So where did Robin Hood make his profit?

Robinhood is without a doubt a revolutionary startup. The company managed to completely rewrite the laws of retail trade. Using a commission-free model, the platform allows you to buy assets such as stocks, indices and cryptocurrencies at the same rate as institutional markets. Many believe that this approach will democratize the market and take the entire field to a new level.

Many people wonder how a broker can make a sustainable profit while working without commissions? 

According to SEC research, Robinhood has a rather interesting business model - the company sells customer order information to high-frequency trading (HFT) firms.

Let's take a closer look at Robinhood's business model, the HFT industry, and how it impacts end-user traders. 

This information first appeared when Robinhood, in accordance with SEC Regulation 206, disclosed financial statistics for the second quarter. The exchange's report showed that they sold all of their orders to four different HFT firms - Citadel Securities, Two Sigma Securities, Wolverine Securities and Virtu Financial.

The same report also published information about financial relationships with these firms. Market makers paid for every order they received from Robinhood. For example, Citadel Securities paid the exchange “less than $0.00026 for every dollar processed by the trading platform.”

In other words, Robinhood does not make money from clients, they are paid by market makers who receive order information from the company information about orders. The market maker, in turn, will use this information to formulate the rate. 

The creators of Robinhood had previously collaborated with HFT firm Chronos Research as part of their former startup. This company developed software that was used by HFT firms to place orders.

Plus, it's not just Robinhood that sells access to order information. This practice is very common among other brokers, for example, TD Ameritrade Holding Corp., E*Trade Financial Corp., and Charles Schwab Corp.

Earlier this year, Robinhood representatives announced their plans to enter the cryptocurrency market. The company launched Bitcoin trading. Ethereum, Litecoin, Bitcoin Cash and Dogecoin in many states. Users were excited about the prospect of buying cryptocurrency without commission. However, when this information became public, many were concerned about the consequences of this business model.

Why do HFT firms buy information about open orders? 

HFTs are looking for information and market data that they can use in their trading algorithms.. More specifically, they try to understand as best as possible the current state of the retail market (individual traders).

While HFTs often become the proverbial whipping boys for a large number of market participants, they can provide liquidity and tighten spreads. The agreements between Robinhood and HFT firms benefit the end user. Thanks to this, traders are able to buy cryptocurrency and conduct transactions with it completely without commission.

 Who can suffer losses due to these arrangements?

Large institutions or cryptocurrency whales may experience some inconvenience when placing large orders. HFTs can find information about these orders and use it to the benefit of the market maker.

On the other hand, if a retail trader is able to trade commission-free on the backs of cryptocurrency whales and giants, isn't that indicative of the true spirit of Robin Hood?

According to ccn.com