![]() ![]() Alphacution compared the firms' total order routing revenue, which includes payment for order flow, to its average account value. The data shows how Robinhood makes much more from its users' trades than competitors do. (Alphacution looked at Q1 2020 because consolidation in the sector made later comparisons difficult: In October, Charles Schwab closed its acquisition of TD Ameritrade and Morgan Stanley completed its acquisition of E-Trade.) As an asset manager, Robinhood looks like a pipsqueak. That's an average account value of $2,235, compared to an average account value of $97,214 for TD Ameritrade, $86,131 for E-Trade and $274,568 for Schwab. Its assets under custody as of the end of March 2020 were $19.2 billion across 8.6 million users, according to its S-1. The accumulation of wealth provides more opportunities for charging fees and cross-selling products. The online brokerage game has long been defined by gathering more and more assets under management. ![]() The sums in question are typically fractions of a penny a share, making it hard to see the harm - except when, as Robinhood has in filing to go public, the overall numbers become visible. It's just better at it, the data shows.īrokers and market makers say these payments provide better prices for retail investors as well as fee-free trading, while critics say that brokers and market makers are grabbing the lion's share of benefit from these trades when they could be getting better pricing elsewhere. ![]() Payment for order flow, the system in which market makers pay brokers for sending them retail orders to execute, dates back to the 1990s, and Robinhood isn't the only one using it. Robinhood's retail trading business, which relies on payment for order flow, is much more lucrative per dollar held in its users' accounts than its competitors. Robinhood is far better at selling that product than Schwab, E-Trade or Ameritrade, according to a new report by Alphacution Research Conservatory. But it's also a powerful illustration of the maxim that if you're not paying for something, you're not the customer, you're the product. The company famously doesn't charge commissions. When Robinhood filed its S-1 to go public, it also revealed just how much better it is than its long-established competitors at making money from retail trading. ![]()
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