How Does Robinhood Make Money?

September 28, 2022
Knowledge Center » Blog » How Does Robinhood Make Money?

Robinhood makes money in a few different ways. First, the company charges for premium features like margin trading and extended-hours trading. Second, Robinhood makes money from the interest it earns on customers' uninvested cash and securities. Finally, the company generates revenue from rebates it receives from market makers, through activities such as payment for order flow.

Robinhood's business model has generated a lot of controversies. Some critics argue that the company's reliance on selling premium features and earning interest on customers' cash balances is unfair to investors. Others argue that Robinhood's rebate-based business model could lead to conflicts of interest. Overall, though, Robinhood has been successful in attracting a large number of customers and generating significant revenue.

What is payment for order flow?

Payment for order flow is a practice whereby a brokerage company receives payments from market makers in return for directing its customers' orders to those market makers. This practice is controversial because it can create conflicts of interest. For example, if a market maker is willing to pay a higher rebate than another market maker, the brokerage company may have an incentive to send its customers' orders to the first market maker, even if doing so is not in the best interests of those customers.

Robinhood has been criticized for its payment for order flow practices. The company has defended these practices, arguing that they allow it to offer commission-free trading to its customers.

Robinhood Gold Business Model

Robinhood Gold is a premium subscription service that allows customers to trade with margin and access extended-hours trading. Robinhood charges a monthly fee for this service, which ranges from $5 to $200 depending on the amount of margin used.

The Robinhood Gold business model has generated some controversy. Some critics argue that it is unfair to charge customers a monthly fee for access to margin and extended-hours trading. Others argue that the fee is reasonable given the value of these features.

What is Robinhood's Cash Balance Business Model?

Robinhood makes money from the interest it earns on customers' uninvested cash and securities. This practice is controversial because it means that Robinhood is effectively earning interest on its customers' money.

Some critics argue that Robinhood should return this interest to its customers. Others argue that the amount of interest earned is relatively small and that Robinhood is entitled to keep it as profit.

What are the benefits of Robinhood's business model?

There are several benefits of Robinhood's business model. First, the company's reliance on charging for premium features and earning interest on cash balances means that it does not have to rely on commissions from trades to generate revenue. This allows Robinhood to offer commission-free trading to its customers. Second, the company's rebate-based business model means that it does not have to take sides in trades, which reduces the potential for conflicts of interest. Finally, Robinhood's business model gives it a large customer base from which to generate revenue.

What are the risks of Robinhood's business model?

There are several risks associated with Robinhood's business model. First, the company's reliance on premium features and interest income means that it is vulnerable to changes in market conditions. For example, if interest rates rise, Robinhood's interest income will decline. Second, the company's rebate-based business model could lead to conflicts of interest.

For example, if a market maker is willing to pay a higher rebate than another market maker, the brokerage company may have an incentive to send its customers' orders to the first market maker, even if doing so is not in the best interests of those customers. Finally, Robinhood's large customer base gives it a lot of power in the markets. This power could be abused if the company were to act in a way that was not in the best interests of its customers.

Where does most of Robinhoods Money come from?

The majority of Robinhood's revenue comes from its premium subscription service, Robinhood Gold (~30%), and it's payment for order flow practice (~70%).

Robinhood also generates revenue from the interest it earns on customers' uninvested cash and securities.

Should you use Robinhood to trade?

There is no easy answer to this question. Robinhood's business model has both benefits and risks. The decision of whether or not to use Robinhood to trade should be based on a careful consideration of these factors, and how they suit you as an individual trader. Due to the clean user interface and amount of free trading functionalities, it's the go-to choice for many retail traders.

About Trevor English

Trevor is a technology journalist & engineer who has made a career out of engineering and technical communication. His work has appeared on Curiosity, BBC, Interesting Engineering and other sites across the web. Originally the Chief editor for Interesting Engineering back in 2016, he now works with software & tech companies, aiding them in content marketing and technical communication. Currently living in Texas, he’s also a published children’s book author and producer for the YouTube channel Concerning Reality.

Stay up to date

gdf-logoABC Logo
SOC 1 & SOC 2 Audited
chevron-left-circlechevron-right-circle linkedin facebook pinterest youtube rss twitter instagram facebook-blank rss-blank linkedin-blank pinterest youtube twitter instagram