How does Robinhood Make Money via Robinhood Business Model and How RobinHood makes Money by Arbitraging Privacy

How does Robinhood Make Money | Robinhood Business Model | How does Robinhood App Make Money | How Robinhood Makes Money

How does RobinHood Work
How does RobinHood Work

Hope you are enjoying India rains as much as I am.  Relief from this Summer!  Well, to start off this Monsoon so How does Robinhood Make Money came to my mind because Markets are good here and I was wondering what can remove my trade costs?  Here is something that will make you wonder, do such companies really exist?  Every Industry has their share of the Bulls and the Bears!  I am sure, you now would have understood what Robinhood is all about.

Yes!

Just another stock trading app!  It’s a trading app/website in the USA that offers completely free trades, ZERO COMMISSIONS.  Yes, you got that right, coming from the best-performing markets of Asia and being an avid investor, this is really interesting to see how Robinhood has carved out a business model from thin air and giving the stuff REALLY REALLY FREE.  Let’s look at How does Robinhood Make Money and Robinhood Business Model.  We will also be looking at How does Robinhood App Make Money along with deep diving into How Robinhood Makes Money from Non-Stock Market Investments.

About Robinhood, Founders, Funding, and Facts

The company was founded when two high-frequency traders for financial institutions in New York City realized that high-frequency traders and electronic trading firms pay effectively nothing to execute trades. This inspired them to bring this technology to the retail brokerage market with Robinhood, a commission-free stock brokerage.  As of March 2018, it had nearly four million customers and it is no longer a stock trading platform, it’s a fully functional cryptocurrency trading platform as well.

Robinhood Founders: Vladimir Tenev and Baiju Bhatt

Robinhood Funding: Robinhood has raised a total of $600 million (appx) in venture capital funding. Robinhood received seed capital from investors including Google Ventures, Andreessen Horowitz, Index Ventures, IT Ventures, Social Leverage, and Elefund.  Series A was led by Index Ventures and Ribbit Capital; Howard Lindzon, co-founder of StockTwits and general partner at Social Leverage; Aaron Levie, founder of Box; Dave Morin, founder of Path; Jared Leto; Snoop Dogg; and Nas of QueensBridge Venture Partners. Series B funding in May 2015, led by New Enterprise Associates (NEA). Existing investors Index Ventures, Ribbit Capital and Social Leverage joined the round, along with new investor Vaizra Investments.  $1.3 billion valuation led by Yuri Milner from DST Global made the company jump to Unicorn status. As of May 2018, they are valued at $5.6 Billion.

Let’s now look at How does Robinhood Make Money and Robinhood Business Model.

How does Robinhood Make Money?

How does RobinHood Make Money
How does RobinHood Make Money

How does Robinhood Make Money is a question that I am sure, comes to the minds of a lot of “millennial investors” Robinhood’s 80% user base.  To put it bluntly, it doesn’t make any money from its core offering.  Let’s look at How does Robinhood work and understand Robinhood Business Model.

What is Robinhood? 

Before moving on to How does Robinhood Make Money, it’s important to know that Robinhood is a US brokerage firm, of the likes of Scottrade, Charles Schwab, E-Trade, TD Ameritrade etc. and is giving a tough competition to these large names on account of this being a FREE BROKER.  I’m sure, you guys must have heard of the discount brokerage industry (flat rates, cheap rates on large volume trades etc.) where a tech-enabled broker uses tech platform to push brokerage rates on trading of public listed securities down south.

The secret of How does Robinhood Make Money actually works in a new concept altogether, rather a twist in the discount brokerage segment, where it doesn’t charge brokerage at all.  That’s why this is THE favorite amongst millennial investors who don’t want to pay up to $10 a trade for low volume trades.

Robinhood operates a mobile app that allows customers to buy and sell stocks on U.S. exchanges commission-free. The app is available for iPhone, Apple Watch, and Android.  Robinhood is also available on mobile and on the web.  To keep costs down, the company has no storefront offices and does not provide research reports or analytical tools on its platform and has very lean operations when comes to employee strength.

Now that you’ve understood What is Robinhood and How does Robinhood work, Let’s now look at Robinhood Business Model to understand How does Robinhood Make Money.

Robinhood Business Model

RobinHood Business Model
RobinHood Business Model

Business Model of Robinhood App is very simple. It makes money of ancillary incomes rather than making money off of the brokerage or commission that other brokerage firms charge when you trade.

Robinhood Business Model – App/Web

The Robinhood Business Model works exactly same way that of Uber, AirBnB, Venmo etc. where they just provide a platform to connect the supply and demand and they do this on a scale.

The platform that they have created acts as a common platform that a buyer and seller of securities can do so with ease and for free and this is the core pillar to the answer of How does Robinhood Make Money.

Robinhood Business Model – Market Makers

Robinhood’s Business Model depends, to some extent, on supplying information and trade execution orders to market makers (basically they execute the trade in such high volumes that they nearly execute the trade for zero fees).

This information can also be used in turn to know the buying flavor of the market and since this is mostly millennials, you can also do some trend spotting while shopping for some multi-baggers in your portfolio.   This may be an unethical angle to How does Robinhood Make Money but for time sake, let’s park it as of now and look at other revenue lines in detail, more on this later in the article.

Now that you’ve understood Robinhood Business Model lets now take a look at How does Robinhood Make Money?

How does Robinhood Make Money?

Robinhood Makes Money from the below-mentioned ways:

  • Robinhood Gold Subscription
  • Robinhood Investments of Trade Funds of Customers
    • From Securities Market
    • And from its recently launched Crypto Trading Platform
  • Margin Lending to retail users via Banks
  • Executing orders through Market Makers

Let’s look at these revenue lines in detail below.

How does Robinhood Make Money – Robinhood Gold Subscriptions?

This is unlike your typical retail subscription business model where you pay for a service recurring every month.  This is linked to your margin call amount.  How does Robinhood Make Money is, if you have 1000$ in your bank account and you want to intra-day trade for 2000$, you can get the balance 1000$ as retail credit to your account.  For availing this extra money, you need to subscribe to the Robinhood Gold plan.

1000$ against a 6$ monthly plan is the bare minimum as of the time of writing this post, 6000$ costs 25$ per month.  There is no interest charged on this extra trading limit that you avail.  There are some TnCs of use however though.

Other features of Robinhood Gold are:

  • Access to extended trading hours (pre-market 30 mins and post-market 2 hours) to take advantage of yesterday’s announcements early on, or take advantage of post-market announcements in the post-trading window
  • Instant deposits to the trading account and instant settlements, typically their normal subscription takes up to 2 days (settlements up to 1000$ are instant, with Gold it is up to 50,000$)

How Robinhood Makes Money – Investment of Trade funds of Securities Customers

After reading the above Gold plan revenue line, I’m sure, you understand How Robinhood Makes Money from subscriptions and you also know that normal users have a delayed deposit window into trading account as well as a delayed settlement above 1000$.

So, what does Robinhood do with your money during these two days, How does Robinhood Make Money?

They invest these funds!

Yes!

You got that right, don’t worry, your money will not go to high beta stocks so that it can become ZERO in a matter of seconds, as per regulations they can only invest these in no-risk securities, bonds etc.  This rate of interest is typically in the range of 4-5% as per their SEC filings.  Now you may be thinking 200$ of my investment money at 5% (PER YEAR) will not even amount to 10$ post taxes, so How does Robinhood make money on it.  Imagine the same scenario for 200$ of 4million people, that’s nearly 1 billion dollars’ float….  Refer to the below screenshot to take this number into cognizance.

How does Robinhood App Make Money
How does Robinhood App Make Money

How Robinhood Makes Money – Investment of Trade funds of Crypto Customers

Robinhood, like many other Securities brokerages, has jumped into the bandwagon of Crypto Trading.  They now offer a fully functional crypto trading platform, where customers can buy/sell Bitcoin, Ether etc.  I had recently written about Crypto Business Model and you can find all about it here.

Anyways, How does Robinhood Make Money is the same model as securities funding applies here, the deposit and settlement time lag is used as a window of opportunity to invest into money market instruments and that earns a bit of interest income to Robinhood.

How Robinhood Makes Money – Retail Lending to Users via Banks

Robinhood also makes Money from lending to retail users, but since it is registered as a Brokerage firm under FINRA, it can’t directly lend money to users, so it keeps time deposits with Banks who in turn use this money to lend out to retail customers.  You can read more about this lending business here in my Bank Business Model article.

How Robinhood Makes Money – Executing orders through Market Makers

This is actually the true answer to How Robinhood Makes Money without actually having to make money.  This is by far my favorite Business Model Example.  You must’ve read about this in my business models of Facebook, SnapChat, WhatsApp and what not.  It normally reads like below:

How WhatsApp Makes Money
How WhatsApp Makes Money

Anyways, here is a little background to what a Market Maker is:  Any large institutional investor, is known to make or break the price of a stock by buying in bulk (inflate the price by putting buy orders in large quantities), or selling in bulk (push price of stock south).  So if they beforehand know that Mr. A is going to invest in let’s say stock C, they will either pre-place the order of that stock so that it bumps up for Mr. A (leading to fewer profits) as a whole or do tag-along along with Mr. A to push up the price for both of them.

Normally it’s the former in every case because this institutional investor is normally doing high value and high volume trades, so a small arbitrage in the price while selling and buying will lead to huge gains for the company.

How Robinhood Makes Money from these market makers is they execute their trade through these players so that they have a beforehand idea of your trades (of 4 million users) so that they can either pre-purchase or tag-along with these users.  For each trade that users execute this information is simultaneously passed on to these market makers for a small fee (very small fee).  Below is a screenshot of this publicized name of market makers.

How Robinhood Makes Money
How Robinhood Makes Money

Look at the below computation for a better understanding:

How Robin Hood Makes Money
How Robin Hood Makes Money

These large companies cannot do these things unless Robinhood has given them a backdoor API.  Now, How does Robinhood Make Money from this API is they do have an API which they use to integrate with exchanges and provide real-time announcements and stock quotes plus publish ledger of purchases to SEC, so this API of pushing these trades to executors must also be available.

This way of How Robinhood Makes Money may be unethical, but who cares, you’ve agreed to their TnCs of getting commission-free trades.  If you’re really bothered about your privacy and not missing out on small gains, then switch to a fee-paying discount broker instead.  If you think How does Robinhood Make Money as gains from this is just few 100 thousand dollars, you are wrong on two counts.  First, I think this is just for name sake that these numbers are put, in reality, I am sure, this is a percentage of wins of the above-mentioned traders.  Two, the law of large numbers will push this number to millions of dollars when mainstream investors start using Robinhood.

How does Robinhood App Make Money – Potential Revenue Lines

If you’re still wondering How does Robinhood App Make Money then you’ve come to the correct section, well, some future revenue lines can be offering analysis reports, offering options trading, mutual fund buying, commodities trading, forex trading etc.

Disclaimer:  All of the above information is based on secondary market analysis, any interpretation of How does Robinhood Make Money, Robinhood Business Model, How does Robinhood App Make Money, How Robinhood Makes Money will be have to indemnify the author and this blog.

Unicorn Economy
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2 Comments

  1. I had to scroll through 50% of this article’s BS marketing garbage before it told me a single piece of information that was useful in any way about how the money is actually made.

    I found myself here because one of the founders of the company pointed to the URL himself from Quora.

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