Robinhood’s trading boom has generated a boon for market makers
Since the start of 2020, commission-free trading app Robinhood has added over three million users and seen its trading volume triple.
While Robinhood has certainly benefited from the increase in order flow sales, the third-party market makers buying into this order flow have benefited the most.
Virtu Financial, Robinhood’s biggest buyer of user orders, recently reported that its revenue grew 267% from 2019.
It is difficult to know the magnitude of the windfall from the market makers. Citadel Securities, another market maker that buys order flow from Robinhood as well as competing commission-free brokers TD Ameritrade and Charles Schwab, is privately owned and has not reported profits. But the company buys around 40% of all orders placed by retail merchants, so it likely made an even bigger profit than rival Virtu.
Robinhood’s practice of selling user orders to third-party market makers has been controversial. However, this is common practice among retail brokers, and is actually the number of commission-free brokers that make the majority of their income.
Market makers like Virtu Financial and Citadel Securities fulfill trades placed on Robinhood by constantly buying and selling securities. These companies make money on the spread, the difference between the buying and selling prices of a stock, as well as by using order data from retail traders to inform their own investments.
Notably, stock spreads increase when the market is volatile. Thus, these companies may also have benefited from higher spreads during the peak of market transactions in March and April.