How does Robinhood make profit with zero-fee trading?

17 Sep, 2018
by Fifi Arisandi
Analysis
How does Robinhood make profit with zero-fee trading?

Robinhood promotes zero-fee trading for their services, but how do they make profit? The answer lies in the fact that their "actual clients" are high-frequency trading firms, not the customers who use their trading services. 

The renowned investment company, Robinhood is actively promoting their zero-fee trading services to prospect customers. Using the marketing slogan "Invest for Free", the company that just expanded their business in crypto in the beginning of this year also mentions in the website's main page "Robinhood lets you learn to invest in the stock market for free".

Many might be wondering how the company makes their profit if they don't charge the customers who use their services. The answer lies on the company's business model. 

Turns out, Robinhood doesn't perform all their customers' trades on their own platform, but instead, they sell the trading orders to 5 high-frequency trading companies; they are Apex Clearing Corporation, Citadel Securities, Two Sigma Securities, Wolverine Securities, and Virtu Financial. From there, they will choose which trading platform to use to run the transactions on behalf of their customers. 

Those companies pay Robinhood between USD 0.00008 and USD 0.00026 for each USD sold in a trading transaction. While it may seem insignificant, Robinhood actually makes a decent amount of income from such system. In fact, compared to companies, such as E*Trade that makes USD 47 million and TD Ameritrade that makes USD 119 million per quarter, Robinhood is said to generate 10 times more in profit. 

Looking at this, it can be said that Robinhood's "clients" are actually the high-frequency trading companies, and their "products" are actually the customers who use their investment services.

According to Bitcoinnews, the high-frequency trading companies make hefty profit from Robinhood's customers, whereas the customers don't really pay attention to the unoptimized deals they get from Robinhood, probably due to the "Invest for Free" marketing campaign run by the company. 

Nonetheless, customers can explore and be benefited from Robinhood's wide-option of investment portfolio as the company strives to provide support for more cryptocurrencies on their platform, as reported previously by Chepicap

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