Over-trading: good for Robinhood, bad for clients

There’s nothing noble about the free trading app’s business model

Free trading app Robinhood made its market debut last week, following a $27 billion (€22.7 billion) initial public offering (IPO).

Robinhood says its mission is to "democratise finance for all" but there's nothing noble about its business model. Zero commissions are made possible by payments for order flow, which accounted for 81 per cent of first-quarter revenues.

Robinhood receives an average of 2.5 cents for every $100 traded; the more clients trade, the more money it makes.

Luckily for Robinhood, its young client base likes to trade. According to its prospectus, 98 per cent use the app every month; almost half use it every day; of those daily users, the average number of visits was seven per day.



Trading options, a high-risk business, accounted for 47 per cent of Robinhood's transaction-based revenues in 2020. Reduced trading in dogecoin, the cryptocurrency founded as a joke, is listed as a risk factor in its IPO. So are reduced spreads and reduced trading in general.

Some argue Robinhood has engaged a new generation who will, in time, learn from their inevitable mistakes and become long-term investors.

Still, the reality is that over-trading is bad for clients but good for Robinhood. Asking it to rein in its clients is, as Nobel economist and behavioural finance expert Richard Thaler notes, "like asking a beer company to help people drink less beer".