Robinhood Markets Inc. was generating over 40% of its revenue by selling customers' orders for stock trades to high-frequency trading firms earlier in 2018, unnamed sources told Bloomberg News.
The operator of a commission-free trading app earns rebates for shipping its customer orders to market makers, including Two Sigma, Citadel and Virtu, co-founder and co-CEO Vlad Tenev confirmed in an Oct. 12 letter posted on the company's website. For every $100 of stock purchased by a customer, Robinhood makes about 2.6 cents from the high-frequency trading firms in rebates, which Tenev said allows the company to "cover the costs of operating our business" and offer commission-free trading.
During the fourth quarter of 2017, Robinhood outsourced nearly all of its orders for stock trades to four market makers, Bloomberg said, citing regulatory filings. The payments made to Robinhood per share by Citadel and Two Sigma were more than the payments made to TD Ameritrade Holding Corp. by the two market makers.
Robinhood's Tenev wrote in his letter that the company collects the same rebate rate from all the market makers with which it has arrangements.
"Market makers don't front-run your orders — they're actually required by [regulation] to execute your order at the best price among all of the exchanges, and unlike exchanges, they don't charge fees," he noted.
Formed in 2013, Robinhood has six million customers and enjoys a valuation of $5.6 billion, according to the news report.