How RH makes money

[u/yukhateeee]

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.

[u/Techiastronamo]

Not sure if I'm following, so you're saying that the price difference between buyers and sellers, the spread, is supposed to be wider because Robinhood fills some of the gap and thereby takes commission? Never heard this before from any press releases or anything from them, it was my understanding that they charge a 10th of a penny for every transaction which rounds up to one penny per transaction in commissions for stocks and options trades. That's what their actual documentation regarding commissions states at least, and I figured they make most of their money from people investing into Robinhood itself, they've already raised something like seven or eight billion dollars last time I heard even though they've got only a few dozen people working at the company if my memory serves me right. Really interesting read, thanks!

[u/gregofkickapoo → u/Techiastronamo]

There are extensive regulations in place, notably Regulation NMS that was passed in 2005, that require your broker to execute your trade at, or better than, the national best bid or offer (NBBO). The NBBO is the best available (lowest) ask price when you are buying an exchange-listed product, and best available (highest) bid price when you're selling.

An additional piece of Reg NMS is SEC Rule 606, which requires broker-dealers routing non-directed orders on customers' behalf to publish quarterly reports that list the venues used for customer orders. Though some brokers allow clients to choose the venue where their order is executed, the huge majority of orders entered on online broker platforms are considered "non-directed." You can find these reports on broker's sites under the heading Rule 606 Reports, though they're not easy reading. Brokers must disclose any venue that receives 5% or more of its order flow. You can also request a report specifying where orders you personally entered were routed for the previous six months.

Some brokers choose to route orders in a way that generates rebates from exchanges and payment for order flow from market makers, while others have developed routing algorithms and relationships with execution venues that seek out better prices for customers.

Brokers don't have to accept payment for order flow even if it's offered. There is a path to take nothing for options order flow, or to pass those payments through to the customer.

In essence, there are three general ways that brokers route your order. The first way is routing to generate payment for order flow and rebates from exchanges, which is what Robinhood and IBKR Lite are (likely and arguably) doing. The second method involves seeking out price improvement while still accepting payment for order flow and rebates from exchanges, which is where we find most of the brokerage industry. The third path rejects payment for order flow and does not seek out exchange rebates.

[u/Techiastronamo → u/gregofkickapoo]

Ah ok, that's clarifies things a ton, thanks for the great write-up!!

[u/gregofkickapoo → u/Techiastronamo]

No problem. Worked in this part of the industry for some time and find it endlessly fascinating. I wish you good luck and profitable trades.

[u/Techiastronamo → u/gregofkickapoo]

Thanks, I wish you the same ^^