Yesterday’s Home Monetary Companies Committee listening to about GameStop and Robinhood wasn’t nice. Reuters has an excellent abstract of 1 its few attention-grabbing bits, a scrap between the elected inquisitors and Robinhood CEO Vlad Tenev concerning whether or not or not his agency needed to increase further capital to proceed operations through the GameStop saga; TechCrunch has reported on the matter since its inception, although studying a bit of bit extra was helpful.
Lawmakers additionally managed to extract an attention-grabbing, if anticipated knowledge level: the corporate generates more than half of its revenues from fee for order stream (PFOF), a controversial observe by which Robinhood is paid by market makers for executing buyer trades.
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These skeptical of PFOF contend that the setup successfully transforms customers of neotrading providers that monetize their order quantity into the product being offered, leaving retail traders prone to poor commerce execution pricing. Robinhood has gotten into hassle concerning commerce pricing up to now. However these in who don’t discover PFOF to be an inherent concern contend that it permits for low-cost shopper 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 seem like in materials hazard of being regulated out of existence, and Robinhood’s use of the enterprise mannequin allowed it to generate large progress in 2020. For perspective, Robinhood’s PFOF revenues rose from a bit of over $90 million in Q1 2020 to round $220 million in This autumn.
What number of customers did it take to generate these PFOF sums? Tenev additionally informed Congress in his written testimony that Robinhood has greater than 13 million “clients,” although we lack readability on exactly who counts as buyer. However these hundreds of 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 be taught what fraction of Robinhood customers commerce choices. Right here’s Tenev, through his testimony:
[A]s of the tip of 2020, about 13 p.c of Robinhood clients traded fundamental choices contracts (e.g., places and calls), and solely about two p.c traded multi-leg choices. Lower than three p.c of funded accounts had been margin-enabled.
This, mixed with the truth that Tenev allowed that PFOF incomes comprise the vast majority of its income, involves an attention-grabbing conclusion: A considerably small fraction of Robinhood’s customers are liable for the huge bulk of its incomes. We are able to inform that that’s the case by recalling that once we look at 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 stream comprised the vast majority of the income reported in current durations.
For instance, within the months of October, November, and December, TechCrunch calculates that Robinhood’s PFOF revenues had 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 multi-leg choices quantity is a much smaller 260,000 customers.