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Robinhood trading boom has generated a windfall for market makers

Virtu Financial is the largest purchaser of Robinhood's order flow.
(Image credit: Brendan McDermid/Reuters)

Since the start of 2020, commission-free trading app Robinhood has added more than three million users and seen its trading volume triple. 

While Robinhood has certainly benefited from the increase in order flow sales, the third-party market makers that purchase that order flow have benefitted most of all. 

Virtu Financial, the largest purchaser of user orders from Robinhood, recently reported that its revenue increased 267% compared to 2019.

It’s difficult to know the full extent of market makers’ windfall. Citadel Securities, another market maker that purchases order flow from Robinhood as well as competing commission-free brokers TD Ameritrade and Charles Schwab, is privately owned and has not reported earnings. But the company buys an estimated 40% of all orders made by retail traders, so it has likely turned an even larger profit than rival Virtu.

Order flow

Robinhood’s practice of selling users’ orders to third-party market makers has been controversial. However, this is common practice among retail brokers, and in fact is how many commission-free brokers make the majority of their revenue. 

Market makers like Virtu Financial and Citadel Securities fulfill trades placed on Robinhood by constantly buying and selling securities. These companies make money on the spread, the difference between the buy and sell prices of a stock, as well as by using order data from retail traders to inform their own investments.

Notably, stock spreads increase when the market is volatile. So, these companies may also have profited from higher spreads during the peak of stock trading in March and April.

Via FT / NY Post