Robinhood Very Much Depends on Payment for Order Flows

Posted on 07/01/2021

For Robinhood a majority of its revenue is transaction-based (including payment for order flow, or “PFOF”), reduced spreads in securities pricing, reduced levels of trading activity generally, changes in their business relationships with market makers and any new regulation of, or any bans on, PFOF and similar practices may result in reduced profitability, increased compliance costs and expanded potential for negative publicity. A majority of Robinhood’s revenue is transaction-based, in that they receive consideration in exchange for routing their users’ equity, option, and cryptocurrency trade orders to market makers for execution. With respect to equities and options trading, such fees are known as PFOF. With respect to cryptocurrency trading, Robinhood receive “Transaction Rebates.” PFOF practices have drawn heightened scrutiny from the U.S. Congress, the SEC, state regulators, and other regulatory and legislative authorities. For example, in November 2018, the SEC amended its rules relating to broker-dealer disclosure of order handling and routing to require that, among other things, such public disclosures must now describe additional detail regarding terms of PFOF arrangements and profit-sharing relationships that may influence a broker-dealer’s routing decision, including information about average rebates the broker received from, and fees the broker paid to, trading venues.

Concentration of credit risk
Robinhood had transaction-based revenues from market makers in excess of 10% of total revenues, as follows:

Market maker: Three Months Ended March 31, 2020 Percentages Three Months Ended March 31, 2021 Percentages
Citadel Securities, LLC 31  27 
Entities affiliated with Susquehanna International Group, LLP (Consists of Global Execution Brokers, LP and G1X Execution Services, LLC) 20  12 
Tai Mo Shan Limited (Jump Trading Group) 11 
Entities affiliated with Wolverine Holdings, L.P. (Consists of Wolverine Execution Services, LLC and Wolverine Securities LLC) 13 
All others individually less than 10% 22 
Total as percentage of total revenue: 75  81 

Source: SEC.

For year 2020, Robinhood made US$ 720,133,000 in transaction-based revenue. Total net revenue for 2020 was US$ 958,833,000. For the year ended December 31, 2020, revenue derived from PFOF and Transaction Rebates represented 75% of their total revenues, and for the three months ended March 31, 2021, represented 81% of their total revenues.

At March 31, 2021, Robinhood had US$ 80,932,400,000 (US$ 65,076,700,000 in equities and US$ 11,597,400,000 in cryptocurrencies) in assets under custody vs. US$ 14,135,600,000 (US$ 11,721,800,000 in equities and US$ 414,700,000 in cryptocurrencies) at December 31, 2019.

Furthermore, Robinhood have been subject to regulatory investigations, actions and settlements. Days ago, FINRA fined Robinhood around US$ 70 million. RHM, RHF, RHS and Robinhood Co-Founder and CEO, Vladimir Tenev, among others, have received requests for information, and in some cases, subpoenas and requests for testimony, related to investigations and examinations of the Early 2021 Trading Restrictions from the United States Attorney’s Office for the Northern District of California (“USAO”), the U.S. Department of Justice, Antitrust Division, the SEC staff, FINRA, the New York Attorney General’s Office, other state attorneys general offices and a number of state securities regulators.

DST Global, Ribbit Capital, and New Enterprise Associates have stake Robinhood with lots of cash, they are banking on a successful Robinhood IPO. Robinhood began operations in 2013, publicly launched our first product in 2015

Keywords: Robinhood Markets Inc.

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