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Robin Hood’s Trivially Easy Path To Profitability



The Robin Hood app is, apparently, likely to have a certain difficulty in getting to profitability. This isn’t actually true, it’s going to be rather easy. Over time that is. Something which people reporting on financial markets really ought to know. Even if they only recall it through cautionary takes like MF Global:

While Robinhood has become a darling among venture capitalists, it’s unclear when or if it will turn a profit. The firm doesn’t charge users to trade—an innovation that led the rest of the industry last year to follow suit. Robinhood has earned $453 million so far this year from “payment for order flow,” which involves obtaining rebates from market-making firms like Citadel Securities that execute Robinhood customers’ trades. The tactic accounts for around 70% of Robinhood’s revenue, raising questions of whether this is sustainable and if the firm will be able to diversify its revenue stream in the future.

Sure that’s sustainable.

There are other sources of revenue possible. They could, like Plus 500, start to be their own bookmakers. That company isn’t merely a broker offering access to the markets. If you trade there you will often actually be trading against the company itself.

They could start matching order flow across their own book. This would work better if there was in fact a bid offer spread on the stocks being traded which usually isn’t, sadly, true. The one thing that HFT has definitely provided is cheaper trading, in that the buy and sell price, at any one time, is usually the same now.

They could be lending more to people as leverage – buying on margin etc. They do this already, do more of it.

But the biggie is the MF Global model. Actually, this is standard among varied broking companies. Folks have to put down margins in order to be able to trade. At any one time that’s a significant chunk of cash in those accounts. Just as with a bank lending the float out, the broker gets to lend out that money. And keep the interest. The bigger the company the more that can be lent out.

Now, sure, currently interest rates are spit. Which is where MF Global got into trouble. In trying to still make good money they took on more risk and then, ooops, the risks didn’t go their way and they lost the margin entrusted to them. But as and when interest rates rise this will be a good source of income.

One other source. I think it’s true that Robin Hood doesn’t register stock – legally that is – as actually being yours. It’s in a trustee account somewhere. OK, but that means that, as with brokers and margins, that they can lend out that stock to short sellers. Even, charge for lending it to their own customers.

OK, maybe all of this isn’t trivial but there are other revenue sources they can exploit. It’s also true that maybe these won’t pay for all the expenses of the company although, with higher interest rates more generally, I’d suspect they will. My point here being really that they’re not reliant upon this one revenue source forever.

It’s also possible – having done some work for them myself – that they fire some of their middle management and get in some competent people but then that’s being excessively picky, isn’t it?



in British English
expunct (ɪkˈspʌŋkt)
VERB (transitive)
1. to delete or erase; blot out; obliterate
2. to wipe out or destroy

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