Robinhood’s biggest business tripled in the 1st quarter as Reddit-fueled day-trading ran wild

Vladimir Tenev Robinhood cofounder
Co-founder of Robinhood, Vladimir Tenev.

  • Robinhood’s revenue soared in the first quarter as a result of the early 2021 social-media fueled day-trading mania.
  • The trading app’s payment for order flow business generated $331 million in revenue during the period, per the WSJ.
  • That was more than triple the amount the amount generated in the first quarter of 2020.
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The Reddit-fueled trading frenzy of early 2021 propelled Robinhood‘s biggest business to new heights, according to The Wall Street Journal.

The brokerage app’s payment for order flow generated $331 million in revenue in the first quarter, said the Journal, citing a securities filing from last week. That’s more than triple the $91 million Robinhood reeled in from the business during the first quarter of 2020.

Payment for order flow is the compensation brokerages earn by having third-party firms execute client orders. When Robinhood’s clients buy and sell stocks and options, Robinhood routes the trade orders to outside firms who actuate carry out the trade. The outside firms pay Robinhood for routing the order to them.

The practice is Robinhood’s largest source of revenue, and has drawn criticism from investor advocates who say it encourages brokerages to maximize their revenue at the expense of customers.

In December, Robinhood agreed to pay $65 million to settle charges from the SEC that accused the app of making misleading statements about how it made money with market makers.

The SEC alleged that the brokerage routinely provided inferior trade prices, even as Robinhood marketed its trades as commission-free and executed with quality that matched or beat peers. The second-rate prices have cost clients a total of $34.1 million, even after accounting for the lack of commission fees, the SEC said.

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SEC chief Jay Clayton says he is nervously eyeing retail-driven euphoria in the stock market

FILE PHOTO: Jay Clayton, Chairman of the U.S. Securities and Exchange Commission, speaks at the Economic Club of New York luncheon in New York City, New York, U.S.,September 9, 2019. REUTERS/Shannon Stapleton
FILE PHOTO: Jay Clayton, Chairman of the U.S. Securities and Exchange Commission, speaks at the Economic Club of New York luncheon in New York City

  • Chairman of the Securities and Exchange Commission Jay Clayton told CNBC on Thursday he’s concerned about stock market euphoria stemming from retail investors. 
  •  “When stocks run away… we do get concerned because it is a situation where professional investors understand this, I do worry that retail investors do not understand that trees don’t grow to the sky,” Clayton added. 
  • His concerns come as all three major indexes hovered around record highs on Friday.
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Chairman of the Securities and Exchange Commission Jay Clayton told CNBC on Thursday he’s concerned about stock market euphoria that’s stemming from retail investors.

“We are in a situation where with mobile communications, access, and the like, there is a new paradigm. There are more retail investors participating in the market than ever before,” Clayton said.

“One thing we don’t regulate directly…is euphoria and we’re seeing some euphoria here,” he added. 

His concerns echo those of Goldman Sachs CEO David Solomon, who said earlier this week he’s also worried about retail investors driving the market to dizzying new heights. Both pointed to the hot IPO market. Airbnb, for example, leaped 115% on its first day of trading. On Friday, all three major indices hit all-time highs.

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“When stocks run away… we do get concerned because it is a situation where professional investors understand this. I do worry that retail investors do not understand that trees don’t grow to the sky,” Clayton added.

His interview comes as the SEC charged Robinhood with misleading customers on the revenue from trades resulting in a $65 million settlement, as well as a complaint from the Massachusetts securities regulator stating that the trading app encouraged inexperienced investors to execute frequent trades.  

 

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