[supster]

All the major retail brokers sell their order flow, so you generally eat this cost no matter who you use. In addition, the hidden cost is fractions of a penny on the dollar (so still better than the $5-7 a regular broker charges per trade anyways).

[mr_turtle]

What's the long play then? Surely Robin Hood isn't absorbing the the transaction fees as a loss leader just to increase it's user base? If that's the play, any other company can emulate that.. The incentive seems to be this may cause a price war with existing brokerages.

[supster]

The long play is that it actually doesn't cost significant money per trade at an institutional level. The only reason the other major brokers charge you money is because it covers their brick and mortar retail costs (e.g. Scottrade) and it adds to the bottomline (e.g. Etrade). So Robin Hood is actually just giving this surplus to the consumer instead of keeping it for themselves, and building a user base / brand in the process. Eventually once they have enough users, they will start to up sell you for other services (e.g. checking/savings, margin trading, options trading, check writing etc).

[skylark]

But how is competing on price a business model in and of itself? Surely Etrade can do the same thing, right?

[supster]

So majority of the brokers have brick and mortar operations that can't afford to compete on price. That leaves only the online brokers. Then the next step is to build a brand that attracts customer trust/loyalty, which is what Robinhood seems to be doing and to build a really nice experience which they do with their slick apps. Once customers (generally young ppl who are first time investors) are invested in the Robinhood platform, then Robinhood can up sell them on additional features/services (margin, options, API access etc). So sure Etrade could compete on price (I doubt they would want to since it would immediately hit the bottom line vs a new company not depending on broker fees), but if you look at it from a long term perspective eliminating broker fees is just step 1.

[mywittyname]

The long play seems to be deliver retail stock trading at the lowest possible price. There's a lot of money to be made even if they don't try to maximize profits.

Plus, I bet they are banking on the existing brokerages not responding until things are too late for them. Most brokerages offer free trades and other perks, but limited to "high-value" customers. They won't drop trading fees until they absolutely have to, but by that time, their low-value customers will all be gone.

[user5994461]

If I have to guess a business model:

They get a good deal on the commission and they get enough money from the gold subscribers to cover the commissions across all users.

A fix subscription package is user friendly and easy to understand. It can be "better" for business than a variable commission on trades.

[scott00]

There aren't actually any transactions fees to absorb. Wholesale brokers (think Citadel) pay retail brokers (think Robin Hood) for the privilege of executing their orders.

[cturner]

I found 'RHF SEC Rule 606 and 607 Disclosure' on their disclosures page. https://www.robinhood.com/legal/

[hn9780470248775]

Why?

[scott00]

Because, for the most part, retail investors are not well-informed investors and are willing to cross the bid-ask spread. To simplify dramatically, suppose Citadel thinks the fair value of a stock is 25.185, the market is 25.18-25.19, and a Robin Hood customer wants to pay 25.19 to buy 1 share of the stock. If they buy from Citadel, Citadel makes $0.0050 on average. Given those basic economics, it makes sense for Citadel to pay, say $0.0018, to make sure that the Robin Hood customer buys from them instead of from Knight.

[lurker456]

Their end game is being bought by a larger financial org. RH is capturing a user base that has eluded more established institutions for a long time.

[mr_turtle]

Oh damn, then it's just opening short/long term trading to a new segment of people that wouldn't otherwise do it. That's like 100% casino/poker bonuses during the poker boom.