Yesterday’s Home Fiscal Products and services Committee listening to about GameStop and Robinhood wasn’t great. Reuters has a very good summary of one its few fascinating bits, a scrap between the elected inquisitors and Robinhood CEO Vlad Tenev regarding no matter if or not his firm experienced to increase additional cash to continue on functions all through the GameStop saga TechCrunch has described on the issue due to the fact its inception, while finding out a very little little bit a lot more was helpful.
Lawmakers also managed to extract an exciting, if expected info stage: the business generates additional than 50 % of its revenues from payment for buy flow (PFOF), a controversial practice in which Robinhood is paid out by marketplace makers for executing client trades.
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Those skeptical of PFOF contend that the setup effectively transforms users of neotrading products and services that monetize their purchase volume into the item staying marketed, leaving retail traders vulnerable to very poor trade execution pricing. Robinhood has gotten into hassle concerning trade pricing in the previous. But people in who don’t discover PFOF to be an inherent problem contend that it will allow for small-price shopper access to the equities marketplaces. That’s reasonable sufficient.
Irrespective of exactly where you land involving — or even on — these two poles is immaterial. PFOF does not appear to be in materials danger of being controlled out of existence, and Robinhood’s use of the business model permitted it to crank out huge advancement in 2020. For point of view, Robinhood’s PFOF revenues rose from a little in excess of $90 million in Q1 2020 to around $220 million in Q4.
How numerous customers did it acquire to make all those PFOF sums? Tenev also instructed Congress in his composed testimony that Robinhood has more than 13 million “customers,” though we deficiency clarity on exactly who counts as purchaser. But all those tens of millions do not monetize similarly. Some of individuals 13 million people are more beneficial than some others.
To realize that, let us begin with working to understand what fraction of Robinhood consumers trade solutions. Here’s Tenev, via his testimony:
[A]s of the end of 2020, about 13 % of Robinhood consumers traded primary selections contracts (e.g., puts and calls), and only about two per cent traded multi-leg solutions. Much less than a few per cent of funded accounts ended up margin-enabled.
This, put together with the truth that Tenev authorized that PFOF incomes comprise the the greater part of its revenue, comes to an appealing summary: A considerably compact portion of Robinhood’s consumers are liable for the huge bulk of its incomes. We can notify that that is the case by recalling that when we study PFOF info, 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 options’ purchase circulation comprised the the greater part of the earnings described in modern intervals.
For illustration, in the months of October, November, and December, TechCrunch calculates that Robinhood’s PFOF revenues ended up close to 67%, 64%, and 63% possibilities-derived, respectively.
For reference, 13% of 13 million is 1.69 million. That’s the amount of Robinhood consumers we estimate have traded possibilities. The multi-leg possibilities quantity is a much lesser 260,000 people.