How Robinhood plans to make money on US stock trading in the UK

Robinhood UK president Wander Rutgers.
Robinhood UK president Wander Rutgers.
Image: Robinhood
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Robinhood, the Silicon Valley startup that operates a commission-free trading app, is opening up a waiting list for customers in Britain. The fintech’s cut-rate fees for trading stocks, options, and crypto have roiled the securities brokerage industry in the US, and it’s looking to add to its more than 6 million customers by expanding internationally.

The six-year-old company will offer trading in more than 3,500 US stocks, as well as another 1,000 global equities that aren’t listed on US exchanges but are available there using American depositary receipts (ADRs). Robinhood UK won’t require account minimums and customers can get started with just £1. The company says it won’t charge its British customers any foreign-exchange fees.

“When we launch in the UK, we will bring the best and the core of Robinhood in the US to UK customers,” Wander Rutgers, president of Robinhood UK, said in an interview in London. The company says it will go live in Britain, its first international market, in early 2020.

Robinhood doesn’t charge brokerage commissions—a move that helped spark a price war in the US—but it makes money in other ways. Robinhood UK will generate revenue through its US affiliate, Robinhood Securities, which is a clearing firm.

That affiliate generates revenue from interest on customer deposits, charging traders who buy stocks with borrowed money (margin trading), a premium service called Robinhood Gold, and from selling clients’ stock orders to the market makers who handle the trades, a process called payment for order flow. This means their UK customers’ orders will be bought and sold in the US, and those trades will be filled by a trading firm there.

Payment for order flow is also used by other big American brokerages like Charles Schwab and Etrade, but it’s frowned on by UK authorities and generally isn’t used by brokerages that offer direct trading in London-listed stocks. It’s controversial because it can be difficult for the customer to figure out how much exactly a given trade is truly costing them, and officials are concerned it could cause conflicts of interest.

Professional trading firms, sometimes called high-frequency traders, buy the retail-investor orders from brokers like Robinhood and execute the trades for them. These trading outfits typically make money from the gap between the bid and the offer. When the trading company buys order flow, they give some of that money (the rebate) to the brokerage that provided the orders.

Brokers can keep that money or offer better prices for their clients. And some regulators worry that brokers could be tempted to send trades to the market maker that offers the best rebates, instead of the best stock trade execution for the customer. The expense is buried somewhere in the spread between the bid and the offer, and the amount of rebate that wasn’t passed along.

On the other hand, market makers can potentially save money for retail customers by executing orders “off-exchange.” This allows them to avoid the fees that come with trading on New York Stock Exchange, for example, by filling a retail stock order directly with their own money, or with institutional orders. In the US, market makers are required to provide the best bid or offer that’s publicly available, regardless of how a trade is filled.

Robinhood said last year in a blog post that it sends customer trades to the market maker that’s likely to provide the best execution quality. “The revenue we receive from these rebates helps us cover the costs of operating our business and allows us to offer commission-free trading,” the company said.

Robinhood said it doesn’t have specific plans to directly offer UK stocks, which would probably rule out payment for order flow, and so it couldn’t comment on how it would monetize that business. 

In the meantime, as the company opens up its waiting list in Britain, Robinhood will run up against several challenges. The UK doesn’t have as deep a stock trading culture as the US, which makes for a smaller market opportunity. And companies like Freetrade and Revolut also offer buying and selling of stocks.

“We know that the UK market is a challenging market with consumers that are very savvy,” Robinhood co-founder Vlad Tenev said in an interview. “If we can do a great job in the UK market, other markets will be more straight forward.”