This is how Robinhood makes money while offering free trades

Описание: CNBC's Kate Rooney takes a look at how Robinhood brings in revenue. For access to live and exclusive video from CNBC subscribe to CNBC PRO: https://cnb.cx/2NGeIvi

Robinhood is raking in more money than ever on customer trades as new investors flood the stock market during the pandemic.

Despite not charging customers to trade, the Silicon Valley start-up made $180 million off trades in the second quarter — roughly double from the prior quarter, according to a recent Securities and Exchange Commission regulatory filing. The majority of that total came from options trading.

Robinhood, and the rest of the online brokerage industry, rely on what’s known as payment for order flow as their profit engine in lieu of commissions. The pioneer of “free trading,” Robinhood’s business model hinges on the back end payments, since the other brokers have established other revenue streams and only recently slashed commissions. Thanks to a recent change in SEC rules, these brokers are now required to give more disclosures on how trades are executed, and how much money they bring in for firms.

Payment for order flow is a common practice but it’s often criticized for its lack of transparency. It has become especially vital to companies’ bottom line after commissions went to zero.

Market makers, such as Citadel Securities or Virtu, pay e-brokers like Robinhood for the right to execute customer trades. The broker is then paid a small fee for the shares that are routed, which can add up to millions when customers trade as actively as they have this year.

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