what do discount brokerage firms think about Robinhood?

A few excerpts below:

https://www.investopedia.com/articles/active-trading/020515/how-robinhood-makes-money.asp

How Robinhood Makes Money

For now, the app stays afloat for mainly two reasons. First, the business itself is extremely lean: no physical locations, a small staff, no massive public relations campaigns. Robinhood also generates interest off of unused cash deposits from user accounts according to the Federal Funds rate.

Second, venture capitalists such as Index Ventures, Ribbit Capital, Google Ventures, Andreessen Horowitz, Social Leverage, among others, have invested more than $16 million in the app.

According to Barron’s, Robinhood plans to implement margin trading, eventually charging 3.5% interest for the service. E*Trade charges 8.44% for accounts under $25,000. Phone assisted trading will also be available at $10 per trade in the future.

In the end of September 2016, the company announced the launch of Robinhood Gold, an advanced version of the platform that was initially priced at a flat fee of $10 a month at the time of the announcement. Robinhood Gold currently provides a possibility to trade pre- and after-hours, a line of credit and immediate access to proceeds as well as immediate deposits.

Originally, Robinhood planned to make money off of order flows – a common tactic used by discount brokerages in the 1990s to generate revenue. According to the company's FAQ, Robinhoodbackpedaled on the idea because it executes orders through a clearing partner and, as a result, receives little to no payment for order flow. The company is willing to return to its original plan in the future if it receives order flows directly or begins to generate a lot of revenue from them.
 
"How does Robinhood make money?

With Robinhood Gold, you get up to 2x your buying power and access to after hours trading for as little as $6 per month. This is the only product Robinhood charges you for, and is completely optional. Trading is still commission free.

Additionally, Robinhood earns revenue by collecting interest on the cash and securities in Robinhood accounts, much like a bank collects interest on cash deposits."

Revenue on collecting interest on the cash... hmm... at 1.5% that isn't bringing in much.
Revenue on securities held, that would be stock lending I guess... wouldn't be that much either.
Subscribtion at $72 on average of 1k... I guess that helps.

Definitely not meant for very active traders, since that would be a losing game for them.
 
This can also be a bait and switch model. I.e. develop a client base via no-commissions word of mouth marketing.

Down the road, start to charge small commissions and fees and compete with firms like IB and giving free deals like newletters or news reports etc. If they can place themselves between/in the middle of "IB and the rest", then they have made a place in the market.

They can also try to charge some fees but still be cheaper than IB and hope to get bought out by a bigger player whose business they are biting off. Few billions in the account does not hurt at all !!

Also, by business process outsourcing they can (if efficiently possible) have their back offices in cheap labor overseas markets like Asia or E. Europe to reduce the overhead.


Care for animals........https://animalaidunlimited.org/
 
I'm actually opened a Robinhood account last month....I can tell you it's free commission. I have made over 20 trades so far without paying a single penny in commission. Yes you can opt to the gold plan for a margin account and extended hours trading....now the app is very very very basic. I guess that's what comes with free commissions, I mean how many investors who use online brokerage accounts actually use every single option available to them? I know about 4-5 people who use Robinhood. They are pretty much first time traders...I was speaking to one of robinhoods competitors the other day and they couldn't believe how Robinhood could give free commission to stock trades, they asked me how they make their money. Pretty simple. They take all the millions accounts with all the tens of millions of dollars in them and grab the interest, so instead of a money market account bearing Say 2% interest that would otherwise be yours is actually going to them. Hey I say that fine. Brokers are charging 5-6-7 dollar trades...which by historical measures is actually still very cheap but if you can have free commissions why not....I have heard brokers are trying to push free equity trading soon. I think in the next 2-3 years there will be another price war where brokers lower commission costs even more, then I believe in the next 3-5 years all equity trading will be free....should get interesting moving forward.
 
toc said:
This can also be a bait and switch model. I.e. develop a client base via no-commissions word of mouth marketing.

Down the road, start to charge small commissions and fees and compete with firms like IB and giving free deals like newletters or news reports etc. If they can place themselves between/in the middle of "IB and the rest", then they have made a place in the market.

They can also try to charge some fees but still be cheaper than IB and hope to get bought out by a bigger player whose business they are biting off. Few billions in the account does not hurt at all !!

Also, by business process outsourcing they can (if efficiently possible) have their back offices in cheap labor overseas markets like Asia or E. Europe to reduce the overhead.


Care for animals........https://animalaidunlimited.org/
More...



I don't see that happening....to go from a free service to a cost basis service would ruin the reputation of the company......alot of these accounts are millenials and first time traders just starting out.
 
S2007S said:
.I was speaking to one of robinhoods competitors the other day and they couldn't believe how Robinhood could give free commission to stock trades, they asked me how they make their money. Pretty simple. They take all the millions accounts with all the tens of millions of dollars in them and grab the interest, so instead of a money market account bearing Say 2% interest that would otherwise be yours is actually going to them.
More...

Personally I wouldn't be comfortable with that notion.

Several high-profile brokers have gotten into trouble trying to "make the float" on customer funds. Maybe innocuous at first... maybe more aggressive later. As a customer, you should know all about this. May not be in your best interest.

Personally, I would avoid such an arrangement.

I like a broker who claims, "We don't DO anything with customer funds to make money. We make ours on commissions and fees. That's it".

Seems Refco and MF Global (and others?) got into a world of shit trying to "make a little float money on customer funds".
 
Most asset managers charge a fee of 1.-1.5% of AUM so if Robinhood is making approximately that amount in cash in client accounts they're just using a similar model. Plenty of outfits make big $$$ getting paid 1%. These days about half of the private wealth management business runs on making 1% on AUM, costs are low just need licensure and office space and support staff. Robinhood has licensure and office space and software, even lower cost model yet using the HNW pricing model. Very smart.
 
Scataphagos said:
Several high-profile brokers have gotten into trouble trying to "make the float" on customer funds.
More...

It is very common for a clearing broker to take credit balances and do repos to generate revenues. They will share some of that with the introducing broker, in this case, Robinhood. Robinhood will not get all the interest, it will be shared in some way,
 
Robert Morse said:
It is very common for a clearing broker to take credit balances and do repos to generate revenues. They will share some of that with the introducing broker, in this case, Robinhood. Robinhood will not get all the interest, it will be shared in some way,
More...

I don't know the details and specifics of Robinhood. But I've been "involved" with brokers who got into trouble with customer funds. All I'm saying is "buyer beware".

When I established an account with Crossland years ago, I asked them about what they do with customer funds?. They said, "We don't do anything with customer funds. They are segregated and that's that... we make our money on commission and various fees." Having had accounts with Chicago Grain, Refco, MF Global and others", I liked that.
 
Last edited:
You must log in or register to reply here.
Back
Top