Robinhood's commission-free approach to stock trading has fueled its explosive growth, and as it prepares to go public, it's betting that free crypto orders could add to its momentum as the digital currencies grow in mainstream awareness.
But its approach could highlight gaps in crypto regulation, and given Robinhood's already-high profile among regulators and legislators, bring unwanted attention to some shadowy corners of the industry.
With the hypergrowth of crypto in recent months, Robinhood doubled down on this practice in a blog post Thursday, touting its fee-free crypto trades and outlining how it funnels crypto orders to "various trading venues" to obtain "competitive prices." It compared its free crypto trades to competitors such as Coinbase, Gemini and Venmo, which each charge about $2.30 to $2.99 per trade, saying that the fees cut into investors' gains.
The parallels to Robinhood's approach to stocks and option trading were clear. In order to offer free stock trades, the brokerage routes its orders to big market makers who pay Robinhood for sending customer orders to them, essentially splitting the trading profits those firms make.
This practice, known as payment for order flow, is controversial in the industry because some critics believe it is a conflict of interest, leads to market concentration and doesn't provide the best prices. Robinhood and others who use it say payment for order flow provides better prices and enables commission-free trading, which saves small retail investors money.
Robinhood says that it doesn't consider negotiated payments when choosing where to route orders, but the company paid a $65 million fine in December to settle charges it had misled customers about its revenue sources and failed to deliver best execution on trades.
Similar to how it handles stock trades, Robinhood says it does not consider payments from crypto trading venues: "We receive uniform volume-based rebates from trading venues, but never consider rebates when deciding where to route your order."
Coinbase declined to comment but CFO Alesia Haas told CNN in April that Coinbase does not get paid for its order flow. "Today we believe our fees represent the product that we're selling," she said. "Those are transparent fees that we share with our customers. There's no other embedded or hidden fees. We're not monetizing through any back end mechanisms."
Unlike with stock trades, U.S. crypto brokers do not have to disclose where they are routing their trades. (Robinhood declined to comment on where it routes its crypto trades, though Bloomberg reported in 2019 that Robinhood was using Jump Trading to execute crypto orders.)
That's because crypto trading firms are not regulated like stockbrokers and equities markets — they are mainly regulated by states via money transmitter licenses.
Robinhood Crypto is also regulated by the New York State Department of Financial Services as a virtual currency business, but that state's regulations mainly consider which coins a regulated business can list, not payments or rebates for trading.
New SEC chair Gary Gensler has said he wants to evaluate how crypto exchanges are regulated.
With wild swings in prices often juiced by popular figures like Elon Musk weighing in on social media, crypto is becoming more popular for retail investors and institutions. It's also playing a bigger role for Robinhood in recent months. In the first quarter of 2021, 9.5 million customers traded crypto on Robinhood, up from 1.7 million in the fourth quarter of 2020.
As Robinhood prepares to go public, the increase in crypto trading could provide a boost to its revenue, which in turn could mean a bigger bounce when its shares begin trading.
While it isn't a crypto specialist in the way Coinbase is, Robinhood clearly wants to build on its branding as an advocate for the small retail investor. And crypto, borne out of an ethos of decentralization and superseding big financial institutions, fits nicely with that narrative.
"Crypto was born out of a mission to return power to the people. To stay true to that mission, we believe that crypto trading should be accessible to all," Robinhood wrote in its blog post.
But Robinhood's lack of clarity in funneling orders to unnamed partners for undisclosed payments could backfire among crypto believers. Many who have championed the digital currencies say they prize the transparency that cryptocurrencies bring with their public blockchain ledgers.
Robinhood doesn't currently offer crypto customers a wallet to hold their cryptocurrencies, though CEO Vlad Tenev said in March it hoped to build one "as fast as possible."
Update: This story has been updated to include a Coinbase executive's comments on its fee structure.
