While Americans have been stuck at home during the pandemic, they’re flocking to stock-trading app Robinhood in increasing numbers, propelling its business to new heights. The Silicon Valley company’s “payment for order flow” revenue, which it earns by routing users’ buy and sell orders to large trading firms to be executed, reached $180 million in the second quarter, according to areleased last week. That’s nearly double the $91 million it made in the first quarter.
Big trading firms pay Robinhood and other online brokerages handsomely for the right to execute their trades because it helps them earn profits by picking up pennies on each transaction. Among the different financial products Robinhood users can purchase, options are the most lucrative for the company to facilitate by far. Options are complex securities that give people the right to buy or sell a stock at a predetermined price. They can be riskier than traditional stocks, with greater potential for big gains or losses. Of Robinhood’s $180 million in second-quarter order flow revenue, $111 million came from options.
Market Makers pay for order flow because they make a bid-ask spread on trades. Instead of paying a fee for trades, the fee is encompassed in bid-ask spread. There’s no such thing as free robinhood trading stocks
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