Yesterday’s Home Monetary Providers Committee listening to about GameStop and Robinhood wasn’t great. Reuters has a good summary of 1 its few fascinating bits, a scrap between the elected inquisitors and Robinhood CEO Vlad Tenev relating to whether or not his agency needed to increase further capital to proceed operations in the course of the GameStop saga; TechCrunch has reported on the matter since its inception, although studying a bit bit extra was helpful.
Lawmakers additionally managed to extract an fascinating, if anticipated knowledge level: The corporate generates more than half of its revenues from cost for order move (PFOF), a controversial apply by which Robinhood is paid by market makers for executing buyer trades.
The Alternate explores startups, markets and cash. Learn it every morning on Extra Crunch, or get The Exchange newsletter each Saturday.
These skeptical of PFOF contend that the setup successfully transforms customers of neotrading companies that monetize their order quantity into the product being bought, leaving retail traders prone to poor commerce execution pricing. Robinhood has gotten into trouble relating to commerce pricing up to now. However those that don’t discover PFOF to be an inherent problem contend that it permits for low-cost client entry to the equities markets. That’s truthful sufficient.
No matter the place you land between — and even on — these two poles is immaterial. PFOF doesn’t look like in materials hazard of being regulated out of existence, and Robinhood’s use of the enterprise mannequin allowed it to generate huge growth in 2020. For perspective, Robinhood’s PFOF revenues rose from a bit over $90 million in Q1 2020 to round $220 million in This fall.
What number of customers did it take to generate these PFOF sums? Tenev additionally instructed Congress in his written testimony that Robinhood has greater than 13 million “prospects,” although we lack readability on exactly who counts as a buyer. However these thousands and thousands don’t monetize equally. A few of these 13 million customers are extra profitable than others.
To grasp that, let’s begin with working to study what fraction of Robinhood customers commerce choices. Right here’s Tenev, through his testimony:
[A]s of the top of 2020, about 13% of Robinhood prospects traded primary choices contracts (e.g., places and calls), and solely about 2% traded multileg choices. Lower than 3% of funded accounts have been margin-enabled.
This, mixed with the truth that Tenev allowed that PFOF incomes comprise nearly all of its income, involves an fascinating conclusion: A considerably small fraction of Robinhood’s customers are answerable for the huge bulk of its incomes. We will inform that’s the case by recalling that after we study PFOF knowledge, Robinhood’s revenues from trades in S&P 500 shares are modest, its incomes from trades involving non-S&P 500 shares a bit bigger, and its incomes from choices’ order move comprised nearly all of the income reported in current durations.
For instance, within the months of October, November and December, TechCrunch calculates that Robinhood’s PFOF revenues have been round 67%, 64% and 63% options-derived, respectively.
For reference, 13% of 13 million is 1.69 million. That’s the variety of Robinhood customers we estimate have traded choices. The multileg choices quantity is a much smaller 260,000 users.
