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Half of Robinhood’s customers are riding its runaway growth

The day prior to this’s Home Monetary Products and services Committee listening to about GameStop and Robinhood wasn’t big. Reuters has a honest appropriate abstract of one its few intriguing bits, a scrap between the elected inquisitors and Robinhood CEO Vlad Tenev regarding whether his agency needed to lift extra capital to continue operations for the interval of the GameStop saga; TechCrunch has reported on the topic since its inception, although learning a chunk of of bit more became priceless.

Lawmakers also managed to extract a exciting, if expected data level: The corporate generates more than half of its revenues from price for picture gallop (PFOF), a controversial educate by which Robinhood is paid by market makers for executing buyer trades.

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Those skeptical of PFOF contend that the setup effectively transforms customers of neotrading services and products that monetize their picture volume into the product being supplied, leaving retail merchants at risk of wretched alternate execution pricing. Robinhood has gotten into effort regarding alternate pricing within the previous. Nonetheless folks that don’t salvage PFOF to be an inherent enviornment contend that it permits for low-price client salvage admission to to the equities markets. That’s appealing ample.

Whatever the set you land between — or even on — those two poles is immaterial. PFOF doesn’t appear like in enviornment cloth risk of being regulated out of existence, and Robinhood’s exercise of the industry mannequin allowed it to generate beneficial growth in 2020. For perspective, Robinhood’s PFOF revenues rose from a chunk of of over $90 million in Q1 2020 to spherical $220 million in Q4.

How many customers did it salvage to generate those PFOF sums? Tenev also told Congress in his written testimony that Robinhood has more than 13 million “customers,” although we lack clarity on exactly who counts as a buyer. Nonetheless those millions kind not monetize equally. Some of those 13 million customers are more lucrative than others.

To grab that, let’s initiate with working to be taught what half of Robinhood customers alternate alternatives. Here’s Tenev, by job of his testimony:

[A]s of the end of 2020, about 13% of Robinhood customers traded total alternatives contracts (e.g., puts and calls), and handiest about 2% traded multileg alternatives. Now not as a lot as 3% of funded accounts were margin-enabled.

This, combined with the truth that Tenev allowed that PFOF incomes comprise the huge majority of its earnings, comes to a exciting conclusion: A somewhat tiny half of Robinhood’s customers are accountable for the beneficial bulk of its incomes. We are in a position to bid that is the case by recalling that after we peek PFOF data, Robinhood’s revenues from trades in S&P 500 stocks are modest, its incomes from trades consuming non-S&P 500 stocks a chunk of bigger, and its incomes from alternatives’ picture gallop comprised the huge majority of the earnings reported in contemporary intervals.

As an instance, within the months of October, November and December, TechCrunch calculates that Robinhood’s PFOF revenues were spherical 67%, 64% and 63% alternatives-derived, respectively.

For reference, 13% of 13 million is 1.69 million. That’s the selection of Robinhood customers we estimate own traded alternatives. The multileg alternatives quantity is a powerful smaller 260,000 customers.

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