Robinhood made $331 million from clients’ trading activity in Q1 2021
Pavlo Gonchar | LightRocket | Getty Images
Robinhood posted record consumer store sales in the first quarter of 2021 as the retail juggernaut neared its public debut.
The millennial-favored stock trading app raised $ 331 million in the first quarter of 2021 for the flow of orders that the money brokerage firms receive to direct client trades to market makers. This emerges from a recent announcement filed by the US Securities and Exchange Commission.
This compares to the $ 221 million Robinhood made from paying the flow of orders in the fourth quarter of 2020 and the $ 91 million made in the first quarter of 2020.
Robinhood and others in the online brokerage industry rely on what is known as payment for the flow of orders as a source of income rather than commissions. The business model of Robinhood, the “free trade” pioneer, relies on back-end payments when there are no commissions.
Market makers like Citadel Securities or Virtu pay e-brokers like Robinhood for the right to conduct client trades. The broker receives a small fee for the stocks routed, which can add up to millions if clients trade as actively as they did this year.
Robinhood – which is expected to go public on the Nasdaq in the first half of 2021 – paid $ 133 million for the flow of orders from stock deals, while $ 198 million came from options trading.
The order flow boom coincided with record retail activity and new customer accounts across the industry.
The Silicon Valley startup found itself in the middle of a firestorm in January amid brief pressure on GameStop, partly fueled by Reddit-fueled retail investors. JMP Securities estimates Robinhood gained nearly 6 million new customers in the first two months of the year.
Paying for the flow of orders is a common practice, but it is often criticized for a lack of transparency. The GameStop commercial frenzy shed light on the source of income and many lawmakers scrutinized the practice. Main Street argued that Robinhood had reasons to encourage more trade.
Over the weekend, legendary investor Warren Buffett said Robinhood “has become a very important part of the casino, the casino group that has gone public in the past year and a half”.
Robinhood refuted that “people are fed up with the world’s Warren Buffetts and Charlie Mungers who act like they are the only oracles of investing.”
Become a smarter investor with CNBC Pro.
Get stock picks, analyst calls, exclusive interviews and access to CNBC TV.
Sign in to start a free trial today.
– With reports from Kate Rooney of CNBC.