Robinhood app how it works11/19/2022 ![]() The regulators also take aim at Robinhood for failing to “reasonably supervise” its technology to make sure it could handle orders from its growing user base. Robinhood was bound by regulations to run some checks on investors before clearing them to trade options, to glean “the essential facts relative to the customer.” FINRA says Robinhood had what were known at the company as “option account approval bots” that “were programmed to approve options trading based on inconsistent or illogical information, including for customers who were younger than 21 years old but who claimed to have had more than three years’ experience trading options.” Options trading can be enticing because it lends itself to fast profits if done right: Imagine being able to buy a stock for $80 while it’s trading for $120. (Robinhood says four market makers provided 59 percent of the company’s total revenue in the first three months of 2021.)įINRA’s report details how Robinhood made it laughably easy for inexperienced traders to get involved in options trading.įor one thing, FINRA’s report details how Robinhood made it laughably easy for inexperienced traders to get involved in options trading-a risky investment where someone loses their entire premium (and, FINRA notes, sometimes more) if a stock doesn’t move in a particular direction. I have never seen a detailed explanation for why, and Robinhood didn’t answer when the Times asked about it, but two sensible possibilities are that Robinhood simply has lots of traders and they’re willing to accept prices that are favorable to the market makers. The New York Times reported last year that compared with other trading platforms, Robinhood makes a particular killing on these transactions. Robinhood sells them (or, specifically, their trades) to market makers. This system makes clear that Robinhood’s users are not so much its customers as its product. Bernie Madoff was the idea’s pioneer, so you know consumer interests are top of mind. ![]() The market makers sell the security for a smidgen more than they paid for it, and they make their money when Robinhood taps them many millions of times to execute trades. Robinhood made 75 percent of its money in 2020 (and 81 percent in the first three months of 2021) from transaction rebates and “payment for order flow.” Under payment for order flow, market makers-the companies that go and actually get the stock that’s given to a Robinhood user placing an order-pay Robinhood, which routes user trades to the market makers. ![]()
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