Robinhood was established in 2013, which means the company has gained experience in the financial industry and should possess what it takes to stay competitive in the changing financial landscape.
What You Should Also Know
You are probably aware by now, that such a thing as “free value” does not exist. This being said, Robinhood is still capable of providing commission free trading, however, it comes at the price of charting tools, education, analysis, and prices, as well as the lack of important features you’d find elsewhere.So how does Robinhood makes money? You see, not making money on the commission’s turns you, the client, into the product. Robinhood, offers your orders to market makers – which could sometimes lead to less favourable prices.
Robinhood counter argues this notion – Vice President of Product Josh Elman says, “We send your orders to the market maker that’s most likely to give you the best execution quality, which includes price improvement.”
However, the price improvement statistics reported by investopedia.com used for this review were much lower than the industry average.
The company makes money through marginal interest and lending, premium accounts and rebates.
The premium service cost $6/month and providers up to $1,000 in financing fees – allowing to use more cash for position than available through personal funds.
Furthermore, the company makes money off of marginal interest and margin lending. According to Robinhood they make money through: “interest from customer cash and stocks, much like a bank collects interest on cash deposits” as well as “rebates from market makers and trading venues.”
Robinhood reportedly makes over 40% of its revenues from high-frequency trading and order flow payments.
This allows Robinhood to make money from processing the trades through the third parties that provide the other end to the trade, instead of going through an exchange. Citadel Securities, Two Sigma, Wolverine, and Virtu are among the third party liquidity providers, disclosed by Robinhood in accordance to the SEC Rule 606.