However with the rising proportion of trades happening off the official exchanges, the SEC is worried a couple of lack of transparency for the execution costs for such trades.

SEC Chairman Gary Gensler has been a critic of PFOF, arguing the observe creates a battle of curiosity for brokerages as a result of it incentivizes them to ship buyer orders to the best bidder versus the market maker providing the very best costs or quickest execution. The SEC is reportedly contemplating a wide range of different points that will have an effect on Robinhood as nicely, together with so-called “digital buying and selling prompts” that gamify the buying and selling course of to encourage extreme buying and selling, problems with market focus and pricing, and settlement instances. Retail brokerages had been pressured to place up further collateral following the meme inventory buying and selling volatility, and blamed the two-day settlement course of for inventory trades. The SEC was reportedly contemplating decreasing settlement time to a single day.