Robinhood is well known within the retail investment community as one of the first, if not the first to reach sizable scale, in the free-to-trade equity platform. But often times, any regular business and numbers person will wonder how they make their revenue. Some might very well extrapolate with their Robinhood Gold product, which essentially serves as a SaaS-like pricing on the surface, with APR interest rate gain on anything above their predetermined $50k benchmark (currently 5% APR for active deposits > $50k). However, I decided to do a little deeper dive into the structural order routing route within the Robinhood the ecosystem.
Below is the data provided by Robinhood to the SEC. The charts below show info on routing of “non-directed orders” which essentially means the orders are NOT directly or guided by the assets holders to any specific market makers. In fact, 100% of their orders are done in the “non-directed” route which allows the middlemen, in this case Robinhood, to have a slight (basis points of a basis point) edge on their corporate revenue gain. Besides the dominance of Citadel, Two Sigma and Wolverine, what’s good to know is general market participants (on Robinhood that is) placed ~80% of their orders via a limit order, essentially cap their downside and upside in the short-term, which is one not too bad of a risk management directional guide for retail, though stop loss and such would also be a decent strategy likewise (currently bunched into the 6% bracket)
Below are the revenue interaction between market makers and Robinhood:
- APEX Clearing: Robinhood receives a fee for routing orders coming via their platform to this specific vendor. Revenue varies by variables such as securities, duration and types etc. but it averages out to < $0.00008 per dollar in the latest quarter.
- Citadel and Two Sigma: Same concepts and variables as above and likewise, Robinhood receives a fee for routing orders to Citadel and Two Sigma. Revenue for Robinhood averages out to < $0.00026 per dollar of executed trade, which on a % is almost 400% more than that of the revenue received by routing Robinhood order to them.
Bear in mind these revenue quotes are quoted on a “per dollar” basis, which probably can be extrapolated the average order size for Robinhood users are pretty minuscule in the grand scheme of things. The sizable orders are usually processed by market makers in blocks, and therefore, revenue share are quoted in blocks, rather than pure dollar basis.
But on that note, Robinhood is look to build a relatively transparent cross-border equity liquidity platform for retail investors as evident with their announcement today, in which US based investors can now easily access non-US based equities (i.e. Tencent, Reebok, Adidas etc) via their US-based mobile app.
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