A fraction of Robinhood’s users are driving its runaway growth – ClearTips

Tomorrow’s home financial The service committee hearing about GameStop and Robinhood was not great. Reuters has a good summary of some of its interesting bits, a scrap between Chosen Curiouss and Robinhood CEO Vlad Tenev over whether his firm had to raise additional capital to continue operating during the GameStop saga; ClearTips has reported on this matter since its inception, although learning a bit more was useful.

If the expected data point: the company generates, the lawmakers also managed to extract an interesting More than half of its revenue Payment for Order Flow (PFOF), a controversial practice in which Robinhood is paid by market makers to execute customers’ merchandise.

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Those PFOF skeptics believe the setup effectively turns users of innovative services that monetize their order volume into the product sold, leaving retail investors susceptible to poor trade execution prices Huh. Robinhood has been in trouble in the past about trade pricing. But those who do not consider PFOF to be an underlying issue say that it allows for a lower cost consumer in equity markets. that’s fair enough.

Even if between you – or even where you land On – Those two poles are immaterial. PFOF does not appear to be in physical danger of going out of existence, and the use of Robinhood’s business model has allowed it to grow heavily in 2020. In perspective, Robinhood’s PFOF revenue has grown slightly from $ 90 million in Q1 2020 to about $ 220 million in Q4.

How many users did it take to generate those PFOF sums? Tenev also told Congress in his written testimony that Robinhood has more than 13 million “customers”, although we clearly lack clarity on who the customer is. But they do not monetize millions equally. Some of those 13 million users are more attractive than others.

To understand this, let’s start working to find out what fraction of Robinhood users’ business options. Here is Tenev, through his testimony:

[A]By the end of 2020, approximately 13 percent of Robinhood’s customers traded basic options contracts (eg, put and call) and only two percent traded multi-leg options. Less than three percent of funded accounts were margin-able.

This, combined with the fact that Tenev has allowed that PFOF income comprise the majority of its revenue, comes to an interesting conclusion: a small fraction of Robinhood’s users are responsible for the vast bulk of its income. We can point out that when we examine the PFOF data, it should be remembered that Robinhood’s revenue from trades in S&P 500 shares is modest, the trades associated with non-S&P 500 shares are slightly larger, and Its income is from the order flow of choices. The majority of reported revenue is included in recent times.

For example, in the months of October, November and December, ClearTips calculated that Robinhood’s PFOF revenues were 67%, 64% and 63% option-derived, respectively.

For reference, 13% of 13 million is 1.69 million. The number of Robinhood users we estimate has trading options. The multi-leg option number is over 260,000 users.

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