How much money broker dealers make from each trade and account
Charles Schwab, TD Ameritrade and others compared to Robinhood
Welcome to the post #4 🎉
This one will be about Robinhood and other broker dealers, answering very important question of what broker dealer makes the most money out of brokerage account and individual trade.
We’ve all seen the news about Robinhood, GameStop and other stocks that were driven by the community on Reddit. This case uncovered one thing that was already known but never had a lot of attention - broker dealers get paid by the market makers. And sometimes such payments contribute to a significant part of a broker dealer’s revenue.
Robinhood is going through a class lawsuit from the users for restricting buying the stock. Vlad has already explained why the company has done this, if you want to read more, here’s the Robinhood’s blog post about it.
A week after all these events, Public.com announced that they won’t sell the order flow and rather focus on tips - users will be able to tip the broker dealer after the trade is executed. In this blog post I want to analyze what PFOF - payment for order flow - means for major broker dealers in the market. We’ll look through TD Ameritrade, E*Trade, Robinhood and other documents and financials, check what role PFOF plays and how broker dealers make money apart from getting paid for orders.
Here we go!
Part I: SEC 606 data
Thankfully all the data about payment for order flow is public and each of us can see how much broker dealers are making by selling our orders. One moment to have in mind when looking at the numbers:
Charles Schwab acquired TD Ameritrade and this deal was closed in the second half of 2020 - however both companies are reporting SEC 606 disclosures separately. Therefore I aggregated pre-deal data with post-deal - pre-deal is June 2020, post-deal is December 2020.
As you can see from that diagram Charles Schwab and TD Ameritrade combined make 61% more in PFOF than Robinhood. But you can also argue that this combined company is way bigger than Robinhood. Let’s take a look if it’s true.
Part II: Number of trades
Luckily we have this data as well. First, we need to understand how many clients, or brokerage accounts, both of them have. In order to maintain the initial list of companies, I have this chart with latest numbers of how many accounts each of them has right now or had pre-deal (referring to Charles Schwab and TD Ameritrade again):
The statement from the previous part is correct for the number of accounts - Charles Schwab and TD Ameritrade have indeed a larger customer base than Robinhood, in fact the difference is large - 2.3x or 130%.
Let’s hold off on saying that Robinhood makes more money out of less accounts because there’s another metric that we should take into account. This metric is called DART - daily average revenue trades - or how many trades generate revenue for a broker dealer. All the broker dealers are proud to report how DART is growing, so here’s another chart that shows you that metric for each company:
Disclaimer: Robinhood’s latest reported DART was 4.3M back in June, E*Trade reported their DART number in June as well, before the acquisition from Morgan Stanley. I assumed that both numbers have gone up by 20% by December 2020.
What this chart says: clients of Charles Schwab and TD Ameritrade make 78% more trades than Robinhood’s customers. Remember that the difference in customer base is over 2x which means that each customer of Robinhood makes almost 30% more trades than a customer of Charles Schwab.
Okaaay, but what does it mean for PFOF revenue?
Part III: PFOF, margin and other revenue
In this part I want to show how much money each broker makes - from PFOF, margin and other sources. Let’s start from PFOF revenue, since we’ve already seen the PFOF breakdown and understand how many clients and trades each of them reports. Next chart shows PFOF revenue per trade:
This is where it’s getting interesting - Robinhood’s PFOF per trade is 2x lower than what TD Ameritrade had pre-deal, and just 10% higher than what combined Charles Schwab and TD Ameritrade have.
As you know, PFOF is a big but not the only source of revenue. The other significant source is interest on margin accounts, securities lending and more. Recently Robinhood disclosed that PFOF contributes to over 50% of total revenue:
What about others? Next chart shows how much of the same revenue other broker dealers are making:
Disclaimer: I assume that Robinhood makes 55% of revenue from PFOF and the rest comes from margin accounts.
All the numbers are reported by the companies in the quarterly reports. As you can see, the combination of Charles Schwab and TD Ameritrade makes 40% more non-PFOF trading revenue. You can still say that Robinhood makes more in PFOF, in total and in average.
Another interesting chart that we should also pay attention to is the one that shows commissions revenue. As we all know the notion of zero commission does not mean that all the broker dealers do not charge anything for trade execution. Charles Schwab, for example, makes money by selling the options order flow and by charging their customers as well. You can easily look up brokerage fees for various types of orders and asset classes, but I want to show the total numbers:
Since we assumed that the rest of Robinhood’s revenue is coming from margin, Robinhood’s number on that chart might not be accurate. However you can still see how much money others make from the commissions - Charles Schwab pre-deal was making 5x more money from commissions than from PFOF.
Part IV: Revenue per trade and per account
The core goal of this analysis is to show how much money we, as customers, are paying to each broker dealer in average for each trade we make. We don’t have a breakdown of how many clients use margin accounts, so let’s take the total number of accounts - assume that the share of such users is relatively the same for each broker dealer.
Now it’s time to take a look at how much money each broker dealer makes per trade and per account per month.
As you can see from that chart above - Robinhood makes a lot less money per account than E*Trade and TD Ameritrade before the merge with Charles Schwab, almost 30% less than Charles Schwab and TD Ameritrade combined and roughly the same amount as Charles Schwab before the deal with TD Ameritrade.
It gets even more interesting when you look at how much money each company makes per trade and we can easily see that Robinhood makes a lot less than any of those broker dealers. So even when we say that Robinhood makes a ton of money from PFOF, let’s also have a bigger picture in mind. That picture says that other broker dealers make a ton of money too - we just need to know the sources.
Summary
With all the numbers, we can say that Robinhood is becoming one of the leaders of the broker dealer market by number of accounts and by daily average number of trades. At the same time, Robinhood indeed makes less money from each user and each trade compared to other broker dealers.
If you want to get access to the spreadsheet with all calculations, feel free to drop me a message on twitter - https://twitter.com/Max_Grigoryev.
Best,
Max