Top rated Robin Hood competitor brokerage companies offering free or low priced trades.

Top Robinhood Competitors

Best Free Brokerage Firms

Let's review the top Robin Hood competitor companies in 2021:

-  Firstrade offers the lowest commissions on all investment products in the industry. Their pricing is $0 for stock, options, bond, or ETF trades, and for mutual funds transactions. One of the main reasons it is The Best free brokerage firm is that unlike its competitors it does offer investing in mutual funds and bonds. There are no account maintenance or inactivity fees. Learn more ...

Promotion link: 2 free stocks & $0 fees on all mutual fund, stock, ETF, & option trades.

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-  M1 Finance offers a unique investing way for stocks and ETFs - customers create "pies" - the basket of stocks and ETFs that can be traded as one unit. There are no account maintenance or inactivity fees with this broker. Investors can open a free brokerage account with $0 down. Learn more ...

Promotion link: Get $30 for $1,000 deposit or up to $3,500 when you transfer account with $10K+.

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-  WeBull is the most high-tech among the top Robin Hood competitors. It offers no commission investing in U.S. stocks, options and ETFs. Unlike the other two competitors, Webull provides an advanced trading platform. Learn more ...

Promotion link: Grab your last chance to get 2 free stocks valued up to $2,300 and $5 of Bitcoin.

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How Robinhood Makes Money

You probably think it’s great that Robinhood provides a simple, free trading platform, but like many other investors, you’re probably also wondering how they can generate revenues from a free service. The saying “there’s no such thing as a free lunch” rings true with Robinhood and this article will dig into exactly how Robinhood users end up “paying for their lunch”.

There are three ways Robinhood generates income: Robinhood Gold subscriptions, the interest earned on your idle cash, and from market makers paying for priority access to customers’ orders. In general, all three of these things are common revenue-generators with most online brokers. The remainder of this article will discuss how Robinhood uses each of these three cash streams in more detail.

Robinhood Gold

Despite Robinhood Financial offering free trades, many users opt to pay a monthly fee for a multi-tiered Gold account, which has a number of benefits, namely access to margin, instant settlement for deposits, and extended trading hours. Robinhood Gold is basically a margin account, which gives you up to two times your account balance in buying power depending on which tier of Robinhood Gold you pay for (the more buying power you want, the higher your monthly Gold fee).

For example, if you pay a flat $10/month you will have access to $2,000 of extra buying power. $120/month will get you $25,000 in extra buying power, and $200/month will get you $50,000 in extra buying power.

This is a similar concept to having a margin account at any other broker where they charge you interest on the money you borrow. If you do the math, a top-tier Gold account where you pay $200/month for an extra $50,000 in buying power is the equivalent to paying a 4.8% annual interest rate on the borrowed funds, assuming your extra buying power is fully invested the whole year.

The difference between Robinhood and your more traditional online broker is that by just charging the user a fixed monthly fee for a fixed amount of credit Robinhood claims to offer a simplified margin structure. But they are also effectively charging each tiered Gold user the same monthly fee, regardless of how much of the extra buying power they actually use. This revenue source is common among most brokers, but is probably a more predictable amount for Robinhood due to the fixed nature of the fees.

Robin Hood

Interest on Idle Cash

Another way Robinhood makes money relies on the interest the broker earns on users’ idle cash balances. Most portfolios have at least a small percentage of idle cash sitting in their account, waiting to be deployed whenever the right opportunity presents itself. While to the individual investor a 5% cash balance may seem relatively insignificant in terms of earning power, when you add up these cash balances across Robinhood’s millions of accounts you have a significant amount of idle cash. Robinhood lends this out (and can also use it to provide the extra buying power it offers Gold users) at the short term lending rate and gets to keep this interest since they don’t pay account owners interest on their cash balances.

As the Fed continues to raise short-term rates, Robinhood should see higher revenues coming from the interest it earns on this cash. Robinhood likely invests a lot of this in short-term Treasury notes, which should see higher yields as the Federal Funds Rate increases.

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Selling Order Flow to Market Makers

The last revenue source is probably one of the lesser-known ones, as most brokers prefer to brush over this one so as not to draw too much attention to it since it doesn’t market itself too well. If you look in Robinhood’s Help Center where they address how the company makes money it says one revenue source is “rebates it receives from executing brokers”. What they mean to say (in a more direct way) is that they receive payments from market makers for giving them priority in executing users’ trades.

Market makers are the middle men in the stock market that offer to buy shares in XYZ from one investor and turn around and sell them to another investor for a slightly higher price, and they earn a profit from the difference – called the bid/ask spread. They generally aren’t taking positions in the stocks they trade in, and so their profit is purely a function of the spread (which generally doesn’t vary much) and the volume of orders they process. Therefore, to increase their profits they need to execute more orders.

When a user submits an order through their broker, it will generally be posted for many market makers to see and act on (if the price is right). A market maker has an advantage in that they can view the pending orders at each price level, which gives them a more intimate understanding of a security’s likely path during price discovery.

If they see from the order flow that the supply of shares shifts considerably at a certain price level, they can use this information to their advantage when acting on incoming market orders. Thus, market makers are willing to pay brokers for priority access to fulfill their customers’ orders not only because they profit off the spread of every trade they execute, but also because the information from pending order flow can be a valuable insight into future short-term market direction.

There is some research that suggests Robinhood Financial may receive notably higher payments from market makers for their order flow than other brokers, but exploring this would be beyond the scope of this article. It would make sense however, that Robinhood may have higher than average orders per user given that trading on the app is commission-free. The higher volume of trades would make Robinhood’s business especially valuable to market makers, and therefore it’s easy to see why one might pay a premium for priority access to their order flow.


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