Robinhood’s PFOF Engine Still Roars — Yet It’s No Longer the Whole Story

The pandemic-era meme-stock rally put Robinhood at the center of the action, with its PFOF model driving a significant share of its revenue, but the company has since diversified its revenue streams, reducing its reliance on a model that now faces heightened regulatory scrutiny.

• In early January, the SEC said that Robinhood has agreed to pay $45 million in combined civil penalties to settle a range of SEC charges arising from its brokerage operations.
• In its November quarterly filing, Robinhood said that in recent years, PFOF practices have drawn heightened scrutiny from the U.S. Congress, the SEC, state regulators, and other regulatory and legislative authorities.
• The company is also witnessing a surge in gold subscribers, which has led the “other revenue” segment to double YoY to $88 million.

During the pandemic, Robinhood’s meteoric rise was driven by one of the most controversial revenue models – payment for order flow (PFOF), a pennies-per-trade model that paid brokerage firms to route retail buy and sell orders to a specific market maker.

PFOF became central to Robinhood’s business model, as the platform attracted a large user base focused on trading meme stocks and cryptocurrencies. The surge in retail trading during the pandemic positioned PFOF as the primary driver of Robinhood’s growth during this period.

But that is no longer the case. With increased regulatory scrutiny and a more diversified revenue base, the company is reshaping the sources of its income.

“Robinhood just posted one of its strongest quarters ever, and while PFOF remains part of its transaction-based revenue and is still disclosed as a regulatory risk factor, it’s no longer the centerpiece of the growth story,” said Scott Acheychek, COO of REX Financial, REX Shares’ parent company.

REX offers the T-REX 2X Long HOOD Daily Target ETF (ROBN) as well as the REX Hood Growth & Income ETF (HOII).

Regulatory Scrutiny Surrounding HOOD

In early January, the Securities and Exchange Commission (SEC) said that broker-dealers Robinhood Securities LLC and Robinhood Financial LLC (collectively, Robinhood) have agreed to pay $45 million in combined civil penalties to settle a range of SEC charges arising from their brokerage operations.

According to the SEC’s order, Robinhood's violations related to several areas of conduct, one of which was suspicious activity reporting.

The SEC noted that from January 2020 through March 2022, Robinhood failed to timely investigate suspicious transactions, resulting in systematic failures to file suspicious activity reports in a timely manner. The period is synonymous with the meme-stock frenzy that took place and gave Robinhood the fame it has today through PFOF transactions.

In its November quarterly filing, Robinhood said that in recent years, PFOF practices have drawn heightened scrutiny from the U.S. Congress, the SEC, state regulators, and other regulatory and legislative authorities.

The company noted that in December 2020, it settled an SEC investigation into Robinhood’s best execution and PFOF practices and is defending a consolidated putative class action in federal district court relating to the same factual allegations.

“Additionally, since July 2023, we have been cooperating with an investigation being conducted by the New York Attorney General concerning brokerage execution quality,” Robinhood said.

PFOF No Longer Defining HOOD’s Trajectory

A close look at Robinhood’s financials reveals that crypto trading, net interest income, subscriptions, and gold subscribers are driving a significant share of the company’s revenue.

Robinhood said transaction-based revenues for the third quarter increased 129% year-over-year (YoY) to $730 million, primarily driven by a 300% jump in cryptocurrency revenue to $268 million.

Robinhood said options revenue came in at $304 million, up 50%, and equities revenue was $86 million, up 132% year over year.

On the other hand, net interest revenues increased 66% YoY to $456 million, primarily driven by growth in interest-earning assets and securities lending activity, partially offset by lower short-term interest rates.

A surge in Gold subscribers has helped propel the company’s “other revenue” segment, which doubled YoY to $88 million.

“Bottom line is yes, PFOF is still in the model, but Robinhood’s recent performance shows the business is growing across multiple lines that lessen its reliance on any single revenue source,” REX Financials’ Acheychek said.

What Is Strikingly Different About HOOD Today?

Acheychek said that the Robinhood management now counts 11 business lines generating roughly $100 million each in annualized revenue across trading, banking, wealth, and crypto.

The monthly active users are up 25% YoY to 13.8 million, and the planned CFO transition to longtime executive Shiv Verma ensures continuity as the company scales, he noted.

Robinhood has been expanding its base outside the United States and early this week announced that it has entered into agreements to acquire PT Buana Capital Sekuritas, an Indonesian brokerage, and PT Pedagang Aset Kripto, a licensed Indonesian digital financial asset trader.

“With more than 19 million capital market investors and 17 million crypto investors, Indonesia is a compelling market for equities and crypto trading,” Robinhood said.

Earlier this year, Robinhood received approval for the Markets in Crypto-Assets and Markets in Financial Instruments Directive — two European Union directives that together form the comprehensive regulatory framework for digital assets — helping it expand across the entire European Union and European Economic Area.

What Is Retail Thinking?

Retail sentiment on Robinhood dipped to ‘bullish’ from ‘extremely bullish’ a month ago, with message volumes at ‘high’ levels, according to data from Stocktwits.

A user on Stocktwits called HOOD a “good stock” to trade. The stock closed down 9% on Thursday, reacting to a report that Robinhood ended November with 26.9 million funded customers, about 130,000 fewer than in October. 

Shares of Robinhood have jumped over 230% so far this year. The company has a market cap of $122 billion, larger than that of crypto exchange Coinbase at $74.2 billion.

For updates and corrections, email newsroom[at]stocktwits[dot]com.<