Robinhood's business boom has generated a boon for market makers

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• Robinhood's business boom has generated a boon for market makers

Since the beginning of 2020, commission-free trading app Robinhood has added more than three million users and has tripled its trading volume. While Robinhood has certainly benefited from the increase in order flow sales, third-party market makers who buy this order flow have mostly benefited. Virtu Financial, the largest buyer of Robinhood user orders, recently announced that its revenue grew 267% since 2019. The full extent of the market maker's windfall is difficult to know. 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 held and has reported no earnings. But the company buys about 40% of all orders placed by retailers, so it probably made an even bigger profit than rival Virtu.

The order flow

Robinhood's practice of selling user orders to third-party market makers has been controversial. However, this is a common practice among retail brokers, and in fact, it is the number of commission-free brokers that make most of their income. Market makers like Virtu Financial and Citadel Securities run trades on Robinhood by constantly buying and selling securities. These companies make money from the spread, the difference between the buying and selling prices of a stock, and they also use data from retail traders' orders to report their own investments. In particular, stock market spreads increase when the market is volatile. Therefore, these companies may have also benefited from the higher margins during the peak of stock trading in March and April. Via FT/NY Post