Robinhood made $ 331 million from its clients’ trading activities in the first quarter of 2021
Pavlo Gonchar | LightRocket | Getty Images
Robinhood reaped a record amount of revenue from customer transactions in the first quarter of 2021, as the retail giant nears its public debut.
The millennial-favored stock trading app raised $ 331 million in payment for order flow – the funds brokerage firms receive to direct their clients’ trades to market makers – at first quarter of 2021, according to a recent regulatory filing by the Securities and Exchange Commission.
This compares to the $ 221 million earned by Robinhood from Order Flow payment in Q4 2020 and the $ 91 million earned in Q1 2020.
Robinhood and other players in the online brokerage industry rely on what is called payment for order flow as a source of income instead of commissions. A pioneer of “free trading”, Robinhood’s business model revolves around back-end payments, in the absence of commissions.
Market makers, such as Citadel Securities or Virtu, pay e-brokers like Robinhood for the right to execute transactions with clients. The broker receives a small commission for the stocks routed, which can run into the millions when clients trade as actively as this year.
Robinhood – what is expected go public on the Nasdaq in the first half of 2021 – made $ 133 million in payment for stock trading order flow, while $ 198 million came from options trading.
The boom in order flow coincided with record retail activity and new accounts receivable in the industry.
The Silicon Valley startup found itself in the middle of a firestorm in January amid GameStop’s short squeeze, which was fueled in part by Reddit-focused retail investors. JMP Securities estimates that Robinhood added nearly 6 million new clients in the first two months of the year.
Payment for order flow is common practice, but it is often criticized for its lack of transparency. GameStop’s business craze has shed light on the revenue stream, and many lawmakers have looked at the practice. Main Street argued that this gives Robinhood reason to encourage more business.
Over the weekend, legendary investor Warren Buffett said Robinhood has “become a very important part of the casino aspect, the casino group, which has joined the stock market in the last year or a year and a half.”
Robinhood refuted that “people are tired of the Warren Buffetts and Charlie Mungers of the world acting like they’re the only oracles to invest.”
Become a smarter investor with CNBC Pro.
Get stock picks, analyst calls, exclusive interviews, and access to CNBC TV.
Register to start a free trial today.
– with reporting from CNBC’s Kate Rooney.