CNBC’s Kate Rooney takes a look at how Robinhood brings in revenue. For access to live and exclusive video from CNBC subscribe to CNBC PRO: https://cnb.cx/2NGeIvi

Robinhood is raking in more money than ever on customer trades as new investors flood the stock market during the pandemic.

Despite not charging customers to trade, the Silicon Valley start-up made $180 million off trades in the second quarter — roughly double from the prior quarter, according to a recent Securities and Exchange Commission regulatory filing. The majority of that total came from options trading.

Robinhood, and the rest of the online brokerage industry, rely on what’s known as payment for order flow as their profit engine in lieu of commissions. The pioneer of “free trading,” Robinhood’s business model hinges on the back end payments, since the other brokers have established other revenue streams and only recently slashed commissions. Thanks to a recent change in SEC rules, these brokers are now required to give more disclosures on how trades are executed, and how much money they bring in for firms.

Payment for order flow is a common practice but it’s often criticized for its lack of transparency. It has become especially vital to companies’ bottom line after commissions went to zero.

Market makers, such as Citadel Securities or Virtu, pay e-brokers like Robinhood for the right to execute customer trades. The broker is then paid a small fee for the shares that are routed, which can add up to millions when customers trade as actively as they have this year.

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Here’s why Robinhood Order Flow could get banned, my thoughts on the new Cathie Wood ETF, and the issue of Social Security – Add me on Instagram: GPStephan

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ROBINHOOD:
In terms of Payment For Order Flow…essentially, these High Frequency Traders pay ROBINHOOD for the right to take a peak at your trades RIGHT WHEN THEY COME IN…giving them a quick opportunity to buy your stock ahead of time, and then sell it back to you at for a small profit automatically.

Usually, this is an amount that isn’t EVER going to be noticed by you…in fact, Bloomberg estimated that this “profit” amounted to be an average of 0.0024 cents per share…although, here’s where some of the controversy begins: in 2005….the SEC passed the Regulation National Market System, requiring brokers to obtain the “best price for their clients.” In 2019, Robinhood was fined for “sending customer trading orders to four broker-dealers WITHOUT guaranteeing the best price.

Recently, Gary Gensler signaled that he was open to BANNING the practice of payment for order flow – which, would directly affect nearly every stock market brokerage out there…and, ultimately, the price you wind up paying for the stocks you buy and sell.

SOCIAL SECURITY:
The Problem: The current system is paying out a LOT more money than it’s taking in…or, in other words, it’s losing MORE money because fewer people are in the workforce to fill it back up…and, at the current rate, social security will run out of funds to pay the full benefit by 2034.

As far as my own thoughts: expect that taxes will go up over the next 5 years, because they most likely will….and expect that you’ll receive NOTHING by the time you’re older. That way, if you get anything – it’s a bonus, but it’ll never be something to rely on – just incase something happens.

THE FEDERAL RESERVE:
During a recent meeting, the Federal Reserve announced that they might begin to reduce their asset purchases by the end of the year, as they BEGIN to taper and let the economy run on its own. HOWEVER, they’ve made it clear that they won’t explicitly begin to raise rates until more progress is made, although this would begin to set the expectation that – it might be coming soon.

MONEY AND HAPPINESS:
A recent report actually shows that, happiness does NOT plateau..and, in fact…you DO get happier, the more money you make. Even though $75,000 provides the greatest bang for the buck in terms of life satisfaction and well being…both factors continue increasing as you make more money…albeit to a slower degree.

It goes to show you that everything is in proportion to your own perspective, and for one person – earning $50,000 to $100,000 per year would bring the same increase in well-being as someone else going from $5 million to $10 million per year. The important part, here…is that we spend our money wisely, we stay true to ourselves, we enjoy what we do…and, at the end of the day…even though more money can open up new possibilities…that only goes so far before we each need to take matters into our own hands…and smash the like button for the YouTube algorithm.

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*Some of the links and other products that appear on this video are from companies which Graham Stephan will earn an affiliate commission or referral bonus. Graham Stephan is part of an affiliate network and receives compensation for sending traffic to partner sites. The content in this video is accurate as of the posting date. Some of the offers mentioned may no longer be available. This is not investment advice. Public Offer valid for U.S. residents 18+ and subject to account approval. There may be other fees associated with trading. See Public.com/disclosures/

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Yahoo Finance’s David Hollerith joins the Live show to report that Coinbase has reached a $100 million settlement with New York regulators.
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