Question

Robinhood is a free-trading app that lets investors trade financial assets without paying commissions or fees. When I started to trade during my college days, E*Trade charged me 19.95 per day. When I heard about Robinhood, I couldn't believe Robinhood's zero-fee business model. How does Robinhood's zero-fee business model impact online brokerage firms? If Robinhood charges no fees, how does Robinhood make money? How do you think about this zero-fee trading model? Do you think it's a good or bad thing for investors? Why?

Answer 1

Robinhood trader

Robinhood is a free-trading app that lets investors trade stocks, options exchange-traded funds and cryptocurrency without paying commissions or fees. ... That said, it's still a solid choice, and currently it's one of the few brokers that gives investors the opportunity to trade cryptocurrency.

Six years after Robinhood launched with zero-fee trading, major brokerages are catching up with a wave of fee-eliminating announcements this week.Analysts say the move by Charles Schwab and others has the potential to take away price sensitive customers who flooded Robinhood in search of low costs. Some say this puts pressure on Robinhood to lean into new banking products to add value beyond just stock trading.Their business model is now in serious jeopardy,” says UBS senior equity analyst Brennan Hawken. Models like Robinhood and others seem unlikely to press ahead at their current pace.

Robinhood Markets is a discount brokerage that offers commission-free trading through its website and mobile app. The company generates significant income from payments, a common although controversial practice whereby a broker receives compensation and other benefits for directing orders to different parties for trade execution. Robinhood refers to this revenue as "rebates from market rsmake and trading venues

 While the payments are negligible for small retail trades, a company that directs billions of dollars in trades to market makers can earn substantial amounts. Independent analysis suggests that payments for order flow generated an estimated $69 million in revenue for Robinhood in 2018, up 227% from the previous year, and accounted for more than 40 percent of its overall revenue.

1.Robinhood provides commission-free trading for stocks, ETFs, options, ADRs and cryptocurrencies.It generates revenue from a broad range of sources, including Gold membership fees, stock loans, and rebates from market makers and trading venues.In December 2019, FINRA fined Robinhood $1.25 million for failing to direct trades so that its customers received the best prices.

How does Robinhood make money

Payment for order flow is typically paid on a per share basis. Robinhood, however, receives a fixed rate per spread which is higher than the average rate the other major brokers receive. TD Ameritrade reported $324 million in order flow revenue, up from roughly $200 million last year.With no commission or annual fee, how does Robinhood make money? The investment firm has multiple other channels for revenue, including marginal interest and premium accounts. Robinhood charges a starting fee of $5 per month for its premium service, Robinhood Gold. The premium service gives customers access to up to $1,000 of margin. It means users can invest up to $1,000 more than the amount of funds in their account. Robinhood also charges interest when its margin customers borrow money over $1,000 to buy or short stocks.

Zero-fee trading model

By enticing customers with free trades, they hope to earn money from their customers' financial behavior in other ways. For example, most brokerage firms pay little to nothing for idle cash sitting in an account. But like a bank, a broker can use that cash for other purposes

Because the zero commission have good and bad things for investors

Over the years, I’ve heard from several clients who have had trouble disciplining themselves from trading too frequently. That was in a low-cost world.

Now that trades are no-cost, it’s going to get a lot worse.

It’s difficult enough to match, much less beat, stock indexes without the drag of frequent trading. Frequent traders, from my experience, rarely do well in the stock market.

In one study, he found that trading costs did indeed weigh on the performance of investors who traded more frequently – a problem that no-commission accounts will render obsolete.

But no-commission trades won’t do anything about the results garnered from another study. Odeon found that on average the stocks that these investors bought went on to underperform the stocks they sold.