What makes Robinhood allow 22 million people to trade stocks commission-free? This business model has something going for it.

When it comes to Robinhood, many people's first reaction is the GME battle in 2021—a group of retail investors organized purchases on Reddit, forcing the short positions to explode. But what’s truly impressive about this trading app is not the memes it creates, but how it makes money.

Behind Zero Commission: What is Order Flow Payment?

You might be wondering: How does Robinhood survive without charging fees? The answer is Payment for Order Flow.

In simple terms: when you place an order on Robinhood, your order is bundled and sold to market makers or trading firms for execution. These institutions pay Robinhood for the execution rights and then make money from the bid-ask spread. It sounds a bit shady, and both the SEC and Finra are keeping an eye on it, concerned about potential conflicts of interest.

There are also these ways to make money

• Cash Interest: Users' idle funds are held on the platform, and Robinhood deposits these funds into FDIC-insured bank accounts, earning interest and sharing a portion with users.
• Membership Subscription (Robinhood Gold): Pay monthly to enjoy advanced features such as margin trading, secondary market data, and professional research.
• Stock Lending: Users can authorize Robinhood to lend their stocks to financial institutions, and Robinhood takes a cut from the interest.
• API Access Fee: Charge to third-party developers

The pros and cons are all here

Fragrant Places:

• Zero-commission trading is super friendly for beginners and retail investors with limited funds.
• Supports fractional share purchases (minimum investment of 1 dollar)
• In 2022, a 1% matching IRA was launched, and pension funds can also benefit.
• Cryptocurrency trading is also free (early selling point)
• The interface is simple and intuitive, allowing those without technical knowledge to get started.

The place where it went wrong:

• Fined 70 million USD in 2021 - Recommended high-risk strategies (such as options) to beginners, leading to a lot of people losing money.
• Customer service response is slow, and it's hard to find someone when there's a problem.
• Research tools and educational resources are lacking, which is not attractive to experienced traders.
• The asset class is too singular, lacking mutual funds, bonds, etc., making it difficult to build a truly diversified portfolio.
• Technical failure incidents: Trading restrictions and delays occurred during market volatility periods.
• The lack of portfolio management tools makes fragmented shares good, but when there are too many, it becomes a mess.

New Weapon: Robinhood Connect Targets Web3

In April 2023, Robinhood launched the Connect feature – a gateway from fiat to crypto, which is an interesting move.

What can it do:

• Buy crypto directly from Robinhood and transfer to your self-custody wallet without leaving the app.
• Support for DApps and the Web3 ecosystem
• Users truly own their assets (no longer hosted by the platform)

Restrictions:

• Single transaction limit of 5000 USD, up to 10 transfers per day
• Debit card purchases up to 1000 USD per day, instant transfers are also limited to this amount.
• But can be transferred seamlessly between the two platforms (only pay for the network fee)

How safe is it?

• Registered with both SEC and Finra, strictly regulated by US financial laws.
• SIPC insurance coverage: securities up to $500,000, cash $250,000
• However, it was mentioned earlier that they were fined for misleading customers.

So there is security, but there are still flaws in the platform's ecological design.

How low is the threshold?

• Zero Minimum Deposit: You can open an account with $1.
• Zero Commission: Stocks, ETFs, Options, and Crypto all free
• Fractional Shares: It's okay if you can't afford a whole share; you can buy 0.001 shares.
• Requirements: Must be at least 18 years old, U.S. citizen/green card holder/valid visa, SSN, U.S. address

Account opening process: Fill in personal information → Submit for review → Link bank account → Deposit funds → Start trading. It's similar to downloading Douyin.

Why is it so popular?

Pandemic Boost: During the COVID lockdown in 2020, millions invested from home, and Robinhood's revenue skyrocketed by 245% year-on-year (from $390 million in 2019 to $958 million).

GME Event: In early 2021, Reddit users from r/WallStreetBets organized retail investors to collectively buy GME and other “meme stocks,” squeezing profits out of short positions. Robinhood faced backlash due to trade restrictions during this event, but it unexpectedly gained notoriety.

Model Spread: This strategy of zero commission + low threshold has now been replicated by a bunch of brokers such as Webull, E*TRADE, and others.

Current Scale

Although the popularity is not as high as in 2021, Robinhood still has 22 million active users and remains one of the main platforms for retail investors. However, it has long been viewed pessimistically—some say it is an outdated business model, while others claim its growth has peaked.

Summary in One Sentence: Robinhood breaks down the financial barriers to investing, allowing you to start trading stocks with as little as $1, but the cost is that the platform makes money through order flow payments, cash interest, and other hidden methods, while the product design offers insufficient protection for beginners. It is suitable for retail investors looking to test the waters at a low cost, but not for seasoned investors who need in-depth analysis tools and portfolio management.