- Business idea planted in 2011, but Robinhood launched in 2014. What did they do during 2011 ~ 2014?
- Its goal: to build the world’s most customer-centric financial company.
- When customers buy or sells stocks on Robinhood, like many other brokerages, Robinhood send their orders to market makers (Sigma, Citadel, and Virtu, instead of exchanges like NYSE. These are hedge funds). Market makers don’t front-run their orders —— they’re actually required by Regulation NMS to execute the orders at the best price (这句话很有意思Well, we can delve in this a lot deeper.) among all of the exchanges, and unlike exchange, they don’t charge fees.
- To compete with exchange, market makers offer rebates to brokerages. Robinhood, ETrade, Schwab, and TD Ameritrade, they all get rebates from market makers + commission they charge on customers per trade. All market makers with whom Robinhood works have the same rebate rate. They send customers’ orders to the market maker that’s most likely to give you the best execution quality. For even finer control, they offer limit orders and stop limits, which allow customers to name their own price.
- Robinhood is commission-free. However, Robinhood earns ~$0.00026 in rebates per dollar traded. E.g. buy a stock for $100.00, Robinhood earns $0.026 from the market makers. (e.g. if a order cost $1 billion, then Rohinhood earns $260,000. Hmmmm…not that much, curious about its revenue) Unlikely other brokerages who earn rebates and charge customers a per-trade commission fee.)
- So, basically, one of the biggest advantages of Robinhood over its competitors is: dramatically lowered cost with better experience.
- (Hold up a little bit...it is commission-free and 40%+ revenue is from market makers, what about rest 50% revenue?)
- It attracts millions of millennial investors — a demographic traditional Wall Street firms have found tough to capture (indeed)
- Robinhood earns money from the commonly controversial way, 40%+ of its revenue from high-frequency trading firms or market makers.
- Some regulators and customers are unhappy, cuz it is risky playing with those firms.