How Does Robinhood Make Money? An Overview

Robinhood Markets Inc. is a fiscal technology ( fintech ) company that operates an on-line rebate brokerage house offering commission-free deal. It provides a web- and mobile-based fiscal services chopine that allows users to invest in and trade stocks, exchange-traded funds ( ETFs ), options, and american depository receipts ( ADRs ). It besides allows users to invest in certain cryptocurrencies based on their geographic location .

Robinhood makes money through requital for holy order flow, agio membership fees, livestock loans, pastime on uninvested cash, interchange fees related to its debit card, and other smaller tax income streams .

After announcing a confidential initial public offer ( IPO ) file on March 23, 2021, Robinhood submitted an S-1 registration to the U.S. Securities and Exchange Commission ( SEC ) on July 1, 2021. On July 19, 2021, it amended its S-1 to announce that it would be selling 52.4 million shares with its founders and head fiscal officeholder ( CFO ) selling another 2.6 million for a total of 55 million. Robinhood went public at $ 38 a share, giving it a evaluation of $ 32 billion. The shares are listed under the heart HOOD on the Nasdaq .

Robinhood faces significant rival from early discount brokerages, new and established fintech companies, banks, cryptocurrency exchanges, asset management firms, and technology platforms. Some of its major competitors include Charles Schwab Corp. ( SCHW ), Morgan Stanley ’ randomness ( MS ) E*TRADE Financial Holdings LLC, Coinbase Global Inc. ( COIN ), Square Inc. ( SQ ), and River Financial Corp. ( RVRF ) .

Key Takeaways

  • Robinhood is an online discount brokerage that offers a commission-free investing and trading platform.
  • The company gets the vast majority of revenue from transaction-based revenues, including payments for order flow.
  • Robinhood’s net funded accounts increased by 81% in 2021, with about 10 million accounts added over the course of the year, but fell during the year’s fourth quarter.
  • After more than doubling its workforce during 2021 to 3,800 by the end of the year, Robinhood said in April 2022 it would lay off about 9% of its full-time workers.

Robinhood ’ mho Financials

In its most recent quarterly report for the fourth quarter ( Q4 ) of fiscal year ( FY ) 2021, ended Dec. 31, 2021, Robinhood posted a net loss of $ 423.3 million compared with net income of $ 13 million for the prior-year quarter, arsenic well as 14.2 % year-over-year ( YOY ) growth in internet gross. internet loss was impacted by share-based compensation expenses totaling $ 318 million for the quarter .

Robinhood ’ south net accumulative funded accounts, a keystone metric unit that gauges the number of accounts into which users made an initial depository or money transfer during a stipulate period, rose by more than 81 % YOY for Q4 FY 2021 to 22.7 million. The company ’ sulfur monthly active user base grew by about 48 % YOY but declined by roughly 8 % on a consecutive basis for Q4 FY 2021 .

The company besides provided results for FY 2021, which ended Dec. 31, 2021. Robinhood posted a net loss of $ 3.7 billion for the year, compared with net income of $ 7.4 million for FY 2020. Share-based compensation expenses were closely $ 1.6 billion for FY 2021, significantly higher than $ 24 million in these expenses for FY 2020. annual tax income rose 89.3 % from the former year to $ 1.8 billion .

Robinhood ’ south Business Segments

Robinhood operates and reports its fiscal results as one business segment. however, it does provide a breakdown of gross into the following categories : transaction-based revenues ; final interest revenues ; and other revenues. We take a closer expect at these gross categories below .

Transaction-based revenues

Robinhood generates transaction-based revenues by routing its users ’ orders for options, equities, and cryptocurrencies to marketplace makers, which is a process known as payment for order flow ( PFOF ). brokerage house firms that use PFOF are paid to direct customers ‘ orders to a particular market maker. The requital is normally entirely fractions of a penny per plowshare but can be a significant generator of gross for companies dealing with a big number of orders. PFOF is a major rationality why Robinhood is able to offer zero-commission trade. Robinhood ’ s transaction-based tax income rose 12.2 % to $ 362.7 million in Q4 FY 2021, accounting for about 73 % of company-wide gross .

internet interest revenues

Robinhood generates final interest tax income ( interest gross minus sake expenses ) on securities lending transactions. interest is besides earned on margin loans to users, and interest expenses are incurred in connection with the company ’ mho revolving recognition facilities. net interest revenues rose 0.5 % to $ 63.4 million in Q4 FY 2021, comprising 17.5 % of Robinhood ’ s entire tax income .

other revenues

Robinhood ’ s early sources of gross chiefly consist of memberships fees for Robinhood Gold. Robinhood Gold is a pay subscription service that offers users agio features, including enhance instantaneous access to deposits, professional research, Nasdaq Level II market data, and access to margin investing for approve users. other revenues besides include proxy rebates and many-sided exploiter fees. tax income from these sources rose 84.0 % to $ 35.4 million in Q4 FY 2021, accounting for about 9.8 % of company-wide gross .

Robinhood ’ s holocene Developments

On April 26, 2022, Robinhood chief executive and co-founder Vlad Tenev announced the caller would lay off about 9 % of full-time employees. Robinhood increased its work force sixfold since the end of 2019 to 3,800 by the end of 2021, Tenev noted. “ This rapid head count growth has led to some twin roles and problem functions, and more layers and complexity than are optimum, ” he wrote. Robinhood ‘s parcel price set a criminal record low the adjacent day, for a decline of 75 % from its IPO price .

In its Q4 2021 report, Robinhood saw the fastest growth in cryptocurrency tax income, which more than quadrupled as the caller launched Crypto Gifts, a platform enabling customers to send crypto to kin and friends. Robinhood ’ s crypto presence is probable to continue to expand in 2022, as the company anticipates a full launch of cryptocurrency wallets and relate services in Q1 2022. It besides expects to open its crypto platform to customers internationally in 2022 .

In early June 2021, the SEC announced that it was conducting a broad examen of market structure after the meme stock trade craze that drove the share prices of companies like GameStop Corp. ( GME ) and AMC Entertainment Holdings Inc. ( AMC ) up to astronomic levels earlier this class. The SEC was focusing on payments for decree flow ensuring deal orders from individual investors are routed by brokerage firms to off-exchange, high-speed traders known as wholesalers, such as Citadel Securities LLC and Virtu Financial Inc. ( VIRT ). These off-exchange traders must offer prices that are at least a effective as the national good offer, which is what is offered by the official exchanges. But with the growing proportion of trades taking place off the official exchanges, the SEC is concerned about a miss of transparency for the murder prices for such trades .

SEC Chairman Gary Gensler has been a critic of PFOF, arguing the practice creates a dispute of interest for brokerages because it incentivizes them to send customer orders to the highest bidder as opposed to the market manufacturer offering the best prices or fastest execution. The SEC is reportedly considering a variety of early issues that may affect Robinhood adenine good, including alleged “ digital trade prompts ” that gamify the deal action to encourage excessive trade, issues of commercialize concentration and price, and colony times. retail brokerages were forced to put up extra collateral following the meme stock certificate trade excitability, and blamed the two-day settlement process for sprout trades. The SEC was reportedly considering reducing village time to a single day .

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