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How do zero-brokerage firms (like Robinhood) make money?

Zero-brokerage firms like Robinhood make money by generating revenue from sources other than traditional brokerage fees. These firms typically offer brokerage services at no cost to the user, meaning they do not charge a commission or fee for executing trades on behalf of the user.

Instead, zero-brokerage firms generate revenue through other means, such as:

  1. Interest on cash balances: Many zero-brokerage firms hold cash balances in user accounts, and they can generate revenue by earning interest on these balances.

  2. Market data fees: Zero-brokerage firms may also generate revenue by selling market data to third parties.

  3. Order flow: Some zero-brokerage firms may generate revenue by selling the orders placed by their users to other firms, who may then execute the orders on behalf of the zero-brokerage firm. This is known as order flow. When a zero-brokerage firm sells an order to another firm, it may receive a payment for providing this service. This payment, known as a “payment for order flow,” is a key source of revenue for some zero-brokerage firms. Payment for order flow may be based on the volume of orders sold, the type of orders sold, or other factors.

It’s important to note that the business models of zero-brokerage firms may vary, and they may generate revenue through a combination of these and other sources.

“When a falling stock becomes a screaming buy because it cannot conceivably drop further, try to but it thirty percent lower” – Al Rizzo

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