Robinhood is a popular stock trading app that has expanded into crypto, and one of their biggest selling points is that they offer customers zero-fee trading. This business model has been somewhat of a mystery, especially in the areas of sustainability. However, a filing with the Securities and Exchange Commission (SEC) of the United States for Q2 of 2018 reveals that Robinhood is selling their customers’ orders to high-frequency trading firms. This is a practice known as payment for order flow or equity order flow, and could easily be generating Robinhood tens or hundreds of millions of USD.
Essentially, Robinhood doesn’t execute all of their customer’s trades on the Robinhood platform, if any at all, instead they sell orders to 5 high-frequency trading firms and choose on behalf of their customers. The firms are Apex Clearing Corporation, Citadel Securities, Two Sigma Securities, Wolverine Securities, and Virtu Financial. Robinhood is paid between USD 0.00008 and USD 0.00026 for each USD of an order they sell to another trading firm. This at first might seem very small, but it is actually 10 times more than firms like TD Ameritrade and E*TRADE profit on payments for order flow.
Additionally, other major trading firms report payments for order flow in terms of per share, instead of per USD like Robinhood does. By reporting the payments for order flow in terms of per USD it makes them appear minuscule, which is deceptive. Robinhood is likely making tens to hundreds of millions of USD on payments for order flow. E*TRADE makes USD 47 million per quarter on payments for order flow, and TD Ameritrade makes USD 119 million.
The reality is that Robinhood is not really in the business of selling stocks or cryptos, they are selling their customers as a product, and their real clients are high-frequency trading firms. The high-frequency trading firms make tremendous profits off Robinhood’s customers since Robinhood customers are generally uninformed and don’t notice that they aren’t getting optimal deals. This is why high-frequency trading firms pay 10 times more for Robinhood’s payments for order flow versus other trading platforms that have more skilled traders.
The reason behind Robinhood’s popularity is due to the branding of zero-fee trading. In reality, there is a heavy fee being charged for all Robinhood trades by high-frequency trading firms in the form of less than optimal order execution.
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