We Lose Money on Each Trade, But Make It Up In Volume

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I’m not super interested in the whole GameStop fiasco, but a paragraph in a New York Times piece caught my attention last night. A lot of the trades that have sent GameStop into the stratosphere were made via Robinhood, a trading app that charges no fees. So how do they make money?

Without fees, Robinhood makes money by passing its customer trades along to bigger brokerage firms, like Citadel, who pay Robinhood for the chance to fulfill its customer stock orders.

Wait. Robinhood can’t make money with $0 fees, but Citadel can apparently make money with essentially negative fees. I’m no high finance guy, but what am I missing here?

UPDATE: A reader answers my question:

There is value in the “flow” itself. Market makers (like Citadel or others) earn return by buying and selling particular stocks. If they have a ton of orders, buys and sells, at different prices, they can fill those orders in such a way as to earn a spread on each transaction (or really the totality of transactions as they are essentially wholesalers). This is how trading works. Commissions are just like a processing fee. That’s not how trading desks make money.

Huh. Somehow this still seems like a good way to lose a ton of money if things go pear shaped. But my money is all in low-load mutual funds, so what do I know?

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Fact:

In-depth journalism that investigates the powerful takes real money and is so damn important right now.But it doesn’t take a Mother Jones investigation to know that billionaires and corporations will never fund the type of reporting (like they do politicians) we do that exists to help bring about change. Instead, our mission-driven journalism is made possible by people power, and has been for 46 years now since our founding as a non-profit.

In “TITLE TK” Monica Bauerlein writes about the perilous moment we’re in, and why it’s so important that we raise $325,000 by the time November’s midterms are decided so we can be ready to throw everything we have at the big issues facing the nation no matter what happens. Please help MoJo’s people-powered journalism with a donation today.

$400,000 to go!

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