The stock trading mania of early 2021 took Robinhood Markets Inc.’s earnings to new heights.
When its clients buy and sell stocks and options, Robinhood routes those orders to high-speed traders, who pay the start-up brokerage for the right to execute many of these trades. The business, known as payment for order flow, generated around $ 331 million in revenue for Robinhood in the first quarter, according to a securities filing late last week. That’s more than triple the $ 91 million Robinhood made towards order flow payment in the first quarter of 2020.
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Millions of amateur investors downloaded the Robinhood app in the first quarter, attracted by the rise of popular meme stocks on Reddit’s WallStreetBets forum. This rapid growth in users and revenue is likely to attract potential investors as part of Robinhood’s initial public offering, one of the most anticipated listings of the year. The strength of its business through January prompted new and existing investors to pump $ 3.4 billion into the company just three months ago.
Robinhood needed this infusion of capital to continue to support the market rally fueled by Reddit. After the clearinghouse that helped complete Robinhood’s trades asked her to deposit billions of dollars in additional collateral that she did not have on hand, Robinhood restricted the ability of users to buy shares of Robinhood. GameStop Corp. and other high-profile action at the end of January.
The move sparked dozens of customer complaints, dozens of lawsuits against Robinhood, and a social media campaign to remove the app around the beginning of February. But these trends didn’t end up hurting Robinhood’s business. February’s revenue from payments for order flow at Robinhood totaled around $ 121 million, almost 7% more than he earned in January.
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Robinhood has other sources of income, including a subscription service called Robinhood Gold and the fees it collects for lending client shares to short sellers, but paying for the order flow is the most important. The practice has been controversial for years, with critics arguing that it encourages brokerage firms to maximize their income at the expense of clients.
Last year Robinhood agreed to pay the Securities and Exchange Commission a $ 65 million settlement for years of misleading clients about its addiction to these transactions. Robinhood has not admitted his wrongdoing.
In March, an SEC official told lawmakers the agency was considering revisiting pay-as-you-go agreements.