Stock trading mania in early 2021 lifted revenue at Robinhood Markets Inc. to new heights.
When clients buy and sell stocks and options, Robinhood directs these orders to high-speed traders, who pay the startup brokerage firm for the right to execute many of these trades. This business, known as order flow payment, generated about $ 331 million in revenue for Robinhood in the first quarter, according to a securities depository late last week. That̵
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Millions of amateur investors downloaded Robinhood’s app in the first quarter, pulled by the launch of meme stocks popular on Reddit’s WallStreetBets forum. Such rapid growth in users and revenue is likely to appeal to potential investors in Robinhood’s upcoming IPO, one of the year’s most anticipated listings. The strength of its business until January prompted new and existing investors to pump a whopping $ 3.4 billion into the company just three months ago.
Robinhood needed that capital infusion to continue supporting the Reddit-driven market rally. After the clearing house that helped complete Robinhood’s trades asked to provide billions of dollars in extra security that it did not have available, Robinhood restricted users’ ability to buy shares in GameStop Corp. and other high-flying stocks in late January.
This decision created many customer complaints, dozens of lawsuits against Robinhood and a campaign on social media to delete the app around the beginning of February. But these trends did not end up bulging Robinhood’s business. February revenue from order flow payments in Robinhood amounted to about $ 121 million, or nearly 7% more than what they earned in January.
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Robinhood has other sources of revenue, including a subscription service called Robinhood Gold and fees, as it charges lending of customer shares to short sellers, but payment for order flow is the largest. The practice has been controversial for years, with critics claiming it encourages brokerage firms to maximize their revenue at the expense of clients.
Last year, Robinhood agreed to pay a $ 65 million settlement to the Securities and Exchange Commission for misleading clients for years about their reliance on these offers. Robinhood did not admit to any wrongdoing.
In March, an SEC official told lawmakers that the agency is considering the need to review pay-for-order flow schemes.