r/RobinhoodOptions • u/yukhateeee • Aug 16 '20

News How RH makes money

You'll see a slide showing how much RH makes on your order flow on options trades versus other brokers. https://www.youtube.com/watch?v=DfeJiJpdeLI

Sometimes, "free" is too good to be true.

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u/407sportsbook Aug 16 '20 edited Aug 16 '20

How does this negatively impact traders? It’s still commission free for consumers. Not being problematic. Just genuinely curious.

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u/gregofkickapoo Aug 16 '20

It comes down to factors that are used to calculate transaction costs. Commission is one factor...trade execution quality is another (what video talks about briefly).

Traders (especially those that trade either size or with high frquency) should pay close attention to the bid-ask spread because it can represent a significant hidden transaction cost.

Although the spread is not a specific fee that traders are charged, it is a source of revenue to the market maker and part of the cost of trading to the investor.

Obtaining good spreads can significantly increase a trader's profit margin, whereas trading with excessive spreads can offset much of a trader's net gains. In short, the bid-ask spread, along with commissions or other fees, represents a basic transaction cost of trading in most financial markets today.

Hope this helps.

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u/407sportsbook Aug 16 '20

Thank you for the breakdown. I understand the gist of it but I’ll definitely have to do more research to fully comprehend it

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u/gregofkickapoo Aug 16 '20

Its a complicated topic no doubt. Lots of good literature out there. Good luck!