Robinhood is facing backlash for appearing to aid institutional investors over individual traders after the popular investing app blocked users from purchasing shares in GameStop and other companies that experienced a price explosion in January.
GameStop’s share price shot up from about $30 in early January to more than $300 last week as retail investors drove up the price against hedge funds and other institutional investors. Institutional investors had previously shorted some 140% of GameStop’s existing shares on the assumption that the security would decrease in value.
According to data compiled by The Box, Robinhood earned about $675 million in revenue after sending the customer’s orders to “market makers.” Many of the “market makers” are hedge funds or other institutional investors, according to the Financial Times.
Trades on Robinhood are commission free. But to generate revenue, trades are sold to “market makers” who often use their position as the middle man to generate a profit off the information received from Robinhood.
For example, when you buy a share of Tesla on your phone, Robinhood sends that order to a trading giant like Citadel Securities and receives a few pennies in return. Citadel, meanwhile, completes your trade and makes a few pennies itself.
Robinhood has long branded itself as an accessible platform that provides free financial services for its users. Its mission statement includes a pledge to “democratize finance for all.” But the company makes money by selling its order flow — information about user transactions — to third party clients who actually enact trades with access to user data.